ck0001261788-20221231
1919
FINANCIAL SERVICES FUND
CLASS A
(SBFAX), CLASS C (SFSLX), CLASS FI*, CLASS R*, CLASS I (LMRIX)
1919
SOCIALLY RESPONSIVE BALANCED FUND
CLASS A
(SSIAX), CLASS C (SESLX), CLASS FI*, CLASS R*, CLASS I (LMRNX)
1919
MARYLAND TAX-FREE INCOME FUND
CLASS
A (LMMDX), CLASS C (LMMCX), CLASS FI*, CLASS I (LMMIX)
*As
of the date of this Statement of Additional Information,
Class
FI and Class R shares are not available for purchase.
Each
a “Fund,” together, the “1919 Funds” or the “Funds”
Each
Fund is a Series of
Trust
for Advised Portfolios (the “Trust”)
c/o
U.S. Bancorp Fund Services, LLC
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
1‑844‑828‑1919
STATEMENT
OF ADDITIONAL INFORMATION
April
30, 2023
As
Supplemented August 31, 2023
This
Statement of Additional Information (the “SAI”) is not a prospectus and is meant
to be read in conjunction with the current Prospectus dated April 30, 2023 (the
“Prospectus”) of the Trust relating to the 1919 Funds, as amended or
supplemented from time to time, and is incorporated by reference in its entirety
into the Prospectus. The Funds’ financial statements for the fiscal year ended
December 31, 2022 are incorporated into this SAI by reference to the Funds’
annual
report
to shareholders.
The
1919 Funds’ Prospectus and copies of the annual and semi-annual reports may be
obtained free of charge by contacting banks, brokers, dealers, insurance
companies, investment advisers, financial consultants or advisers, mutual fund
supermarkets and other financial intermediaries that have entered into an
agreement with the 1919 Funds’ distributor to sell shares of a Fund (each called
a “Financial Intermediary”), by writing to 1919 Funds, c/o U.S. Bancorp Fund
Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701, by calling
1‑844‑828‑1919, by sending an e-mail request to [email protected], or by
visiting the Funds’ website at www.1919funds.com.
TABLE
OF CONTENTS
No
person has been authorized to give any information or to make any
representations not contained in the Prospectus or this SAI in connection with
the offerings made by the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by a Fund or
its Distributor. The Prospectus and this SAI do not constitute offerings by a
Fund or by Quasar Distributors, LLC (“Quasar” or the “Distributor”) in any
jurisdiction in which such offerings may not lawfully be made.
THE
TRUST
The
Trust is a Delaware statutory trust organized under the laws of the State of
Delaware on August 28, 2003, and is registered with the U.S.
Securities and Exchange Commission (the “SEC”) as an open-end management
investment company. Between March 5, 2013 and January 1, 2014, the Trust was
named “Ziegler Capital Management Investment Trust.” Between August 1, 2011 and
March 4, 2013, the Trust was named “Ziegler Lotsoff Capital Management
Investment Trust.” Prior to August 1, 2011, the Trust was named “Lotsoff Capital
Management Investment Trust.”
Each
Fund is a series of Trust for Advised Portfolios (referred to in this section as
the “Trust”), a Delaware statutory trust.
The
1919 Financial Services Fund commenced operations on November 10, 2014 as a
successor to the Legg Mason Investment Counsel Financial Services Fund, a series
of Legg Mason Partners Equity Trust, a Maryland statutory trust. Prior to
April 16, 2007, the Fund was a series of Legg Mason Partners Investment
Trust, a Massachusetts business trust. Prior to the reorganization of the Fund
as a series of Legg Mason Partners Investment Trust, the Fund was a series of
Legg Mason Partners Sector Series, Inc., a Maryland corporation.
The
1919 Socially Responsive Balanced Fund commenced operations on November 10, 2014
as a successor to the Legg Mason Investment Counsel Social Awareness Fund, a
series of Legg Mason Partners Equity Trust, a Maryland statutory trust.
The
1919 Maryland Tax-Free Income Fund commenced operations on November 10, 2014 as
a successor to Legg Mason Investment Counsel Maryland Tax-Free Income Trust, a
series of Legg Mason Tax-Free Income Fund, a Massachusetts business trust.
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, of no par
value 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 to the 1919
Financial Services Fund, 1919 Socially Responsive Balanced Fund and 1919
Maryland Tax-Free Income Fund.
Registration
with the SEC does not involve supervision of the management or policies of the
Fund. The Prospectus, SAI, shareholder reports, and other information about the
Fund are available free of charge on the EDGAR database on the SEC website at
www.sec.gov. Copies of such information may be obtained from the SEC upon
payment of the prescribed fee by electronic request at the following e-mail
address: [email protected].
1919
FINANCIAL
SERVICES FUND - INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The
1919 Financial Services Fund (the “Financial Services Fund”) is registered under
the Investment Company Act of 1940, as amended (the “1940 Act”) as an open-end,
diversified management investment company.
The
Financial Services Fund’s Prospectus discusses the Financial Services Fund’s
investment objective and policies. The following discussion supplements the
description of the Financial Services Fund’s investment policies in its
Prospectus.
Investment
Objective and Principal Investment Strategies
The
Financial Services Fund’s investment objective is to seek long-term capital
appreciation by investing primarily in common stocks.
Under
normal circumstances, the Financial Services Fund invests at least 80% of its
net assets in equity securities of issuers in the financial services industry.
These companies may include, but are not limited to:
•Regional
and money center banks
•Securities
brokerage firms
•Asset
management companies
•Savings
banks and thrift institutions
•Specialty
finance companies (e.g., credit card and mortgage providers)
•Insurance
and insurance brokerage firms
•Government
sponsored agencies, such as the Government National Mortgage Association
(“Ginnie Mae”)
•Financial
conglomerates
The
Financial Services Fund may invest its assets in securities of foreign financial
services companies (limited to 25% of total assets, not including American
Depositary Receipts (“ADRs”)).
For
purposes of the Financial Services Fund’s 80% policy, issuers in the financial
services industry include companies that derive more than 50% of their revenues
from providing products and services to the financial services industry,
including software, hardware, publishing, news services, credit research and
ratings services, Internet services and business services.
The
Financial Services Fund’s 80% investment policy may be changed by the Board upon
at least 60 days’ prior notice to shareholders.
There
is no guarantee that the Financial Services Fund will achieve its investment
objective.
1919
FINANCIAL SERVICES FUND - INVESTMENT PRACTICES AND RISK FACTORS
The
Financial Services Fund’s principal investment strategies are described above.
The following provides additional information about these principal strategies
and describes other investment strategies and practices that may be used by the
Financial Services Fund, which all involve risks of varying degrees.
Equity
Securities.
Common stocks represent an equity (ownership) interest in a corporation.
Although equity securities have a history of long-term growth in value, their
prices fluctuate based on changes in a company’s financial condition and on
overall market and economic conditions.
Debt
Securities.
Corporate debt securities are bonds or notes issued by corporations and other
business organizations, including business trusts, in order to finance their
credit needs. Corporate debt securities include commercial paper, which consists
of short-term (usually from 1 to 270 days) unsecured promissory notes issued by
corporations in order to finance their current operations.
Corporate
debt securities may pay fixed or variable rates of interest, or interest at a
rate contingent upon some other factor, such as the price of some commodity.
These securities may be convertible into preferred or common stock, or may be
bought as part of a unit containing common stock. In selecting corporate debt
securities for the Financial Services Fund, 1919 Investment Counsel, LLC (the
“Adviser” or “1919ic”) reviews and monitors the creditworthiness of each issuer
and issue. 1919ic also analyzes interest rate trends and specific developments
that it believes may affect individual issuers.
The
prices of debt securities fluctuate in response to perceptions of the issuer’s
creditworthiness and also tend to vary inversely with market interest rates. The
value of such securities is likely to decline in times of rising interest rates.
Conversely, when rates fall, the value of these investments is likely to rise.
The longer the time to maturity the greater are such variations.
Debt
securities rated BBB/Baa or better by S&P Global Ratings, a division of
S&P Global Inc. (“S&P”), or Moody’s Investors Service, Inc. (“Moody’s”)
and unrated securities considered by the Financial Services Fund’s Adviser to be
of equivalent quality are considered investment grade. Debt securities rated
below BBB/Baa, commonly known as “junk bonds,” which the Financial Services Fund
may purchase from time to time, are deemed by the ratings companies to be
speculative and may involve major risk of exposure to adverse conditions. The
prices of lower-rated securities, especially junk bonds, often are more volatile
than those of higher-rated securities, and the security may be difficult to
sell. Those in the lowest rating categories may involve a substantial risk of
default or may be in default. Changes in economic conditions or developments
regarding the individual issuer are more likely to cause price volatility and
weaken the capacity of such securities to make principal and interest payments
than is the case for higher grade debt securities. Securities rated below
BBB/Baa may be less liquid than higher-rated securities, which means the
Financial Services Fund may have difficulty selling them at times, and may have
to apply a greater degree of judgment in establishing a price for purposes of
valuing shares of the Fund. Moody’s considers debt securities rated in the
lowest investment grade category (Baa) to have speculative characteristics. A
description of the rating assigned to corporate debt securities is included in
Appendix A.
The
market for lower-rated debt securities is generally thinner and less active than
that for higher quality debt securities, which may limit the Financial Services
Fund’s ability to sell such securities at fair value. Judgment plays a greater
role in pricing such securities than is the case for securities having more
active markets. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may also decrease the values and liquidity of
lower-rated debt securities, especially in a thinly traded market.
In
addition to ratings assigned to individual bond issues, the Adviser will analyze
interest rate trends and developments that may affect individual issuers,
including factors such as liquidity, profitability and asset quality. The yields
on bonds and other debt securities in which the Financial Services Fund invests
are dependent on a variety of factors, including general money market
conditions, general conditions in the bond market, the financial conditions of
the issuer, the size of the offering, the maturity of the obligation and its
rating. There may be a wide variation in the quality of bonds, both within a
particular classification and between classifications. A bond issuer’s
obligations are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of bond holders or other creditors of an
issuer; litigation or other conditions may also adversely affect the power or
ability of bond issuers to meet their obligations for the
payment
of principal and interest. Regardless of rating levels, all debt securities
considered for purchase (whether rated or unrated) are analyzed by the Adviser
to determine, to the extent possible, that the planned investment is sound.
If
one rating agency has rated a security A or better and another agency has rated
it below A, the Adviser may rely on the higher rating in determining to purchase
or retain the security. Bonds rated A may be given a “+” or “-” by a rating
agency. Bonds denominated A, A+ or A- are considered to be included in the
rating A.
The
Financial Services Fund may invest in foreign corporate debt securities
denominated in U.S. dollars or foreign currencies. Foreign debt securities
include Yankee dollar obligations (U.S. dollar denominated securities issued by
foreign corporations and traded on U.S. markets) and Eurodollar obligations
(U.S. dollar denominated securities issued by foreign corporations and traded on
foreign markets).
The
Financial Services Fund may invest in the debt securities of governmental or
corporate issuers in any rating category of the recognized rating agencies,
including issues that are in default, and may invest in unrated debt
obligations. Most foreign debt obligations are not rated. Debt securities and
securities convertible into common stock need not necessarily be of a certain
grade as determined by rating agencies such as S&P or Moody’s; however, the
Adviser does consider such ratings in determining whether the security is an
appropriate investment for the Financial Services Fund.
The
Financial Services Fund may invest in securities that are in lower rating
categories or are unrated if the Adviser determines that the securities provide
the opportunity of meeting the Financial Services Fund’s objective without
presenting excessive risk. The Adviser will consider all factors it deems
appropriate, including ratings, in making investment decisions for the Financial
Services Fund and will attempt to minimize investment risks through investment
analysis and monitoring of general economic conditions and trends. While the
Adviser may refer to ratings, it does not rely exclusively on ratings, but makes
its own independent and ongoing review of credit quality.
Preferred
Stock.
The Financial Services Fund may purchase preferred stock as a substitute for
debt securities of the same issuer when, in the opinion of the Adviser, the
preferred stock is more attractively priced in light of the risks involved.
Preferred stock pays dividends at a specified rate and generally has preference
over common stock in the payment of dividends and the liquidation of the
issuer’s assets, but is junior to the debt securities of the issuer in those
same respects. Unlike interest payments on debt securities, dividends on
preferred stock are generally payable at the discretion of the issuer’s board of
directors. Shareholders may suffer a loss of value if dividends are not paid.
The market prices of preferred stocks are subject to changes in interest rates
and are more sensitive to changes in the issuer’s creditworthiness than are the
market prices of debt securities. Under normal circumstances, preferred stock
does not carry voting rights.
Convertible
Securities. The
Financial Services Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion or exchange, convertible securities ordinarily provide a stream of
income with generally higher yields than those of common stocks of the same or
similar issuers, but lower than the yield of nonconvertible debt. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation’s capital structure.
The
value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted or exchanged into the underlying common stock. A
convertible security may be subject to redemption at the option of the issuer at
a price established in the convertible security’s governing instrument, which
may be less than the ultimate conversion or exchange value.
Convertible
securities are subject both to the stock market risk associated with equity
securities and to the credit and interest rate risks associated with fixed
income securities. As the market price of the equity security underlying a
convertible security falls, the convertible security tends to trade on the basis
of its yield and other fixed income characteristics. As the market price of such
equity security rises, the convertible security tends to trade on the basis of
its equity conversion features.
Warrants
and Rights.
Warrants and rights are securities permitting, but not obligating, their holder
to purchase other securities, normally the issuer’s common stock.
Warrants
and rights do not carry with them the right to receive dividends on or to vote
the securities that they entitle their holders to purchase. They also do not
entitle the holder to share in the assets of the company in liquidation. The
rights to purchase common stock or other securities conferred by a warrant or
right can only be exercised on specific dates or for a specific period. Trading
in these instruments is affected both by the relationship of the exercise price
to the current market price of the common stock or other securities and also by
the period remaining until the right or warrant expires. An
investment
in warrants and rights may be considered more speculative than other types of
equity investments. A warrant or right expires worthless if it is not exercised
on or prior to its expiration date.
Small
and Medium Capitalization Company Stocks. The
Adviser for the Financial Services Fund believes that the comparative lack of
attention by investment analysts and institutional investors to small and medium
capitalization companies may result in opportunities to purchase the securities
of such companies at attractive prices compared to historical or market
price-earnings ratios, book value, return on equity or long-term prospects.
Investments in securities of companies with small and medium market
capitalizations are generally considered to offer greater opportunity for
appreciation but involve special risks. The securities of those companies may be
subject to more abrupt fluctuations in market price than larger, more
established companies. Small and medium capitalization companies may have
limited product lines, markets or financial resources, or they may be dependent
upon a limited management group. In addition to exhibiting greater volatility,
small and medium capitalization company stocks may, to a degree, fluctuate
independently of larger company stocks, i.e.,
small and medium capitalization company stocks may decline in price as the
prices of large company stocks rise or vice versa.
It
is anticipated that some of the portfolio securities of the Financial Services
Fund may not be widely traded, and that the Financial Services Fund’s position
in such securities may be substantial in relation to the market for such
securities. Accordingly, it may be difficult for the Financial Services Fund to
dispose of such securities at prevailing market prices in order to meet
redemptions.
Financial
Services. Other
than the financial services industry, the Financial Services Fund will not
invest more than 25% of its total assets in a particular industry. Because of
its concentration policy, the Financial Services Fund may be especially subject
to risks affecting the financial services industry. Companies in the financial
services industry include regional and money center banks, securities brokerage
firms, asset management companies, savings banks and thrift institutions,
specialty finance companies (e.g.,
credit
card and mortgage providers), insurance and insurance brokerage firms,
government sponsored agencies (e.g.,
Ginnie
Mae), financial conglomerates and foreign banking and financial services
companies.
Insurance
companies are subject to substantial governmental regulation, predominantly at
the state level, and may be subject to severe price competition. The performance
of the Financial Services Fund’s investments in insurance companies will be
subject to risk from several additional factors. The earnings of insurance
companies will be affected by, in addition to general economic conditions,
pricing (including severe pricing competition from time to time), claims
activity and marketing competition. Particular insurance lines will also be
influenced by specific matters. Property and casualty insurer profits may be
affected by certain weather catastrophes, terrorism and other disasters. Life
and health insurer profits may be affected by mortality and morbidity rates.
Individual
companies may be exposed to material risk, including reserve inadequacy,
problems in investment portfolios (due to real estate or “junk bond” holdings,
for example) and the inability to collect from reinsurance carriers. Insurance
companies are subject to extensive governmental regulation, including the
imposition of maximum rate levels, which may not be adequate for some lines of
business. Proposed or potential anti-trust or tax law changes also may affect
adversely insurance companies’ policy sales, tax obligations and profitability.
Companies
engaged in stock brokerage, commodity brokerage, investment banking, investment
management or related investment advisory services are closely tied economically
to the securities and commodities markets and can suffer during a decline in
either market. These companies also are subject to the regulatory environment
and changes in regulations, pricing pressure, the availability of funds to
borrow and interest rates.
Mortgage-Related
Securities. Mortgage-related
securities provide capital for mortgage loans made to residential homeowners and
include securities which represent interests in pools of mortgage loans made by
lenders such as savings and loan institutions, mortgage bankers, commercial
banks and others. Pools of mortgage loans are assembled for sale to investors
(such as the Financial Services Fund) by various governmental,
government-related and private organizations, such as dealers. The market value
of mortgage-related securities will fluctuate as a result of changes in interest
rates and mortgage rates.
Interests
in pools of mortgage loans generally provide a monthly payment that consists of
both interest and principal payments. In effect, these payments are a
“pass-through” of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities, such as securities issued by Ginnie Mae are described as “modified
pass-through” because they entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, regardless of
whether the mortgagor actually makes the payment.
Commercial
banks, savings and loan institutions, mortgage bankers and other secondary
market issuers, such as dealers, create pass-through pools of conventional
residential mortgage loans. Such issuers also may be the originators of the
underlying mortgage loans. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government guarantees of payments
with respect to such pools. However, timely payment of interest and principal of
these pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies. The
Financial Services Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the persons creating the pools, the Adviser determines that the securities are
an appropriate investment for the Financial Services Fund.
Another
type of security representing an interest in a pool of mortgage loans is known
as a collateralized mortgage obligation (“CMO”). CMOs represent interests in a
short-term, intermediate-term or long-term portion of a mortgage pool. Each
portion of the pool receives monthly interest payments, but the principal
repayments pass through to the short-term CMO first and to the long-term CMO
last. A CMO permits an investor to more accurately predict the rate of principal
repayments. CMOs are issued by private issuers, such as broker/dealers, and by
Fannie Mae (formally known as the Federal National Mortgage Association); and
Freddie Mac (formally known as the Federal Home Loan Mortgage Corporation).
Investments in CMOs are subject to the same risks as direct investments in the
underlying mortgage-backed securities. In addition, in the event of a bankruptcy
or other default of a broker who issued the CMO held by the Financial Services
Fund, the Financial Services Fund could experience both delays in liquidating
its position and losses. The Financial Services Fund may invest in CMOs in any
rating category of the recognized rating services and may invest in unrated
CMOs. The Financial Services Fund may also invest in “stripped” CMOs, which
represent only the income portion or the principal portion of the CMO. The
values of stripped CMOs are very sensitive to interest rate changes;
accordingly, these instruments present a greater risk of loss than conventional
mortgage-backed securities.
The
Adviser expects that governmental, government-related or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be second
mortgages or alternative mortgage instruments (e.g.,
mortgage instruments whose principal or interest payments may vary or whose
terms to maturity may differ from customary long-term fixed rate mortgages). As
new types of mortgage-related securities are developed and offered to investors,
the Adviser will, consistent with the Financial Services Fund’s investment
objective and policies, consider making investments in such new types of
securities. The Prospectus will be amended with any necessary additional
disclosure prior to the Financial Services Fund’s investing in such securities.
The
average life of securities representing interests in pools of mortgage loans is
likely to be substantially less than the original maturity of the mortgage pools
as a result of prepayments or foreclosures of such mortgages. Prepayments are
passed through to the registered holder with the regular monthly payments of
principal and interest, and have the effect of reducing future payments. To the
extent the mortgages underlying a security representing an interest in a pool of
mortgages are prepaid, the Financial Services Fund may experience a loss (if the
price at which the security was acquired by the Financial Services Fund was at a
premium over par, which represents the price at which the security will be
redeemed upon prepayment) or a gain (if the price at which the security was
acquired by the Financial Services Fund was at a discount from par). In
addition, prepayments of such securities held by the Financial Services Fund
will reduce the share price of the Financial Services Fund to the extent the
market value of the securities at the time of prepayment exceeds their par
value, and will increase the share price of the Financial Services Fund to the
extent the par value of the securities exceeds their market value at the time of
prepayment. Prepayments may occur with greater frequency in periods of declining
mortgage rates because, among other reasons, it may be possible for mortgagors
to refinance their outstanding mortgages at lower interest rates. When market
interest rates increase, the market values of mortgage-backed securities
decline. At the same time, however, mortgage refinancing slows, which lengthens
the effective maturities of these securities. As a result, the negative effect
of the rate increase on the market value of mortgage securities is usually more
pronounced than it is for other types of fixed income securities.
The
Financial Services Fund may invest no more than 5% of its net assets in
mortgage-related securities.
U.S.
Government Obligations and Related Securities. U.S.
government obligations include a variety of securities that are issued or
guaranteed by the U.S. Treasury, by various agencies of the U.S. government or
by various instrumentalities that have been established or sponsored by the U.S.
government. U.S. Treasury securities and securities issued by Ginnie Mae and the
Small Business Administration are backed by the “full faith and credit” of the
U.S. government. Other U.S. government obligations may or may not be backed by
the “full faith and credit” of the U.S. government. In the case of securities
not backed by the “full faith and credit” of the U.S. government, the investor
must look principally to the agency or instrumentality issuing or guaranteeing
the obligation (such as the Federal Farm Credit System, the Federal Home Loan
Banks, Fannie Mae and Freddie Mac) for ultimate repayment and may not be able to
assert a claim against the U.S. government itself in the event the agency or
instrumentality does not meet its commitments.
Participation
interests in U.S. government obligations are pro rata interests in such
obligations which are generally underwritten by government securities dealers.
Certificates of safekeeping for U.S. government obligations are documentary
receipts for such obligations. Both participation interests and certificates of
safekeeping are traded on exchanges and in the over-the-counter market.
The
Financial Services Fund may invest in U.S. government obligations and related
participation interests. In addition, the Financial Services Fund may invest in
custodial receipts that evidence ownership of future interest payments,
principal payments or both on certain U.S. government obligations. Such
obligations are held in custody by a bank on behalf of the owners. These
custodial receipts are known by various names, including Treasury Receipts,
Treasury Investors Growth Receipts (“TIGRs”) and Certificates of Accrual on
Treasury Securities (“CATS”).
U.S.
government obligations also include stripped securities, which are created by
separating bonds issued or guaranteed by the U.S. Treasury into their principal
and interest components and selling each piece separately (commonly referred to
as IOs and POs). Stripped securities are more volatile than other fixed income
securities in their response to changes in market interest rates. The value of
some stripped securities moves in the same direction as interest rates, further
increasing their volatility. The Financial Services Fund will consider all
interest-only or principal-only fixed income securities as illiquid.
Floating
and Variable Rate Obligations.
Fixed income securities may be offered in the form of floating and variable rate
obligations. The Financial Services Fund may invest no more than 5% of its net
assets in floating and variable rate obligations, respectively. Floating rate
obligations have an interest rate that is fixed to a specified interest rate,
such as the bank prime rate, and is automatically adjusted when the specified
interest rate changes. Variable rate obligations have an interest rate that is
adjusted at specified intervals to a specified interest rate. Periodic interest
rate adjustments help stabilize the obligations’ market values.
The
Financial Services Fund may purchase these obligations from the issuers or may
purchase participation interests in pools of these obligations from banks or
other financial institutions. Variable and floating rate obligations usually
carry demand features that permit the Financial Services Fund to sell the
obligations back to the issuers or to financial intermediaries at par value plus
accrued interest upon short notice at any time or prior to specific dates. The
inability of the issuer or financial intermediary to repurchase an obligation on
demand could affect the liquidity of the Financial Services Fund’s portfolio.
Frequently, obligations with demand features are secured by letters of credit or
comparable guarantees. Floating and variable rate obligations which do not carry
unconditional demand features that can be exercised within seven days or less
are deemed illiquid unless the Board determines otherwise. The Financial
Services Fund’s investment in illiquid floating and variable rate obligations
would be limited to the extent that it is not permitted to invest more than 15%
of the value of its net assets in illiquid investments.
When-Issued
Securities, Delayed-Delivery and Forward Commitment Transactions.
The Financial Services Fund may purchase securities on a “when-issued” basis for
delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date at a stated price
and yield) or on a forward commitment basis. The Financial Services Fund does
not intend to engage in these transactions for speculative purposes, but only in
furtherance of its investment objective. These transactions occur when
securities are purchased or sold by the Financial Services Fund with payment and
delivery taking place in the future to secure what is considered an advantageous
yield and price to the Financial Services Fund at the time of entering into the
transaction. The payment obligation and the interest rate that will be received
on when-issued securities are fixed at the time the buyer enters into the
commitment. Because of fluctuations in the value of securities purchased or sold
on a when-issued, delayed-delivery or forward commitment basis, the prices
obtained on such securities may be higher or lower than the prices available in
the market on the dates when the investments are actually delivered to the
buyers.
When
the Financial Services Fund agrees to purchase when-issued or delayed-delivery
securities, the Financial Services Fund will set aside cash or liquid securities
equal to the amount of the commitment in a segregated account on the Financial
Services Fund’s books. Normally, the Financial Services Fund’s custodian will
set aside portfolio securities to satisfy a purchase commitment, and in such a
case the Financial Services Fund may be required subsequently to place
additional assets in the segregated account in order to ensure that the value of
the account remains equal to the amount of the Financial Services Fund’s
commitment. The assets contained in the segregated account will be marked to
market daily. It may be expected that the Financial Services Fund’s net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. For transactions
in when-issued and delayed-delivery securities, asset segregation would not be
required if (i) the Fund intends to physically settle the transaction, and (ii)
the transaction will settle within 35 days of the trade date. When the Financial
Services Fund engages in when-issued or delayed-delivery transactions, it relies
on the other party to consummate the trade. Failure of the seller to do so may
result in the Financial Services Fund incurring a loss or missing an opportunity
to obtain a price considered to be advantageous.
Foreign
Securities.
The Financial Services Fund may invest in securities of foreign financial
services companies (limited to 25% of total assets, not including ADRs). The
returns of the Financial Services Fund may be adversely affected by fluctuations
in value of one or more currencies relative to the U.S. dollar. Investing in the
securities of foreign companies involves special risks and considerations not
typically associated with investing in U.S. companies. These include risks
resulting from revaluation of currencies; future adverse political and economic
developments; possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions; reduced availability of public
information concerning issuers; differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; possible expropriation, nationalization or confiscatory
taxation; possible withholding taxes and limitations on the use or removal of
Funds or other assets, including the withholding of dividends; adverse changes
in investment or exchange control regulations; political instability, which
could affect U.S. investments in foreign countries; and potential restrictions
on the flow of international capital. Additionally, foreign securities often
trade with less frequency and volume than domestic securities and, therefore,
may exhibit greater price volatility and be less liquid. Foreign securities may
not be registered with, nor the issuers thereof be subject to the reporting
requirements of, the SEC. Accordingly, there may be less publicly available
information about the securities and about the foreign company issuing them than
is available about a U.S. company and its securities. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions. The
Financial Services Fund may invest in securities of foreign governments (or
agencies or subdivisions thereof), and many, if not all, of the foregoing
considerations apply to such investments as well. These risks are intensified
when investing in countries with developing economies and securities markets,
also known as “emerging markets.”
The
costs associated with investment in the securities of foreign financial services
companies, including withholding taxes, brokerage commissions and custodial
fees, may be higher than those associated with investment in domestic issuers.
In addition, foreign investment transactions may be subject to difficulties
associated with the settlement of such transactions. Transactions in securities
of foreign issuers may be subject to less efficient settlement practices,
including extended clearance and settlement periods. Delays in settlement could
result in temporary periods when assets of the Financial Services Fund are
uninvested and no return can be earned on them. The inability of the Financial
Services Fund to make intended investments due to settlement problems could
cause the Financial Services Fund to miss attractive investment opportunities.
The inability to dispose of a portfolio security due to settlement problems
could result in losses to the Financial Services Fund due to subsequent declines
in value of the portfolio security or, if the Financial Services Fund has
entered into a contract to sell the security, could result in liability to the
purchaser.
Since
the Financial Services Fund may invest in securities denominated in currencies
other than the U.S. dollar, it may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rates between such
currencies and the U.S. dollar. Changes in currency exchange rates may influence
the value of the Financial Services Fund’s shares and may also affect the value
of dividends and interest earned by the Financial Services Fund and gains and
losses realized by the Financial Services Fund. Exchange rates are determined by
the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other factors.
If
the Financial Services Fund invests a substantial portion of its assets in
foreign securities, its expenses can be expected to be higher than those of an
investment company investing exclusively in U.S. securities since the expenses
of investing in foreign securities, such as custodial costs and valuation costs,
are higher than those incurred through investments in U.S. securities. In
addition, dividend and interest income from non-U.S. securities will generally
be subject to withholding taxes imposed by the country in which the issuer is
located and may not be recoverable by the Financial Services Fund.
Generally,
ADRs, in registered form, are denominated in U.S. dollars and are designed for
use in the domestic market. Usually issued by a U.S. bank or trust company, ADRs
are receipts that demonstrate ownership of underlying foreign securities. For
purposes of the Financial Services Fund’s investment policies and limitations,
ADRs are considered to have the same characteristics as the securities
underlying them. ADRs may be sponsored or unsponsored; issuers of securities
underlying unsponsored ADRs are not contractually obligated to disclose material
information in the United States. Accordingly, there may be less information
available about such issuers than there is with respect to domestic companies
and issuers of securities underlying sponsored ADRs. The Financial Services Fund
may also invest in Global Depositary Receipts (“GDRs”), European Depositary
Receipts (“EDRs”) and other similar instruments, which are receipts that are
often denominated in U.S. dollars and are issued by either a U.S. or non-U.S.
bank evidencing ownership of underlying foreign securities. Even where they are
denominated in U.S. dollars, depositary receipts are subject to currency risk if
the underlying security is denominated in a foreign currency. EDRs are issued in
bearer form and are designed for use in European securities markets. GDRs are
tradable both in the United States and Europe and are designed for use
throughout the world.
Securities
of Emerging Markets Issuers.
Investors are strongly advised to consider carefully the special risks involved
in emerging markets, which are in addition to the usual risks of investing in
developed foreign markets around the world.
The
risks of investing in securities in emerging countries include: (i) less
social, political and economic stability; (ii) the smaller size of the
markets for such securities and lower volume of trading, which result in a lack
of liquidity and in greater price volatility; (iii) certain national
policies that may restrict the Financial Services Fund’s investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property.
Investors
should note that upon the accession to power of authoritarian regimes, the
governments of a number of emerging market countries previously expropriated
large quantities of real and personal property similar to the property which may
be represented by the securities purchased by the Financial Services Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by the Financial Services Fund will not also be expropriated, nationalized, or
otherwise confiscated at some time in the future. If such confiscation were to
occur, the Financial Services Fund could lose a substantial portion or all of
its investments in such countries. The Financial Services Fund’s investments
would similarly be adversely affected by exchange control regulation in any of
those countries.
Certain
countries in which the Financial Services Fund may invest may have vocal
minorities that advocate radical religious or revolutionary philosophies or
support ethnic independence. Any disturbance on the part of such individuals
could carry the potential for widespread destruction or confiscation of property
owned by individuals and entities foreign to such country and could cause the
loss of the Financial Services Fund’s investment in those countries.
Settlement
mechanisms in emerging market securities may be less efficient and reliable than
in more developed markets. In such emerging securities markets there may be
delays and failures in share registration and delivery.
Investing
in emerging markets involves risks relating to potential political and economic
instability within such markets and the risks of expropriation, nationalization,
confiscation of assets and property, the imposition of restrictions on foreign
investments and the repatriation of capital invested. In addition, it may be
difficult for the Financial Services Fund to pursue claims against a foreign
issuer in the courts of a foreign country.
Inflation
and rapid fluctuations in inflation rates have had, and may continue to have,
very negative effects on the economies and securities markets of certain
emerging markets. Economies in emerging markets generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
affected adversely and significantly by economic conditions, trade barriers,
exchange controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade.
While
some emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may continue
to have significant effects both on emerging market economies and their
securities markets. In addition, many of the currencies of emerging market
countries have experienced steady devaluations relative to the U.S. dollar and
major devaluations have occurred in certain countries.
Because
of the high levels of foreign-denominated debt owed by many emerging market
countries, fluctuating exchange rates can significantly affect the debt service
obligations of those countries. This could, in turn, affect local interest
rates, profit margins and exports, which are a major source of foreign exchange
earnings.
To
the extent an emerging market country faces a liquidity crisis with respect to
its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of the
Financial Services Fund to liquidate its investments and convert the local
currency proceeds obtained from such liquidation into U.S. dollars. Where this
conversion must be done through official channels (usually the central bank or
certain authorized commercial banks), the ability to obtain U.S. dollars is
dependent on the availability of such U.S. dollars through those channels and,
if available, upon the willingness of those channels to allocate those U.S.
dollars to the Financial Services Fund. The Financial Services Fund’s ability to
obtain U.S. dollars may be adversely affected by any increased restrictions
imposed on the outflow of foreign exchange. If the Financial Services Fund is
unable to repatriate any amounts due to exchange controls, it may be required to
accept an obligation payable at some future date by the central bank or other
governmental entity of the jurisdiction involved. If such conversion can legally
be done outside official channels, either directly or indirectly, the Financial
Services Fund’s ability to obtain U.S. dollars may not be affected as much by
any increased restrictions except to the extent of the price which may be
required to be paid for in U.S. dollars.
Many
emerging market countries have little experience with the corporate form of
business organization and may not have well-developed corporation and business
laws or concepts of fiduciary duty in the business context.
The
securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets;
enforcement of existing regulations has been extremely limited. Investing in the
securities of companies in emerging markets may entail special
risks
relating to the potential political and economic instability and the risks of
expropriation, nationalization, confiscation or the imposition of restrictions
on foreign investment, convertibility of currencies into U.S. dollars and on
repatriation of capital invested. In the event of such expropriation,
nationalization or other confiscation by any country, the Financial Services
Fund could lose its entire investment in any such country.
Some
emerging markets have different settlement and clearance procedures. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Financial Services Fund to make intended
securities purchases due to settlement problems could cause the Financial
Services Fund to miss attractive investment opportunities. Inability to dispose
of a portfolio security caused by settlement problems could result either in
losses to the Financial Services Fund due to subsequent declines in the value of
the portfolio security or, if the Financial Services Fund has entered into a
contract to sell the security, in possible liability to the purchaser.
The
risk also exists that an emergency situation may arise in one or more emerging
markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for the Financial Services Fund’s portfolio
securities in such markets may not be readily available. Section 22(e) of
the 1940 Act permits a registered investment company (“RIC”) to suspend
redemption of its shares for any period during which an emergency exists, as
determined by the SEC. Accordingly, if the Financial Services Fund believes that
appropriate circumstances warrant, it will promptly apply to the SEC for a
determination that an emergency exists within the meaning of Section 22(a)
of the 1940 Act. During the period commencing from the Financial Services Fund’s
identification of such conditions until the date of SEC action, the portfolio
securities in the affected markets will be valued at fair value as determined in
good faith by or under the direction of the Board.
Although
it might be theoretically possible to hedge for anticipated income and gains,
the ongoing and indeterminate nature of the risks associated with emerging
market investing (and the costs associated with hedging transactions) makes it
very difficult to hedge effectively against such risks.
Economic,
Political and Social Factors.
Certain non-U.S. countries, including emerging markets, may be subject to a
greater degree of economic, political and social instability. Such instability
may result from, among other things: (i) authoritarian governments or
military involvement in political and economic decision making;
(ii) popular unrest associated with demands for improved economic,
political and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection and conflict. Such economic, political and
social instability could significantly disrupt the financial markets in such
countries and the ability of the issuers in such countries to repay their
obligations. In addition, it may be difficult for the Financial Services Fund to
pursue claims against a foreign issuer in the courts of a foreign country.
Investing in emerging countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging country, the Financial Services Fund could lose its entire investment
in that country. Certain emerging market countries restrict or control foreign
investment in their securities markets to varying degrees. These restrictions
may limit the Financial Services Fund’s investment in those markets and may
increase the expenses of the Financial Services Fund. In addition, the
repatriation of both investment income and capital from certain markets in the
region is subject to restrictions such as the need for certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
Financial Services Fund’s operation. Economies in individual non-U.S. countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rates of inflation, currency valuation,
capital reinvestment, resource self-sufficiency and balance of payments
positions. Many non-U.S. countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been, and may
continue to be, affected adversely and significantly by economic conditions in
the countries with which they trade. Whether or not the Financial Services Fund
invests in securities of issuers located in or with significant exposure to
countries experiencing economic, financial and other difficulties, the value and
liquidity of the Financial Services Fund’s investments may be negatively
affected by the conditions in the countries experiencing the difficulties.
Sovereign
Government and Supranational Debt.
The Financial Services Fund may invest in all types of debt securities of
governmental issuers in all countries, including emerging markets. These
sovereign debt securities may include: debt securities issued or guaranteed by
governments, governmental agencies or instrumentalities and political
subdivisions located in emerging market countries; debt securities issued by
government owned, controlled or sponsored entities located in emerging market
countries; interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the
above issuers; Brady Bonds, which are debt securities
issued
under the framework of the Brady Plan as a means for debtor nations to
restructure their outstanding external indebtedness; participations in loans
between emerging market governments and financial institutions; or debt
securities issued by supranational entities such as the World Bank. A
supranational entity is a bank, commission or company established or financially
supported by the national governments of one or more countries to promote
reconstruction or development.
Sovereign
debt is subject to risks in addition to those relating to non-U.S. investments
generally. As a sovereign entity, the issuing government may be immune from
lawsuits in the event of its failure or refusal to pay the obligations when due.
The debtor’s willingness or ability to repay in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its non-U.S.
reserves, the availability of sufficient non-U.S. exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor’s policy toward principal international lenders and the
political constraints to which the sovereign debtor may be subject. Sovereign
debtors may also be dependent on disbursements or assistance from foreign
governments or multinational agencies, the country’s access to trade and other
international credits, and the country’s balance of trade. Assistance may be
dependent on a country’s implementation of austerity measures and reforms, which
measures may limit or be perceived to limit economic growth and recovery. Some
sovereign debtors have rescheduled their debt payments, declared moratoria on
payments or restructured their debt to effectively eliminate portions of it, and
similar occurrences may happen in the future. There is no bankruptcy proceeding
by which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Europe
Recent Events.
The United Kingdom (“UK”) formally exited from the EU on January 31, 2020 (known
as “Brexit”), and effective December 31, 2020, the UK ended a transition period
during which it continued to abide by the EU’s rules and the UK’s trade
relationships with the EU were generally unchanged. Following this transition
period, the impact on the UK and European economies and the broader global
economy could be significant, resulting in negative impacts, such as increased
volatility and illiquidity, potentially lower economic growth on markets in the
UK, Europe, and globally, and changes in legal and regulatory regimes to which
certain Fund assets are or become subject, any of which may adversely affect the
value of Fund investments.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, including, but not limited to, current trade and
finance agreements. Brexit could lead to legal and tax uncertainty and
potentially divergent national laws and regulations, as the UK determines which
EU laws to replace or replicate. The extent of the impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of a Fund investments. If one or more other
countries were to exit the EU or abandon the use of the euro as a currency, the
value of investments tied to those countries or the euro could decline
significantly and unpredictably.
Money
Market Instruments.
The Financial Services Fund may invest, for temporary defensive purposes, in
short-term corporate and government money market instruments. Money market
instruments in which the Financial Services Fund may invest include: U.S.
government securities; certificates of deposit (“CDs”), time deposits (“TDs”)
and bankers’ acceptances issued by domestic banks (including their branches
located outside the United States and subsidiaries located in Canada), domestic
branches of foreign banks, savings and loan associations and similar
institutions; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. The following is a more detailed
description of such money market instruments.
CDs
are short-term, negotiable obligations of commercial banks. TDs are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Bankers’ acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Domestic
commercial banks organized under federal law are supervised and examined by the
Comptroller of the Currency (the “COTC”) and are required to be members of the
Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the “FDIC”). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are insured
by the FDIC (although such insurance may not be of material benefit to the
Financial Services Fund, depending upon the principal amount of CDs of each bank
held by the Financial Services Fund) and are subject to federal examination and
to a substantial body of federal law and regulation. As a result of governmental
regulations, domestic branches of domestic banks are, among other things,
generally required to maintain specified levels of reserves, and are subject to
other supervision and regulation.
Obligations
of foreign branches of domestic banks, such as CDs and TDs, may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and government regulation. Such
obligations are subject to different risks than are those of domestic banks or
domestic branches of foreign banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of domestic banks are not necessarily subject to the same or similar
regulatory
requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations, and accounting, auditing and financial recordkeeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank.
Obligations
of domestic branches of foreign banks may be general obligations of the parent
bank in addition to the issuing branch, or may be limited by the terms of a
specific obligation and by governmental regulation as well as governmental
action in the country in which the foreign bank has its head office. A domestic
branch of a foreign bank with assets in excess of $1 billion may or may not be
subject to reserve requirements imposed by the Federal Reserve System or by the
state in which the branch is located if the branch is licensed in that state. In
addition, branches licensed by the COTC and branches licensed by certain states
(“State Branches”) may or may not be required to: (a) pledge to the
regulator by depositing assets with a designated bank within the state, an
amount of its assets equal to 5% of its total liabilities; and (b) maintain
assets within the state in an amount equal to a specified percentage of the
aggregate amount of liabilities of the foreign bank payable at or through all of
its agencies or branches within the state. The deposits of State Branches may
not necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a domestic branch of a foreign bank than about a
domestic bank.
In
view of the foregoing factors associated with the purchase of CDs and TDs issued
by foreign branches of domestic banks or by domestic branches of foreign banks
the Adviser will carefully evaluate such investments on a case-by-case basis.
Investment
in Other Investment Companies.
The Financial Services Fund may invest up to 10% of its assets in the securities
of other investment companies, which can include open-end funds, closed-end
funds and unit investment trusts, subject to the limits set forth in the 1940
Act that apply to those types of investments. Investments in other investment
companies are subject to the risks of the securities in which those investment
companies invest. In addition, to the extent the Financial Services Fund invests
in securities of other investment companies, Financial Services Fund
shareholders would indirectly pay a portion of the operating costs of such
companies in addition to the expenses of the Financial Services Fund’s own
operation. These costs include management, brokerage, shareholder servicing and
other operational expenses.
Section
12(d)(1)(A) of the 1940 Act normally 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 within
the 1940
Act and pursuant to various rules promulgated by the SEC. For
example, the SEC has adopted Rule 12d1-4 under the 1940 Act. Subject to certain
conditions on both the acquired fund and acquiring fund, Rule 12d1-4 provides an
exemption that permits the acquiring fund to invest in the securities of other
registered investment companies in excess of the limits of Section 12(d)(1) of
the 1940 Act.
The
Financial Services Fund may invest in shares of mutual funds or unit investment
trusts that are traded on a stock exchange, called exchange-traded funds
(“ETFs”). Typically an ETF seeks to track the performance of an index, such as
the S&P 500 Index, the NASDAQ-100 Index, the Barclays Treasury Bond Index or
more narrow sector or foreign indexes, by holding in its portfolio either the
same securities that comprise the index, or a representative sample of the
index. Investing in an ETF will give the Financial Services Fund exposure to the
securities comprising the index on which the ETF is based.
Unlike
shares of typical mutual funds or unit investment trusts, shares of ETFs are
designed to be traded throughout the trading day, bought and sold based on
market prices rather than net asset value (“NAV”). Shares can trade at either a
premium or discount to NAV. However, the portfolios held by index-based ETFs are
publicly disclosed on each trading day, and an approximation of actual NAV is
disseminated throughout the trading day. Because of this transparency, the
trading prices of index-based ETFs tend to closely track the actual NAV of the
underlying portfolios and the Financial Services Fund will generally gain or
lose value depending on the performance of the index. However, gains or losses
on the Financial Services Fund’s investment in ETFs will ultimately depend on
the purchase and sale price of the ETF. In the future, as new products become
available, the Financial Services Fund may invest in ETFs that are actively
managed. Actively-managed ETFs will likely not have the transparency of
index-based ETFs and, therefore, may be more likely to trade at a larger
discount or premium to actual NAVs.
The
Financial Services Fund may invest in closed-end funds that hold securities of
U.S. and/or non-U.S. issuers. Because shares of closed-end funds trade on an
exchange, investments in closed-end funds may entail the additional risk that
the discount from NAV could increase while the Financial Services Fund holds the
shares.
Repurchase
Agreements.
The Financial Services Fund may agree to purchase securities from a bank or
recognized securities dealer and simultaneously commit to resell the securities
to the bank or dealer at an agreed-upon date and price reflecting a market rate
of interest unrelated to the coupon rate or maturity of the purchased securities
(“repurchase agreements”). Under the terms of a typical repurchase agreement,
the Financial Services Fund would acquire an
underlying
debt obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Financial Services
Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Financial Services Fund’s holding period. If
the value of such securities were less than the repurchase price, plus interest,
the other party to the agreement would be required to provide additional
collateral so that at all times the collateral is at least 102% of the
repurchase price plus accrued interest. The financial institutions with which
the Financial Services Fund may enter into repurchase agreements will be banks
and non-bank dealers of U.S. government securities that are on the Federal
Reserve Bank of New York’s list of reporting dealers, if such banks and non-bank
dealers are deemed creditworthy by the Adviser. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Financial Services Fund’s
ability to dispose of the underlying securities, the risk of a possible decline
in the value of the underlying securities during the period in which the
Financial Services Fund seeks to assert its right to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. The Adviser, acting under the supervision
of the Board, reviews on an ongoing basis the value of the collateral and
creditworthiness of those banks and dealers with which the Financial Services
Fund enters into repurchase agreements to evaluate potential risks.
Pursuant
to an exemptive order issued by the SEC, the Financial Services Fund, along with
other affiliated entities managed by the Adviser or its affiliates, may transfer
uninvested cash balances into one or more joint repurchase accounts. These
balances are invested in one or more repurchase agreements, secured by U.S.
government securities. Each joint repurchase arrangement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default by the other party to the agreement,
retention or sale of the collateral may be subject to legal proceedings.
Reverse
Repurchase Agreements.
The Financial Services Fund may enter into reverse repurchase agreements, which
involve the sale of Financial Services Fund securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment and
are considered borrowings. Since the proceeds of borrowings under reverse
repurchase agreements are invested, this would introduce the speculative factor
known as “leverage.” The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have maturity dates
no later than the repayment date. Generally, the effect of such a transaction is
that the Financial Services Fund can recover all or most of the cash invested in
the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are advantageous only
if the Financial Services Fund has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid may not
always be available, and the Financial Services Fund intends to use the reverse
repurchase technique only when the Adviser believes it will be advantageous to
the Financial Services Fund. The use of reverse repurchase agreements may
exaggerate any interim increase or decrease in the value of the Financial
Services Fund’s assets.
Securities
Lending.
Consistent with applicable regulatory requirements, the Financial Services Fund
may lend portfolio securities to brokers, dealers and other financial
organizations meeting capital and other credit requirements or other criteria
established by the Board. From time to time, the Financial Services Fund may pay
to the borrower and/or a third party which is unaffiliated with the Financial
Services Fund is acting as a “finder” a part of the interest earned from the
investment of collateral received for securities loaned. Although the borrower
will generally be required to make payments to the Financial Services Fund in
lieu of any dividends the Financial Services Fund would have otherwise received
had it not loaned the shares to the borrower, such payments will not be treated
as “qualified dividend income” for purposes of determining what portion of the
Financial Services Fund’s regular dividends (as defined below) received by
individuals may be taxed at the rates generally applicable to long-term capital
gains (see “Distribution and Tax Information” below).
Requirements
of the SEC, which may be subject to future modification, currently provide that
the following conditions must be met whenever the Financial Services Fund lends
its portfolio securities: (a) the Financial Services Fund must receive at
least 100% cash collateral or U.S.
government securities from
the borrower; (b) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral;
(c) the Financial Services Fund must be able to terminate the loan at any
time; (d) the Financial Services Fund must receive reasonable interest on
the loan, as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (e) the Financial
Services Fund may pay only reasonable custodian fees in connection with the
loan; and (f) voting rights on the loaned securities may pass to the
borrower. However, if a material event adversely affecting the investment in the
loaned securities occurs, the Financial Services Fund must terminate the loan
and regain the right to vote the securities.
The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. The Financial Services Fund could also lose money
if its short-term investment of the cash collateral declines
in
value over the period of the loan. Loans will be made to firms deemed by the
Adviser to be of good standing and will not be made unless, in the judgment of
the Adviser, the consideration to be earned from such loans would justify the
risk.
Illiquid
Investments and Restricted Securities
The
Financial Services Fund may not acquire an illiquid investment if, immediately
after the acquisition, the Financial Services 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 Financial Services 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. If illiquid investments exceed 15% of the Financial
Services Fund’s net assets, certain remedial actions will be taken as required
by Rule 22e-4 under the 1940 Act and the Financial Services Fund’s policies and
procedures.
Restricted
securities are securities subject to legal or contractual restrictions on their
resale, such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when the sale would otherwise be desirable.
Under SEC regulations, certain restricted securities acquired through private
placements can be traded freely among qualified purchasers. While restricted
securities are generally classified as illiquid, the SEC has stated that an
investment company’s board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is “liquid.” The Financial Services Fund intends to rely
on this rule, to the extent appropriate, to deem specific securities acquired
through private placement as “liquid.” The Board has delegated to the Adviser,
pursuant to guidelines established by the Board, the responsibility for
determining whether a particular security eligible for trading under this rule
is “liquid.” Investing in these restricted securities could have the effect of
increasing the Financial Services Fund’s illiquidity if qualified purchasers
become, for a time, uninterested in buying these securities.
Restricted
securities may be sold only (1) pursuant to SEC Rule 144A or another exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933,
as amended (the “1933” Act). Rule 144A securities, although not registered in
the U.S., may be sold to qualified institutional buyers in accordance with Rule
144A under the 1933 Act. As noted above, the Adviser, acting pursuant to
guidelines established by the Board, may determine that some Rule 144A
securities are liquid. Where registration is required, the Financial Services
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Financial Services Fund may be permitted to sell a restricted security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Financial Services Fund might obtain a
less favorable price than prevailed when it decided to sell.
Illiquid
investments may be difficult to value, and the Financial Services Fund may have
difficulty disposing of such investments promptly. The Financial Services Fund
does not consider non-U.S. securities to be restricted if they can be freely
sold in the principal markets in which they are traded, even if they are not
registered for sale in the U.S.
Defensive
Investing.
The Financial Services Fund’s 80% investment policy will not be applicable
during periods when the Financial Services Fund pursues a temporary defensive
strategy, as discussed in the Prospectus. The Financial Services Fund may depart
from its principal investment strategies in response to adverse market, economic
or political conditions by taking temporary defensive positions in any type of
money market instruments, short-term debt securities or cash without regard to
any percentage limitations. If the Financial Services Fund takes a temporary
defensive position, it may be unable to achieve its investment objective.
Derivatives.
General.
Rule 18f-4 under the 1940 Act (the “Derivatives Rule”) provides a comprehensive
framework for the Financial Services Fund’s use of derivatives. The Derivatives
Rule requires registered investment companies that enter into derivatives
transactions and certain other transactions that create future payment or
delivery obligations to, among other things, (i) comply with a value-at-risk
(“VaR”) leverage limit, and (ii) adopt and implement a comprehensive written
derivatives risk management program. These and other requirements apply unless
the Fund qualifies as a “limited derivatives user,” which the Derivatives Rule
defines as a fund that limits its derivatives exposure to 10% of its net assets.
Each Fund qualifies as a limited derivatives user. Complying with the
Derivatives Rule may increase the cost of the Fund’s investments and cost of
doing business. The Derivatives Rule may not be effective to limit the Fund’s
risk of loss. In particular, measurements of VaR rely on historical data and may
not accurately measure the degree of risk reflected in the Fund’s derivatives or
other investments.
The
Financial Services Fund may invest in certain derivative instruments (also
called “Financial Instruments”), discussed below, to attempt to hedge its
investments, among other things, as described in the Prospectus. The use of
Financial Instruments is subject to applicable regulations of the SEC, the
several exchanges upon which they are traded and the Commodity Futures Trading
Commission (the “CFTC”). In addition, the Financial Services Fund’s ability to
use Financial Instruments may be limited by tax considerations. In addition to
the instruments, strategies and risks described below, the
Adviser
expects that additional opportunities in connection with Financial Instruments
and other similar or related techniques may become available. These new
opportunities may become available as the Adviser develops new techniques, as
regulatory authorities broaden the range of permitted transactions and as new
Financial Instruments or other techniques are developed. The Adviser may utilize
these opportunities to the extent that they are consistent with the Financial
Services Fund’s investment objective and are permitted by its investment
limitations and applicable regulatory authorities. The Financial Services Fund
might not use any of these strategies, and there can be no assurance that any
strategy used will succeed.
Each
Financial Instrument purchased for the Financial Services Fund is reviewed and
analyzed by the Adviser to assess the risk and reward of each such instrument in
relation to the Financial Services Fund’s investment strategy. The decision to
invest in derivative instruments or conventional securities is made by measuring
the respective instrument’s ability to provide value to the Financial Services
Fund.
Hedging
strategies can be broadly categorized as “short hedges” and “long hedges.” A
short hedge is a purchase or sale of a Financial Instrument intended partially
or fully to offset potential declines in the value of one or more investments
held in the Financial Services Fund’s portfolio. In a short hedge, the Financial
Services Fund takes a position in a Financial Instrument whose price is expected
to move in the opposite direction of the price of the investment being
hedged.
Conversely,
a long hedge is a purchase or sale of a Financial Instrument intended partially
or fully to offset potential increases in the acquisition cost of one or more
investments that the Financial Services Fund intends to acquire. In a long
hedge, the Financial Services Fund takes a position in a Financial Instrument
whose price is expected to move in the same direction as the price of the
prospective investment being hedged. A long hedge is sometimes referred to as an
anticipatory hedge. In an anticipatory hedge transaction, the Financial Services
Fund does not own a corresponding security and, therefore, the transaction does
not relate to a security the Financial Services Fund owns. Rather, it relates to
a security that the Financial Services Fund intends to acquire. If the Financial
Services Fund does not complete the hedge by purchasing the security as
anticipated, the effect on the Financial Services Fund’s portfolio is the same
as if the transaction were entered into for speculative purposes.
Financial
Instruments on securities may be used to attempt to hedge against price
movements in one or more particular securities positions that the Financial
Services Fund owns or intends to acquire. Financial Instruments on indexes, in
contrast, may be used to attempt to hedge against price movements in market
sectors in which the Financial Services Fund has invested or expects to invest.
Financial Instruments on debt securities may be used to hedge either individual
securities or broad debt market sectors.
Special
Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are described below. In general, these techniques may increase
the volatility of the Financial Services Fund and may involve a small investment
of cash relative to the magnitude of the risk assumed.
•Successful
use of most Financial Instruments depends upon the Adviser’s ability to predict
movements of the overall securities, currency and interest rate markets, which
requires different skills than predicting changes in the prices of individual
securities. There can be no assurance that any particular strategy will succeed
and use of Financial Instruments could result in a loss, regardless of whether
the intent was to enhance returns or manage risk.
•When
Financial Instruments are used for hedging purposes, the historical correlation
between price movements of a Financial Instrument and price movements of the
investments being hedged might change so as to make the hedge less effective or
unsuccessful. For example, if the value of a Financial Instrument used in a
short hedge increased by less than the decline in value of the hedged
investment, the hedge would not be fully successful. Such a change in
correlation might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in which
Financial Instruments are traded. The effectiveness of hedges using Financial
Instruments on indexes will depend on the degree to which correlation between
price movements in the index and price movements in the securities being hedged
can be accurately predicted.
Because
there are a limited number of types of exchange-traded options and futures
contracts, it is likely that the standardized contracts available will not match
the Financial Services Fund’s current or anticipated investments exactly. The
Financial Services Fund may invest in options and futures contracts based on
securities with different issuers, maturities or other characteristics from the
securities in which it typically invests, which involves the risk that the
options or futures position will not track the performance of the Financial
Services Fund’s other investments.
Options
and futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments match the Financial Services
Fund’s investments well. Options and futures prices are affected by
factors
that may not affect security prices the same way, such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument and the time remaining until expiration of the contract.
Imperfect
correlation may also result from differing levels of demand in the options and
futures markets and the securities markets, from structural differences in how
options and futures are traded as compared to securities or from the imposition
of daily price fluctuation limits or trading halts. The Financial Services Fund
may purchase or sell options and futures contracts with a greater or lesser
value than the securities it wishes to hedge or intends to purchase in order to
attempt to compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Financial Services Fund’s options or futures positions have a low
correlation with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
•If
successful, the hedging strategies discussed above can reduce the risk of loss
by wholly or partially offsetting the negative effect of unfavorable price
movements. However, such strategies can also reduce opportunity for gain by
offsetting the positive effect of favorable price movements. For example, if the
Financial Services Fund entered into a short hedge because its Adviser projected
a decline in the price of a security in the Financial Services Fund’s portfolio,
and the price of that security increased instead, the gain from that increase
might be wholly or partially offset by a decline in the price of the Financial
Instrument. Moreover, if the price of the Financial Instrument declined by more
than the increase in the price of the security, the Financial Services Fund
could suffer a loss. In either such case, the Financial Services Fund would have
been in a better position had it not attempted to hedge at all.
•The
Financial Services Fund might be required to maintain segregated assets as
“cover” or make margin payments when it takes positions in Financial Instruments
involving obligations to third parties (i.e.,
Financial Instruments other than purchased options). If the Financial Services
Fund was unable to close out its positions in such Financial Instruments, it
might be required to continue to maintain such assets or accounts or make such
payments until the position expired or matured. These requirements might impair
the Financial Services Fund’s ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or require
that the Financial Services Fund sell a portfolio security at a disadvantageous
time.
•The
Financial Services Fund may be subject to the risk that the other party to a
Financial Instrument (the “counterparty”) will not be able to honor its
financial obligation to the Financial Services Fund.
•Many
Financial Instruments are traded in institutional markets rather than on an
exchange. Nevertheless, many Financial Instruments are actively traded and can
be priced with as much accuracy as conventional securities. Financial
Instruments that are custom designed to meet the specialized investment needs of
a relatively narrow group of institutional investors such as the Financial
Services Fund are not readily marketable and are subject to the Financial
Services Fund’s restrictions on illiquid investments.
The
Financial Services Fund’s ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Financial Services
Fund.
Options,
Futures and Currency Strategies.
The Financial Services Fund may, but is not required to, use forward currency
contracts and certain options and futures strategies to attempt to hedge its
portfolio, i.e.,
hedge against the economic impact of adverse changes in the market value of its
securities because of changes in stock market prices, currency exchange rates or
interest rates, to settle transactions quoted in foreign currencies, as a
substitute for buying or selling securities or as a cash flow management
technique. There can be no assurance that such efforts will
succeed.
To
attempt to hedge against adverse movements in exchange rates between currencies,
the Financial Services Fund may enter into forward currency contracts for the
purchase or sale of a specified currency at a specified future date. Such
contracts may involve the purchase or sale of a foreign currency against the
U.S. dollar or may involve two foreign currencies. The Financial Services Fund
may enter into forward currency contracts either with respect to specific
transactions or with respect to its portfolio positions. For example, when the
Adviser anticipates making a purchase or sale of a security, it may enter into a
forward currency contract in order to set the rate (either relative to the U.S.
dollar or another currency) at which the currency exchange transaction related
to the purchase or sale will be made (“transaction hedging”). Further, when the
Adviser believes that a particular currency may decline compared to the U.S.
dollar or another currency, the Financial Services Fund may enter into a forward
currency contract to sell the currency the Adviser expects to decline in an
amount approximating the value of some or all of the Financial Services Fund’s
securities denominated in that currency. When the Adviser believes that one
currency may decline against a currency in which some or all of the portfolio
securities held by the Financial Services Fund are denominated, it may enter
into a forward contract to buy the currency expected to appreciate for a fixed
amount (“position hedging”). In this situation, the Financial Services Fund may,
in the alternative, enter into a forward currency contract to sell a different
currency for a fixed amount of the
currency
expected to decline where the Adviser believes that the value of the currency to
be sold pursuant to the forward currency contract will fall whenever there is a
decline in the value of the currency in which portfolio securities of the
Financial Services Fund are denominated (“cross hedging”). The Financial
Services Fund’s custodian places cash or other liquid assets in a separate
account of the Financial Services Fund having a value equal to the aggregate
amount of the Financial Services Fund’s commitments under forward currency
contracts entered into with respect to position hedges and cross-hedges. If the
value of the securities placed in a separate account declines, additional cash
or securities are placed in the account on a daily basis so that the value of
the account will equal the amount of the Financial Services Fund’s commitments
with respect to such contracts.
For
hedging purposes, the Financial Services Fund may write covered call options and
purchase put and call options on currencies to hedge against movements in
exchange rates and on securities to hedge against the risk of fluctuations in
the prices of securities held by the Financial Services Fund or which the
Adviser intends to include in its portfolio.
The
Financial Services Fund also may use interest rate futures contracts and options
thereon to hedge against changes in the general level in interest rates and on
stock index futures and options thereon to hedge against fluctuations in the
value of securities.
The
Financial Services Fund may write call options on securities and currencies only
if they are covered, and such options must remain covered so long as the
Financial Services Fund is obligated as a writer. A call option written by the
Financial Services Fund is “covered” if the Financial Services Fund owns the
securities or currency underlying the option or has an absolute and immediate
right to acquire that security or currency without additional cash consideration
(or for additional cash consideration held in a segregated account by the
Financial Services Fund’s custodian) upon conversion or exchange of other
securities or currencies held in its portfolio. A written call option is also
covered if the Financial Services Fund holds on a share-for-share basis a
purchased call on the same security or holds a call on the same currency as the
call written where the exercise price of the call held is equal to less than the
exercise price of the call written or greater than the exercise price of the
call written if the difference is maintained by the Financial Services Fund in
cash or other liquid assets.
The
use of forward currency contracts, options and futures involves certain
investment risks and transaction costs to which the Financial Services Fund
might not otherwise be subject. These risks include: dependence on the Adviser’s
ability to predict movements in the prices of individual securities,
fluctuations in the general equity and fixed-income markets and movements in
interest rates and currency markets; imperfect correlation between movements in
the price of currency, options, futures contracts or options thereon and
movements in the price of the currency or security hedged or used for cover; the
fact that skills and techniques needed to trade options, futures contracts and
options thereon or to use forward currency contracts are different from those
needed to select the securities in which the Financial Services Fund invests;
the lack of assurance that a liquid market will exist for any particular option,
futures contract or options thereon at any particular time; and the possible
need to defer or accelerate closing out certain options, futures contracts and
options thereon in order to continue to qualify for the beneficial tax treatment
afforded a regulated investment company (“RIC”) under the Internal Revenue Code
of 1986, as amended (the “Code”).
Over-the-counter
options in which the Financial Services Fund may invest differ from
exchange-traded options in that they are two-party contracts, with price and
other terms negotiated between buyer and seller, and generally do not have as
much market liquidity as exchange-traded options. The Financial Services Fund
may be required to treat as illiquid over-the-counter options purchased and
securities being used to cover certain written over-the-counter
options.
Futures
Contracts and Options on Futures Contracts.
The Financial Services Fund may invest in stock index futures contracts and
options on futures contracts that are traded on a domestic exchange or board of
trade.
The
purpose of entering into a futures contract is to protect the Financial Services
Fund from fluctuations in the value of securities without actually buying or
selling the securities. For example, in the case of stock index futures
contracts, if the Financial Services Fund anticipates an increase in the price
of stocks that it intends to purchase at a later time, the Financial Services
Fund could enter into contracts to purchase the stock index (known as taking a
“long” position) as a temporary substitute for the purchase of stocks. If an
increase in the market occurs that influences the stock index as anticipated,
the value of the futures contracts increases and thereby serves as a hedge
against the Financial Services Fund’s not participating in a market advance. The
Financial Services Fund then may close out the futures contracts by entering
into offsetting futures contracts to sell the stock index (known as taking a
“short” position) as it purchases individual stocks. But by using futures
contracts as an investment tool to reduce risk, given the greater liquidity in
the futures market, it may be possible to accomplish the same result more easily
and more quickly.
No
consideration will be paid or received by the Financial Services Fund upon the
purchase or sale of a futures contract. Initially, the Financial Services Fund
will be required to deposit with the broker an amount of cash or cash
equivalents equal to approximately 2% to 10% of the contract amount (this amount
is subject to change by the exchange or board of trade on which the contract is
traded and brokers or members of such board of trade may charge a higher
amount). This amount is known as “initial margin” and is in the nature of a
performance bond or good faith deposit on the contract, which
is
returned to the Financial Services Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. Subsequent
payments, known as “variation margin,” to and from the broker, will be made
daily as the price of the index or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as “marking-to-market.” In addition, when the
Financial Services Fund enters into a long position in a futures contract or an
option on a futures contract, it must maintain an amount of cash or cash
equivalents equal to the total market value of the underlying futures contract,
less amounts held in the Financial Services Fund’s commodity brokerage account
at its broker. At any time prior to the expiration of a futures contract, the
Financial Services Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Financial Services Fund’s existing
position in the contract.
Positions
in futures contracts may be closed out only on the exchange on which they were
entered into (or through a linked exchange) and no secondary market exists for
those contracts. In addition, although the Financial Services Fund intends to
enter into futures contracts only if there is an active market for the
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of adverse price movements,
the Financial Services Fund would be required to make daily cash payments of
variation margin; in such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. As described above, however, no assurance can be given
that the price of the securities being hedged will correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
Commodity
Exchange Act Regulation.
The Financial Services Fund is operated by persons who have claimed an
exclusion, granted to operators of registered investment companies like the
Financial Services Fund, from registration as a “commodity pool operator” with
respect to the Financial Services Fund under the Commodity Exchange Act (the
“CEA”), and, therefore, are not subject to registration or regulation with
respect to the Financial Services Fund under the CEA. As a result, the Financial
Services Fund is limited in its ability to use commodity futures (which include
futures on broad-based securities indexes and interest rate futures) or options
on commodity futures, engage in certain swaps transactions or make certain other
investments (whether directly or indirectly through investments in other
investment vehicles) for purposes other than “bona fide hedging,” as defined in
the rules of the CFTC. With respect to transactions other than for bona fide
hedging purposes, either: (1) the aggregate initial margin and premiums
required to establish the Financial Services Fund’s positions in such
investments may not exceed 5% of the liquidation value of the Financial Services
Fund’s portfolio (after accounting for unrealized profits and unrealized losses
on any such investments); or (2) the aggregate net notional value of such
instruments, determined at the time the most recent position was established,
may not exceed 100% of the liquidation value of the Financial Services Fund’s
portfolio (after accounting for unrealized profits and unrealized losses on any
such positions). In addition to meeting one of the foregoing trading
limitations, the Financial Services Fund may not market itself as a commodity
pool or otherwise as a vehicle for trading in the futures, options or swaps
markets.
Options
on Securities.
The Financial Services Fund may engage in the writing of covered call options.
The Financial Services Fund may also purchase put options and enter into closing
transactions.
The
principal reason for writing covered call options on securities is to attempt to
realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. In return for a premium, the writer of a
covered call option forfeits the right to any appreciation in the value of the
underlying security above the strike price for the life of the option (or until
a closing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put option accepts the
risk of a decline in the price of the underlying security. The size of the
premiums the Financial Services Fund may receive may be adversely affected as
new or existing institutions, including other investment companies, engage in or
increase their option-writing activities.
Options
written by the Financial Services Fund will normally have expiration dates
between one and six months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities at the times the options are written. In the case of call
options, these exercise prices are referred to as “in-the-money,” “at-the-money”
and “out-of-the-money,” respectively.
The
Financial Services Fund may write (a) in-the-money call options when the
Adviser expects the price of the underlying security to remain flat or decline
moderately during the option period, (b) at-the-money call options when the
Adviser expects the price of the underlying security to remain flat or advance
moderately during the option period and (c) out-of-the-money call options
when the Adviser expects that the price of the security may increase but not
above a price equal to the sum of the exercise price plus the premiums received
from writing the call option. In any of the preceding situations, if
the
market price of the underlying security declines and the security is sold at
this lower price, the amount of any realized loss will be offset wholly or in
part by the premium received. Writing out-of-the-money, at-the-money and
in-the-money put options (the reverse of call options as to the relation of
exercise price to market price) may be utilized in the same market environments
as such call options are used in equivalent transactions.
So
long as the obligation of the Financial Services Fund as the writer of an option
continues, the Financial Services Fund may be assigned an exercise notice by the
broker/dealer through which the option was sold, requiring it to deliver, in the
case of a call, or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This obligation terminates when
the option expires or the Financial Services Fund effects a closing purchase
transaction. The Financial Services Fund can no longer effect a closing purchase
transaction with respect to an option once it has been assigned an exercise
notice. To secure its obligation to deliver the underlying security when it
writes a call option, or to pay for the underlying security when it writes a put
option, the Financial Services Fund will be required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Options
Clearing Corporation (“OCC”) or similar clearing corporation and the securities
exchange on which the option is written.
An
option position may be closed out only where there exists a secondary market for
an option of the same series on a recognized securities exchange or in the
over-the-counter market. The Financial Services Fund expects to write options
only on national securities exchanges or in the over-the-counter market. The
Financial Services Fund may purchase put options issued by the OCC or in the
over-the-counter market.
The
Financial Services Fund may realize a profit or loss upon entering into a
closing transaction. In cases in which the Financial Services Fund has written
an option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the original option
and will incur a loss if the cost of the closing purchase transaction exceeds
the premium received upon writing the original option. Similarly, when the
Financial Services Fund has purchased an option and engages in a closing sale
transaction, whether it recognizes a profit or loss will depend upon whether the
amount received in the closing sale transaction is more or less than the premium
the Financial Services Fund initially paid for the original option plus the
related transaction costs.
Although
the Financial Services Fund generally will purchase or write only those options
for which the Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will exist
for any particular option or at any particular time, and for some options no
such secondary market may exist or may cease to exist. In the past, for example,
higher than anticipated trading activity or order flow, or other unforeseen
events, have at times rendered certain of the facilities of the OCC and national
securities exchanges inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers’ orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Financial Services Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
Securities
exchanges generally have established limitations governing the maximum number of
calls and puts of each class which may be held or written, or exercised within
certain periods, by an investor or group of investors acting in concert
(regardless of whether the options are written on the same or different
securities exchanges or are held, written or exercised in one or more accounts
or through one or more brokers). It is possible that the Financial Services Fund
and other clients of the manager or Adviser and certain of their affiliates may
be considered to be such a group. A securities exchange may order the
liquidation of positions found to be in violation of these limits, and it may
impose certain other sanctions.
In
the case of options written by the Financial Services Fund that are deemed
covered by virtue of the Financial Services Fund’s holding convertible or
exchangeable preferred stock, the time required to convert or exchange and
obtain physical delivery of the underlying common stock with respect to which
the Financial Services Fund has written options may exceed the time within which
the Financial Services Fund must make delivery in accordance with an exercise
notice. In these instances, the Financial Services Fund may purchase or
temporarily borrow the underlying securities for purposes of physical delivery.
By so doing, the Financial Services Fund will not bear any market risk because
the Financial Services Fund will have the absolute right to receive from the
issuer of the underlying security an equal number of shares to replace the
borrowed stock, but the Financial Services Fund may incur additional transaction
costs or interest expenses in connection with any such purchase or
borrowing.
Although
the Adviser will attempt to take appropriate measures to minimize the risks
relating to the Financial Services Fund’s writing of call options and purchasing
of put and call options, there can be no assurance that the Financial Services
Fund will succeed in its option-writing program.
If
positions held by the Financial Services Fund were treated as “straddles” for
federal income tax purposes, or the Financial Services Fund’s risk of loss with
respect to a position was otherwise diminished as set forth in Treasury
regulations,
dividends on stocks that are a part of such positions would not constitute
qualified dividend income subject to such favorable income tax treatment in the
hands of non-corporate shareholders or eligible for the dividends received
deduction for corporate shareholders. In addition, generally, straddles are
subject to certain rules that may affect the amount, character and timing of the
Financial Services Fund’s gains and losses with respect to straddle positions by
requiring, among other things, that: (1) any loss realized on disposition of one
position of a straddle may not be recognized to the extent that the Financial
Services Fund has unrealized gains with respect to the other position in such
straddle; (2) the Financial Services Fund’s holding period in straddle positions
be suspended while the straddle exists (possibly resulting in a gain being
treated as short-term capital gain rather than long-term capital gain); (3) the
losses recognized with respect to certain straddle positions that are part of a
mixed straddle and that are not subject to Section 1256 of the Code be treated
as 60% long-term and 40% short-term capital loss; (4) losses recognized with
respect to certain straddle positions that would otherwise constitute short-term
capital losses be treated as long-term capital losses; and (5) the deduction of
interest and carrying charges attributable to certain straddle positions may be
deferred.
Stock
Index Options.
The Financial Services Fund may purchase put and call options and write call
options on domestic stock indexes listed on domestic exchanges for the purpose
of hedging its portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index. Some stock index options are based
on a broad market index such as the NYSE Composite Index or the Canadian Market
Portfolio Index, or a narrower market or industry index such as the S&P 100
Index, the NYSE Arca Oil Index or the NYSE Arca Computer Technology
Index.
Options
on stock indexes are generally similar to options on stock except for the
delivery requirements. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder the
right to receive a cash “exercise settlement amount” equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed “index
multiplier.” Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or it may
let the option expire unexercised.
The
effectiveness of purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price movements in the portion of
the securities portfolio of the Financial Services Fund being hedged correlate
with price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Financial Services Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of stock prices in the stock market generally or, in the case of
certain indexes, in an industry or market segment, rather than movements in the
price of a particular stock. Accordingly, successful use by the Financial
Services Fund of options on stock indexes will be subject to the Adviser’s
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual
stocks.
Swaps.
As one way of managing its exposure to different types of investments, the
Financial Services Fund may enter into interest rate swaps and currency swaps.
In a typical interest rate swap, the Financial Services Fund and a counterparty
exchange their right to receive or their obligation to pay interest on a
security. For example, one party may agree to make regular payments equal to a
floating interest rate times a “notional principal amount,” in return for
payments equal to a fixed rate times the same notional amount, for a specified
period of time. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them. If a swap agreement provides for payment in different
currencies, the parties might agree to exchange the notional principal amount as
well.
Swap
agreements will tend to shift the Financial Services Fund’s investment exposure
from one type of investment to another. For example, if the Financial Services
Fund agreed to exchange payments in U.S. dollars for payments in a foreign
currency, the swap agreement would tend to decrease the Financial Services
Fund’s exposure to U.S. interest rates and increase its exposure to foreign
currency and interest rates. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of the Financial Services Fund’s
investments and its share price and yield.
Swap
agreements are sophisticated risk management instruments that typically require
a small cash investment relative to the magnitude of risks assumed. As a result,
swaps can be highly volatile and may have a considerable impact on the Financial
Services Fund’s performance. Swap agreements entail both interest rate risk and
credit risk. There is a risk that, based on movements of interest rates in the
future, the payments made by the Financial Services Fund under a swap agreement
will be greater than the payments it received. Swap agreements are subject to
credit risks related to the counterparty’s ability to perform, and may decline
in value if the counterparty’s creditworthiness deteriorates. The
creditworthiness
of firms with which the Financial Services Fund enters into swaps will be
monitored by the Adviser. If a firm’s creditworthiness declines, the value of
the agreement would be likely to decline, potentially resulting in losses. If a
default occurs by the other party to such transaction, the Financial Services
Fund will have contractual remedies pursuant to the agreements related to the
transaction. The Financial Services Fund may also suffer losses if it is unable
to terminate outstanding swap agreements or reduce its exposure through
offsetting transactions. The Financial Services Fund will maintain in a
segregated account cash or liquid assets equal to the net amount, if any, of the
excess of the Financial Services Fund’s obligations over its entitlements with
respect to a swap transaction.
Mortgage-Backed
Securities and Asset-Backed Securities.
As the Financial Services Fund may invest in mortgage-backed securities (“MBS”),
including those that are issued by private issuers, it may have some exposure to
subprime loans as well as to the mortgage and credit markets generally. Private
issuers include commercial banks, savings associations, mortgage companies,
investment banking firms, finance companies and special purpose finance entities
(called special purpose vehicles or “SPVs”) and other entities that acquire and
package mortgage loans for resale as MBS. Unlike MBS issued or guaranteed by the
U.S. government or one of its sponsored entities, MBS issued by private issuers
do not have a government or government-sponsored entity guarantee, but may have
credit enhancement provided by external entities such as banks or financial
institutions or achieved through the structuring of the transaction itself.
Examples of such credit support arising out of the structure of the transaction
include the issue of senior and subordinated securities (e.g.,
the issuance of securities by an SPV in multiple classes or “tranches,” with one
or more classes being senior to other subordinated classes as to the payment of
principal and interest, with the result that defaults on the underlying mortgage
loans are borne first by the holders of the subordinated class); creation of
“reserve funds” (in which case cash or investments, sometimes funded from a
portion of the payments on the underlying mortgage loans, are held in reserve
against future losses); and “overcollateralization” (in which case the scheduled
payments on, or the principal amount of, the underlying mortgage loans exceed
that required to make payment of the securities and pay any servicing or other
fees). However, there can be no guarantee that credit enhancements, if any, will
be sufficient to prevent losses in the event of defaults on the underlying
mortgage loans.
In
addition, MBS that are issued by private issuers are not subject to the
underwriting requirements for the underlying mortgages that are applicable to
those MBS that have a government or government-sponsored entity guarantee. As a
result, the mortgage loans underlying private MBS may, and frequently do, have
less favorable collateral, credit risk or other underwriting characteristics
than government or government-sponsored MBS and have wider variances in a number
of terms including interest rate, term, size, purpose and borrower
characteristics. Privately issued pools more frequently include second
mortgages, high loan-to-value mortgages and manufactured housing loans. The
coupon rates and maturities of the underlying mortgage loans in a private-label
MBS pool may vary to a greater extent than those included in a government
guaranteed pool, and the pool may include subprime mortgage loans. Subprime
loans refer to loans made to borrowers with weakened credit histories or with a
lower capacity to make timely payments on their loans. For these reasons, the
loans underlying these securities have had in many cases higher default rates
than those loans that meet government underwriting requirements.
The
risk of non-payment is greater for MBS that are backed by mortgage pools that
contain subprime loans, but a level of risk exists for all loans. Market factors
adversely affecting mortgage loan repayments may include a general economic
turndown, high unemployment, a general slowdown in the real estate market, a
drop in the market prices of real estate, or an increase in interest rates
resulting in higher mortgage payments by holders of adjustable rate
mortgages.
If
the Financial Services Fund purchases subordinated MBS, the subordinated MBS may
serve as a credit support for the senior securities purchased by other
investors. In addition, the payments of principal and interest on these
subordinated securities generally will be made only after payments are made to
the holders of securities senior to the Financial Services Fund’s securities.
Therefore, if there are defaults on the underlying mortgage loans, the Financial
Services Fund will be less likely to receive payments of principal and interest,
and will be more likely to suffer a loss.
Privately
issued MBS are not traded on an exchange and there may be a limited market for
the securities, especially when there is a perceived weakness in the mortgage
and real estate market sectors. Without an active trading market, MBS held in
the Financial Services Fund’s portfolio may be particularly difficult to value
because of the complexities involved in assessing the value of the underlying
mortgage loans.
Since
the Financial Services Fund may also purchase asset-backed securities (“ABS”),
it may be subject to many of the same characteristics and risks as the MBS
described above, except that ABS may be backed by non-real-estate loans, leases
or receivables such as auto, credit card or home equity loans.
Commercial
Paper. The
Financial Services Fund may purchase commercial paper, including asset-backed
commercial paper (“ABCP”) that is issued by structured investment vehicles or
other conduits. These conduits may be sponsored by mortgage companies,
investment banking firms, finance companies, hedge funds, private equity firms
and special purpose finance entities. ABCP typically refers to a debt security
with an original term to maturity of up to 270 days, the payment of which is
supported by cash flows from underlying assets, or one or more liquidity or
credit support providers,
or
both. Assets backing ABCP, which may be included in revolving pools of assets
with large numbers of obligors, include credit card, car loan and other consumer
receivables and home or commercial mortgages, including subprime mortgages. The
repayment of ABCP issued by a conduit depends primarily on the cash collections
received from the conduit’s underlying asset portfolio and the conduit’s ability
to issue new ABCP. Therefore, there could be losses to the Financial Services
Fund in the event of credit or market value deterioration in the conduit’s
underlying portfolio, mismatches in the timing of the cash flows of the
underlying asset interests and the repayment obligations of maturing ABCP, or
the conduit’s inability to issue new ABCP. To protect investors from these
risks, ABCP programs may be structured with various protections, such as credit
enhancement, liquidity support, and commercial paper stop-issuance and wind-down
triggers. However there can be no guarantee that these protections will be
sufficient to prevent losses to investors in ABCP.
Some
ABCP programs provide for an extension of the maturity date of the ABCP if, on
the related maturity date, the conduit is unable to access sufficient liquidity
through the issue of additional ABCP. This may delay the sale of the underlying
collateral and the Financial Services Fund may incur a loss if the value of the
collateral deteriorates during the extension period. Alternatively, if
collateral for ABCP commercial paper deteriorates in value, the collateral may
be required to be sold at inopportune times or at prices insufficient to repay
the principal and interest on the ABCP. ABCP programs may provide for the
issuance of subordinated notes as an additional form of credit enhancement. The
subordinated notes are typically of a lower credit quality and have a higher
risk of default. A Fund purchasing these subordinated notes will, therefore,
have a higher likelihood of loss than investors in the senior
notes.
The
Financial Services Fund may also invest in other types of fixed income
securities that are subordinated or “junior” to more senior securities of the
issuer, or which represent interests in pools of such subordinated or junior
securities. Such securities may include preferred stock. Under the terms of
subordinated securities, payments that would otherwise be made to their holders
may be required to be made to the holders of more senior securities, and/or the
subordinated or junior securities may have junior liens, if they have any rights
at all, in any collateral (meaning proceeds of the collateral are required to be
paid first to the holders of more senior securities). As a result, subordinated
or junior securities will be disproportionately adversely affected by a default
or even a perceived decline in creditworthiness of the issuer.
The
Financial Services Fund’s compliance with its investment restrictions and
limitations is usually determined at the time of investment. If the credit
rating on a security is downgraded or the credit quality deteriorates after
purchase by the Financial Services Fund, or if the maturity of a security is
extended after purchase by the Financial Services Fund, the Adviser will decide
whether the security should be held or sold. Certain mortgage- or asset-backed
securities may provide, upon the occurrence of certain triggering events or
defaults, for the investors to become the holders of the underlying assets. In
that case the Financial Services Fund may become the holder of securities that
it could not otherwise purchase, based on its investment strategies or its
investment restrictions and limitations, at a time when such securities may be
difficult to dispose of because of adverse market conditions.
1919
FINANCIAL SERVICES FUND - INVESTMENT POLICIES
The
Financial Services Fund has adopted the fundamental and non-fundamental
investment policies below for the protection of shareholders. Fundamental
investment policies of the Financial Services Fund may not be changed without
the vote of a majority of the outstanding shares of the Financial Services Fund,
defined under the 1940 Act as the lesser of (a) 67% or more of the voting
power of the Financial Services Fund present at a shareholder meeting, if the
holders of more than 50% of the voting power of the Financial Services Fund are
present in person or represented by proxy, or (b) more than 50% of the
voting power of the Financial Services Fund. The Board may change
non-fundamental investment policies at any time.
If
any percentage restriction described below is complied with at the time of an
investment, a later increase or decrease in the percentage resulting from a
change in values or assets will not constitute a violation of such
restriction.
Diversification
The
Financial Services Fund is currently classified as a diversified fund under the
1940 Act. This means that the Financial Services Fund may not purchase
securities of an issuer (other than obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities) if, with respect to 75% of its
total assets, (a) more than 5% of the Financial Services Fund’s total
assets would be invested in securities of that issuer or (b) the Financial
Services Fund would hold more than 10% of the outstanding voting securities of
that issuer. With respect to the remaining 25% of its total assets, the
Financial Services Fund can invest more than 5% of its assets in one issuer.
Under the 1940 Act, the Financial Services Fund cannot change its
classification from diversified to non-diversified without shareholder approval.
Fundamental
Investment Policies
The
Financial Services Fund’s fundamental investment policies are as
follows:
1)The
Financial Services Fund may not borrow money except as permitted by (i) the 1940
Act or interpretations or modifications by the SEC, SEC staff or other authority
with appropriate jurisdiction, or (ii) exemptive or other relief or permission
from the SEC, SEC staff or other authority.
2)The
Financial Services Fund may not engage in the business of underwriting the
securities of other issuers except as permitted by (i) the 1940 Act or
interpretations or modifications by the SEC, SEC staff or other authority with
appropriate jurisdiction, or (ii) exemptive or other relief or permission
from the SEC, SEC staff or other authority.
3)The
Financial Services Fund may lend money or other assets to the extent permitted
by (i) the 1940 Act or interpretations or modifications by the SEC, SEC
staff or other authority with appropriate jurisdiction, or (ii) exemptive
or other relief or permission from the SEC, SEC staff or other
authority.
4)The
Financial Services Fund may not issue senior securities except as permitted by
(i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or
other authority with appropriate jurisdiction, or (ii) exemptive or other relief
or permission from the SEC, SEC staff or other authority.
5)The
Financial Services Fund may not purchase or sell real estate except as permitted
by (i) the 1940 Act or interpretations or modifications by the SEC, SEC staff or
other authority with appropriate jurisdiction, or (ii) exemptive or other relief
or permission from the SEC, SEC staff or other authority.
6)The
Financial Services Fund may purchase or sell commodities or contracts related to
commodities to the extent permitted by (i) the 1940 Act or interpretations or
modifications by the SEC, SEC staff or other authority with appropriate
jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC
staff or other authority.
7)The
Financial Services Fund will not purchase or sell the securities of any issuer,
if, as a result of such purchase or sale, less than 25% of the assets of the
Financial Services Fund would be invested in the securities of issuers
principally engaged in the business activities having the specific
characteristics denoted by the Financial Services Fund.
8)The
Financial Services Fund is a “diversified company” as defined by the 1940
Act.
With
respect to a fundamental policy relating to borrowing money set forth in
(1) above, the 1940 Act permits the Financial Services Fund to borrow
money in amounts of up to one-third of the Financial Services Fund’s total
assets from banks for any purpose, and to borrow up to 5% of the Financial
Services Fund’s total assets from banks or other lenders for temporary purposes.
(The Financial Services Fund’s total assets include the amounts being borrowed.)
To limit the risks attendant to borrowing, the 1940 Act requires the
Financial Services Fund to maintain an “asset coverage” of at least 300% of the
amount of its borrowings, provided that in the event that the Financial Services
Fund’s asset coverage falls below 300%, the Financial Services Fund is required
to reduce the amount of its borrowings so that it meets the 300% asset coverage
threshold within three days (not including Sundays and holidays). Asset coverage
means the ratio that the value of the Financial Services Fund’s total assets
(including amounts borrowed), minus liabilities other than borrowings, bears to
the aggregate amount of all borrowings. Certain trading practices and
investments, such as reverse repurchase agreements, may be considered to be
borrowings and thus subject to the 1940 Act restrictions. Borrowing money
to increase portfolio holdings is known as “leveraging.” Borrowing, especially
when used for leverage, may cause the value of the Financial Services Fund’s
shares to be more volatile than if the Financial Services Fund did not borrow.
This is because borrowing tends to magnify the effect of any increase or
decrease in the value of the Financial Services Fund’s portfolio holdings.
Borrowed money thus creates an opportunity for greater gains, but also greater
losses. To repay borrowings, the Financial Services Fund may have to sell
securities at a time and at a price that is unfavorable to the Financial
Services Fund. There also are costs associated with borrowing money, and these
costs would offset and could eliminate the Financial Services Fund’s net
investment income in any given period. Currently, the Financial Services Fund
has no intention of borrowing money for leverage. The policy in (1) above
will be interpreted to permit the Financial Services Fund to engage in trading
practices and investments that may be considered to be borrowing to the extent
permitted by the 1940 Act. Short-term credits necessary for the settlement of
securities transactions and arrangements with respect to securities lending will
not be considered to be borrowings under the policy. Practices and investments
that may involve leverage but are not considered to be borrowings are not
subject to the policy.
With
respect to a fundamental policy relating to underwriting set forth in
(2) above, the 1940 Act does not prohibit the Financial Services Fund
from engaging in the underwriting business or from underwriting the securities
of other issuers; in fact, the 1940 Act permits the Financial Services Fund
to have underwriting commitments of up to 25% of its assets under certain
circumstances. Those circumstances currently are that the amount of the
Financial Services Fund’s underwriting commitments, when added to the value of
the Financial Services Fund’s investments in issuers where the Financial
Services Fund owns more than 10% of the outstanding voting securities of those
issuers, cannot exceed the 25% cap. A fund engaging in transactions involving
the acquisition or disposition of portfolio securities may be considered to be
an
underwriter
under the 1933 Act. Under the 1933 Act, an underwriter may be liable for
material omissions or misstatements in an issuer’s registration statement or
prospectus. Securities purchased from an issuer and not registered for sale
under the 1933 Act are considered restricted securities. There may be a
limited market for these securities. If these securities are registered under
the 1933 Act, they may then be eligible for sale but participating in the
sale may subject the seller to underwriter liability. These risks could apply to
a fund investing in restricted securities. Although it is not believed that the
application of the 1933 Act provisions described above would cause the
Financial Services Fund to be engaged in the business of underwriting, the
policy in (2) above will be interpreted not to prevent the Financial
Services Fund from engaging in transactions involving the acquisition or
disposition of portfolio securities, regardless of whether the Financial
Services Fund may be considered to be an underwriter under the
1933 Act.
With
respect to a fundamental policy relating to lending set forth in (3) above,
the 1940 Act does not prohibit the Financial Services Fund from making
loans; however, SEC staff interpretations currently prohibit funds from lending
more than one-third of their total assets, except through the purchase of debt
obligations or the use of repurchase agreements. (A repurchase agreement is an
agreement to purchase a security, coupled with an agreement to sell that
security back to the original seller on an agreed-upon date at a price that
reflects current interest rates. The SEC frequently treats repurchase agreements
as loans.) While lending securities may be a source of income to the Financial
Services Fund, as with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the underlying securities should the borrower
fail financially. However, loans would be made only when the Financial Services
Fund’s Adviser believes the income justifies the attendant risks. The Financial
Services Fund also will be permitted by this policy to make loans of money,
including to other funds. The Financial Services Fund would have to obtain
exemptive relief from the SEC to make loans to other funds. The policy in
(3) above will be interpreted not to prevent the Financial Services Fund
from purchasing or investing in debt obligations and loans. In addition,
collateral arrangements with respect to options, forward currency and futures
transactions and other derivative instruments, as well as delays in the
settlement of securities transactions, will not be considered
loans.
With
respect to a fundamental policy relating to issuing senior securities set forth
in (4) above, “senior securities” are defined as fund obligations that have
a priority over a fund’s shares with respect to the payment of dividends or the
distribution of fund assets. The 1940 Act prohibits the Financial Services
Fund from issuing senior securities, except that the Financial Services Fund may
borrow money from a bank in amounts of up to one-third of the Financial Services
Fund’s total assets from banks for any purpose. The Financial Services Fund may
also borrow up to 5% of the Financial Services Fund’s total assets from banks or
other lenders for temporary purposes, and these borrowings are not considered
senior securities. The issuance of senior securities by the Financial Services
Fund can increase the speculative character of the Financial Services Fund’s
outstanding shares through leveraging. Leveraging of the Financial Services
Fund’s portfolio through the issuance of senior securities magnifies the
potential for gain or loss on monies, because even though the Financial Services
Fund’s net assets remain the same, the total risk to investors is increased to
the extent of the Financial Services Fund’s gross assets. The policy in
(4) above will be interpreted not to prevent collateral arrangements with
respect to swaps, options, forward or futures contracts or other derivatives, or
the posting of initial or variation margin.
With
respect to a fundamental policy relating to real estate set forth in
(5) above, the 1940 Act does not prohibit the Financial Services Fund
from owning real estate; however, the Financial Services Fund is limited in the
amount of illiquid assets it may purchase. Investing in real estate may involve
risks, including that real estate is generally considered illiquid and may be
difficult to value and sell. Owners of real estate may be subject to various
liabilities, including environmental liabilities. To the extent that investments
in real estate are considered illiquid, the current SEC position generally
limits the Financial Services Fund’s purchases of illiquid investments to 15% of
net assets. The policy in (5) above will be interpreted not to prevent the
Financial Services Fund from investing in real estate-related companies,
companies whose businesses consist in whole or in part of investing in real
estate, instruments (like mortgages) that are secured by real estate or
interests therein, or real estate investment trust securities.
With
respect to a fundamental policy relating to commodities set forth in
(6) above, the 1940 Act does not prohibit the Financial Services Fund
from owning commodities, whether physical commodities and contracts related to
physical commodities (such as oil or grains and related futures contracts), or
financial commodities and contracts related to financial commodities (such as
currencies and, possibly, currency futures). However, the Financial Services
Fund is limited in the amount of illiquid assets it may purchase. To the extent
that investments in commodities are considered illiquid, the current SEC
position generally limits the Financial Services Fund’s purchases of illiquid
investments to 15% of net assets. If the Financial Services Fund was to invest
in a physical commodity or a physical commodity-related instrument, the
Financial Services Fund would be subject to the additional risks of the
particular physical commodity and its related market. The value of commodities
and commodity-related instruments may be extremely volatile and may be affected
either directly or indirectly by a variety of factors. There may also be storage
charges and risks of loss associated with physical commodities. The policy in
(6) above will be interpreted to permit investments in exchange-traded
Funds that invest in physical and/or financial commodities.
With
respect to a fundamental policy relating to concentration set forth in
(7) above, the 1940 Act does not define what constitutes
“concentration” in an industry. The SEC has taken the position that investment
of 25% or more of a fund’s total assets in one or more issuers conducting their
principal activities in the same industry or group of industries constitutes
concentration. It is possible that interpretations of concentration could change
in the future. A fund that invests a significant percentage of its total assets
in a single industry may be particularly susceptible to adverse events affecting
that industry and may be more risky than a fund that does not concentrate in an
industry. The policy in (7) above will be interpreted to refer to
concentration as that term may be interpreted from time to time. The policy
prohibits the Financial Services Fund from making purchases or sales of
securities of an issuer if doing so would result in the Financial Services
Fund’s investments not being concentrated (per the SEC view of what constitutes
“concentration”). Given the Financial Services Fund’s policy to invest, under
normal circumstances, at least 80 % of its net assets in equity securities of
issuers in this industry, the Financial Services Fund expects this policy
probably will never prohibit a purchase or sale.
The
policy also will be interpreted to permit investment without limit in the
following: securities of the U.S. government and its agencies or
instrumentalities; securities of state, territory, or possession; and repurchase
agreements collateralized by any such obligations. For purposes of the Financial
Services Fund’s concentration limitations, municipal securities backed
principally by the assets and revenues of a non-governmental user, such as an
industrial corporation or a privately owned or operated hospital, are not
subject to this exception. Accordingly, issuers of the foregoing securities will
not be considered to be members of any industry. There also will be no limit on
investment in issuers domiciled in a single jurisdiction or country. The policy
also will be interpreted to give broad authority to the Financial Services Fund
as to how to classify issuers within or among industries.
The
Financial Services Fund’s fundamental policies will be interpreted broadly. For
example, the policies will be interpreted to refer to the 1940 Act and the
related rules as they are in effect from time to time, and to interpretations
and modifications of or relating to the 1940 Act by the SEC and others as
they are given from time to time. When a policy provides that an investment
practice may be conducted as permitted by the 1940 Act, the policy will be
interpreted to mean either that the 1940 Act expressly permits the practice
or that the 1940 Act does not prohibit the practice.
1919
Financial Services Fund -
Non-Fundamental
Investment Policy
This
investment objective is non-fundamental and may be changed by the Board without
shareholder approval upon 60 days’ prior written notice to shareholders. The
Financial Services Fund’s non-fundamental investment policy is as follows:
The
Financial Services Fund may not invest in other registered open-end management
investment companies and registered unit investment trusts in reliance upon the
provisions of subparagraphs (G) or (F) of Section 12(d)(1) of the 1940 Act. The
foregoing investment policy does not restrict the Financial Services Fund from
(i) acquiring securities of other registered investment companies in connection
with a merger, consolidation, reorganization, or acquisition of assets, or (ii)
purchasing the securities of registered investment companies, to the extent
otherwise permissible under Section 12(d)(1) of the 1940 Act.
Portfolio
Turnover
For
reporting purposes, the Financial Services Fund’s portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of the portfolio
securities owned by the Financial Services Fund during the fiscal year. In
determining such portfolio turnover, all securities whose maturities at the time
of acquisition were one year or less are excluded. A 100% portfolio turnover
rate would occur, for example, if all of the securities in the Financial
Services Fund’s investment portfolio (other than short-term money market
securities) were replaced once during the fiscal year.
In
the event that portfolio turnover increases, this increase necessarily results
in correspondingly greater transaction costs which must be paid by the Financial
Services Fund. To the extent the portfolio trading results in realization of net
short-term capital gains, shareholders will be taxed on such gains at ordinary
tax rates (except shareholders who invest through individual retirement accounts
(“IRAs”) and other retirement plans which are not taxed currently on
accumulations in their accounts). Portfolio turnover will not be a limiting
factor should the Adviser deem it advisable to purchase or sell securities.
Following
are the portfolio turnover rates for the fiscal periods indicated
below:
|
|
|
|
|
| |
| December
31, 2022 |
December
31, 2021 |
| 4% |
10% |
1919
SOCIALLY
RESPONSIVE BALANCED FUND - INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The
1919 Socially Responsive Balanced Fund (the “Socially Responsive Fund”) is
registered under the Investment Company Act of 1940, as amended (the
“1940 Act”) as an open-end, diversified management investment company.
The
Socially Responsive Fund’s Prospectus discusses the Socially Responsive Fund’s
investment objective and policies. The following discussion supplements the
description of the Socially Responsive Fund’s investment policies in its
Prospectus.
Investment
Objective and Principal Investment Strategies
The
Socially Responsive Fund seeks to provide high total return consisting of
capital appreciation and current income.
The
Socially Responsive Fund invests primarily in common stocks and other equity
securities of U.S. companies. The Socially Responsive Fund will maintain at
least 25% of the value of its assets in fixed income securities, which are
primarily investment grade and may be of any maturity and duration. The Socially
Responsive Fund may also invest a portion of its assets in equity and debt
securities of foreign issuers. The Socially Responsive Fund emphasizes companies
that offer both attractive investment opportunities and demonstrate an awareness
of their impact on the society in which they operate.
There
is no guarantee that the Socially Responsive Fund will achieve its investment
objective.
The
Adviser, on behalf of the Socially Responsive Fund, has claimed an exclusion
from the definition of the term “commodity pool operator” under the Commodity
Exchange Act. As a result, the Socially Responsive Fund is not subject to
registration or regulation as a commodity pool operator under such Act even
though it may engage to a limited extent in certain transactions that might
otherwise subject it to such registration and regulation.
1919
SOCIALLY
RESPONSIVE BALANCED FUND - INVESTMENT PRACTICES AND RISK FACTORS
The
Socially Responsive Fund’s principal investment strategies are described above.
The following provides additional information about these principal strategies
and describes other investment strategies and practices that may be used by the
Socially Responsive Fund, which all involve risks of varying degrees.
Socially
Responsive Criteria
The
portfolio managers believe that there is a direct correlation between companies
that demonstrate an acute awareness of their impact on the society within which
they operate and companies that offer attractive long-term investment potential.
The portfolio managers believe that actively addressing environmental and social
issues can translate into sound business. For example, by ensuring a product or
service does not negatively impact the environment, a company can avoid costly
litigation and clean-up costs; by maintaining positive standards for the
workplace and a diverse employee population, a company can better ensure access
to quality talent and improved productivity; and by becoming more involved in
the community, a company can enhance its consumer franchise. The portfolio
managers also believe that top quality management teams that successfully
balance their companies’ business interests with their social influences can
gain long-term competitive advantages, which may result in increased shareholder
value and, therefore, make the company’s shares a better investment. The
Socially Responsive Fund is designed to consider both financial and social
criteria in all of its investment decisions.
The
portfolio managers consider whether, relative to other companies in an industry,
a company that meets these investment criteria is also sensitive to
environmental and social issues related to its products, services, or methods of
doing business.
Socially
responsive factors considered include:
• Fair
and reasonable employment practices, with due consideration of a diverse
workforce
•Contributions
to the general well-being of the citizens of its host communities and countries
and respect for human rights
•Efforts
and strategies to minimize the negative impact of business activities and to
preserve the earth’s ecological heritage with those environmental policies,
practices and procedures that are currently acceptable, or are exhibiting
improvement
•Exposure
to fossil fuel real assets including oil, gas and coal;
•Avoidance
of investments in companies that:
•Manufacture
nuclear weapons or other weapons of mass destruction
•Derive
more than 5% of their revenue from the production and sale of non-nuclear
weaponry
•Derive
more than 5% of their revenue from the production or sales of
tobacco
The
portfolio managers perform their own independent review of issuers based on the
above factors and every investment the Fund makes is reviewed against these
factors (excluding securities issued by the U.S. Government or its agencies). In
conducting this review, portfolio managers will seek to understand the business
profile of an issuer and to identify any concerns relating to the above factors
relative to established industry norms. This review is a fundamental,
qualitative analysis based on third-party data, publicly available information
and issuer disclosures and is not based on any pre-established quantitative
screens with respect to any particular data.
With
respect to “fair and reasonable employment practices,” the portfolio managers
will assess whether a company has public labor relations issues, such as
lawsuits, workplace accidents, or union-related disputes. In considering a
company’s “contribution to the general well-being of citizens,” the portfolio
managers assess whether a company has existing conflicts or controversies with
the communities or citizens thereof in which it operates. Similarly, in
assessing whether a company’s business activities have a “negative impact,” the
portfolio managers review whether a company has had disclosed or public
controversies or conflicts with respect to its local environment.
The
Fund also assesses control of or exposure to fossil fuel real assets by
evaluating a company’s ownership interest in oil, gas, and/or coal assets and to
what degree the company’s business is dependent on the extraction,
transportation, processing, and/or distribution of oil, gas, and/or coal. In
making these assessments, the portfolio managers may review sources of revenue,
capital expense, planned and implemented investments, company strategic
direction or other relevant factors.
Socially
responsive factors are not the exclusive considerations in investment decisions
but companies that are not, in the view of the portfolio managers, satisfying
the above factors -- or making efforts to satisfy the above factors --
consistent with applicable industry norms will not be purchased. These portfolio
restrictions are based on the belief that a company will benefit from being
socially responsive by enabling it to better position itself in developing
business opportunities while avoiding liabilities that may be incurred when a
product or service is determined to have a negative social impact.
The
portfolio managers use their best efforts to assess a company’s environmental
and social performance. The portfolio managers monitor the related progress or
deterioration of each company in which the Socially Responsive Fund invests. The
Trustees monitor the socially responsive criteria used by the Socially
Responsive Fund, and the portfolio managers may, upon approval of the Trustees,
change the criteria used to rate the environmental and social performance of an
issuer without prior notice or approval by shareholders.
While
the application of the Socially Responsive Fund’s socially responsive criteria
may preclude some companies with strong earnings and growth potential, the
portfolio managers believe that there are sufficient investment opportunities
among those companies that satisfy the socially responsive criteria to meet the
Socially Responsive Fund’s investment objective.
Equity
Securities
General.
Investors should realize that risk of loss is inherent in the ownership of any
securities and that the NAV of the Socially Responsive Fund will fluctuate,
reflecting fluctuations in the market value of its portfolio positions.
Common
Stocks.
The Socially Responsive Fund may purchase common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other shareholder or class of shareholders, including holders of the entity’s
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so. Common stocks
include securities issued by limited partnerships, limited liability companies,
business trusts and companies organized outside the United States.
Common
stocks do not represent an obligation of the issuer. The issuance of debt
securities or preferred stock by an issuer will create prior claims which could
adversely affect the rights of holders of common stock with respect to the
assets of the issuer upon liquidation or bankruptcy.
Convertible
Securities.
The Socially Responsive Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock of the
same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest
paid or accrued on debt or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion or exchange, convertible securities ordinarily provide a stream of
income with generally higher yields than those of common stocks of the same or
similar issuers, but lower than the yield of nonconvertible debt. Convertible
securities are usually subordinated to comparable-tier nonconvertible securities
but rank senior to common stock in a corporation’s capital structure.
The
value of a convertible security is a function of (1) its yield in
comparison with the yields of other securities of comparable maturity and
quality that do not have a conversion privilege and (2) its worth, at
market value, if converted or
exchanged
into the underlying common stock. A convertible security may be subject to
redemption at the option of the issuer at a price established in the convertible
security’s governing instrument, which may be less than the ultimate conversion
or exchange value.
Convertible
securities are subject both to the stock market risk associated with equity
securities and to the credit and interest rate risks associated with fixed
income securities. As the market price of the equity security underlying a
convertible security falls, the convertible security tends to trade on the basis
of its yield and other fixed income characteristics. As the market price of such
equity security rises, the convertible security tends to trade on the basis of
its equity conversion features.
Preferred
Stock.
The Socially Responsive Fund may invest in preferred stocks. Preferred stock
pays dividends at a specified rate and generally has preference over common
stock in the payment of dividends and the liquidation of the issuer’s assets,
but is junior to the debt securities of the issuer in those same respects.
Unlike interest payments on debt securities, dividends on preferred stock are
generally payable at the discretion of the issuer’s board of directors. Holders
of preferred stock may suffer a loss of value if dividends are not paid. The
market prices of preferred stocks are subject to changes in interest rates and
are more sensitive to changes in the issuer’s creditworthiness than are the
prices of debt securities. Generally, under normal circumstances, preferred
stock does not carry voting rights. Upon liquidation, preferred stocks are
entitled to a specified liquidation preference, which is generally the same as
the par or stated value, and are senior in right of payment to common stock.
Preferred stocks are, however, equity securities in the sense that they do not
represent a liability of the issuer and, therefore, do not offer as great a
degree of protection of capital or assurance of continued income as investments
in corporate debt securities. In addition, preferred stocks are subordinated in
right of payment to all debt obligations and creditors of the issuer, and
convertible preferred stocks may be subordinated to other preferred stock of the
same issuer.
Warrants.
The Socially Responsive Fund may invest in warrants, which provide the Socially
Responsive Fund with the right to purchase other securities of the issuer at a
later date. The Socially Responsive Fund has undertaken that its investment in
warrants, valued at the lower of cost or market, will not exceed 5% of the value
of its net assets and not more than 2% of such assets will be invested in
warrants which are not listed on the NYSE. Warrants acquired by the Socially
Responsive Fund in units or attached to securities will be deemed to be without
value for purposes of this restriction.
Warrants
are subject to the same market risks as stocks, but may be more volatile in
price. Because investing in warrants can provide a greater potential for profit
or loss than an equivalent investment in the underlying security, warrants
involve leverage and are considered speculative investments. At the time of
issuance of a warrant, the cost is generally substantially less than the cost of
the underlying security itself, and therefore, the investor is able to gain
exposure to the underlying security with a relatively low capital investment.
Price movements in the underlying security are generally magnified in the price
movements of the warrant, although changes in the market value of the warrant
may not necessarily correlate to the prices of the underlying security. The
Socially Responsive Fund’s investment in warrants will not entitle it to receive
dividends or exercise voting rights and will become worthless if the warrants
cannot be profitably exercised before the expiration dates.
Real
Estate Investment Trusts.
The Socially Responsive Fund may invest without limitation in shares of real
estate investment trusts (“REITs”), which are pooled investment vehicles that
invest in real estate or real estate loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage (hybrid) 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. A mortgage REIT can make construction, development or long-term
mortgage loans, which are sensitive to the credit quality of the borrower.
Hybrid REITs combine the characteristics of both equity and mortgage trusts,
generally by holding both ownership interests and mortgage interests in real
estate. REITs are not taxed on income distributed to shareholders provided they
comply with the applicable requirements of the Code. Debt securities issued by
REITs, for the most part, are general and unsecured obligations and are subject
to risks associated with REITs. Like mutual funds, REITs have expenses,
including advisory and administration fees paid by REIT shareholders and, as a
result, an investor is subject to a duplicate level of fees if the Socially
Responsive Fund invests in REITs.
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. An equity REIT may be
affected by changes in the value of the underlying properties owned by the REIT.
A mortgage REIT may be affected by changes in interest rates and the ability of
the issuers of its portfolio mortgages to repay their obligations. REITs are
dependent upon the skills of their managers and are not diversified. REITs are
generally dependent upon maintaining cash flows to repay borrowings and to make
distributions to shareholders and are subject to the risk of default by lessees
and borrowers. REITs whose underlying assets are concentrated in properties used
by a particular industry, such as health care, are also subject to industry
related risks.
REITs
(especially mortgage REITs) are also subject to interest rate risks. When
interest rates decline, the value of a REIT’s investment in fixed income
obligations can be expected to rise. Conversely, when interest rates rise, the
value of a REIT’s investment in fixed rate obligations can be expected to
decline. If the REIT invests in adjustable rate mortgage loans (the interest
rates on which are reset periodically) yields on a REIT’s investments in such
loans will gradually align themselves to reflect changes in market interest
rates. This causes the value of such investments to fluctuate less dramatically
in response to interest rate fluctuations than would investments in fixed rate
obligations. REITs may have limited financial resources, may trade less
frequently and in a limited volume and may be subject to more abrupt or erratic
price movements than larger company securities.
The
values of securities issued by REITs are affected by tax and regulatory
requirements and by perceptions of management skill. They are also subject to
heavy cash flow dependency, defaults by borrowers or tenants, self-liquidation,
the possibility of failing to qualify for the ability to avoid tax by satisfying
distribution requirements under the Code, and failing to maintain exemption from
the 1940 Act. Also, the Socially Responsive Fund will indirectly bear its
proportionate share of expenses incurred by REITs in which the Socially
Responsive Fund invests. REITs are also sensitive to factors such as changes in
real estate values and property taxes, interest rates, overbuilding and
creditworthiness of the issuer.
Investment
in Other Investment Company Securities.
The Socially Responsive Fund may invest in the securities of other investment
companies, which can include open-end funds, closed-end funds and unregistered
investment companies, subject to the limits set forth in the 1940 Act that
apply to these types of investments. Investments in other investment companies
are subject to the risks of the securities in which those investment companies
invest. In addition, to the extent the Socially Responsive Fund invests in
securities of other investment companies, Socially Responsive Fund shareholders
would indirectly pay a portion of the operating costs of such companies in
addition to the expenses of the Socially Responsive Fund’s own operation. These
costs include management, brokerage, shareholder servicing and other operational
expenses.
Section
12(d)(1)(A) of the 1940 Act normally 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 within
the 1940 Act and pursuant to various rules promulgated by the SEC. For example,
the SEC has adopted Rule 12d1-4 under the 1940 Act. Subject to certain
conditions on both the acquired fund and acquiring fund, Rule 12d1-4 provides an
exemption that permits the acquiring fund to invest in the securities of other
registered investment companies in excess of the limits of Section 12(d)(1) of
the 1940 Act.
The
Socially Responsive Fund may invest in shares of mutual funds or unit investment
trusts that are traded on a stock exchange, called exchange-traded funds
(“ETFs”). Typically, an ETF seeks to track the performance of an index, such as
the S&P 500®
Index, the NASDAQ-100 Index, the Barclays Treasury Bond Index, or more narrow
sector or foreign indexes, by holding in its portfolio either the same
securities that comprise the index, or a representative sample of the index.
Investing in an ETF will give the Socially Responsive Fund exposure to the
securities comprising the index on which the ETF is based.
Unlike
shares of typical mutual funds or unit investment trusts, shares of ETFs are
designed to be traded throughout the trading day, bought and sold based on
market prices rather than NAV. Shares can trade at either a premium or discount
to NAV. However, the portfolios held by index-based ETFs are publicly disclosed
on each trading day, and an approximation of actual NAV is disseminated
throughout the trading day. Because of this transparency, the trading prices of
index-based ETFs tend to closely track the actual NAV of the underlying
portfolios and the Socially Responsive Fund will generally gain or lose value
depending on the performance of the index. However, gains or losses on the
Socially Responsive Fund’s investment in ETFs will ultimately depend on the
purchase and sale price of the ETF. In the future, as new products become
available, the Socially Responsive Fund may invest in ETFs that are actively
managed. Actively managed ETFs will likely not have the transparency of
index-based ETFs and, therefore, may be more likely to trade at a larger
discount or premium to actual NAVs.
The
Socially Responsive Fund may invest in closed-end funds, which hold securities
of U.S. and/or non-U.S. issuers. Because shares of closed-end funds trade on an
exchange, investments in closed-end funds may entail the additional risk that
the discount from NAV could increase while the Socially Responsive Fund holds
the shares.
Fixed
Income Securities
General.
The
Socially
Responsive
Fund may invest in certain debt and fixed income securities.
These
securities share three principal risks: First, the level of interest income
generated by the Socially
Responsive
Fund’s fixed income investments may decline due to a decrease in market interest
rates. When fixed income securities mature or are sold, they may be replaced by
lower-yielding investments. Second, their values fluctuate with changes in
interest
rates. A decrease in interest rates will generally result in an increase in the
value of the Socially
Responsive
Fund’s fixed income investments. Conversely, during periods of rising interest
rates, the value of the Socially
Responsive
Fund’s fixed income investments will generally decline. However, a change in
interest rates will not have the same impact on all fixed rate securities. For
example, the magnitude of these fluctuations will generally be greater for a
security whose duration or maturity is longer. Changes in the value of portfolio
securities will not affect interest income from those securities, but will be
reflected in the Socially
Responsive
Fund’s NAV. The Socially
Responsive
Fund’s investments in fixed income securities with longer terms to maturity or
greater duration are subject to greater volatility than the Socially
Responsive
Fund’s shorter-term securities. The volatility of a security’s market value will
differ depending upon the security’s duration, the issuer and the type of
instrument. Third, certain fixed income securities are subject to credit risk,
which is the risk that an issuer of securities will be unable to pay principal
and interest when due, or that the value of the security will suffer because
investors believe the issuer is unable to pay.
Issuer
Risk.
The value of fixed income securities issued by corporations may decline for a
number of reasons which directly relate to the issuer such as management
performance, financial leverage or reduced demand for the issuer’s goods and
services.
Interest
Rate Risk.
When interest rates decline, the market value of fixed income securities tends
to increase. Conversely, when interest rates increase, the market value of fixed
income securities tends to decline. The volatility of a security’s market value
will differ depending upon the security’s duration, the issuer and the type of
instrument.
Default
Risk/Credit Risk.
Investments in fixed income securities are subject to the risk that the issuer
of the security could default on its obligations, causing the Socially
Responsive Fund to sustain losses on such investments. A default could impact
both interest and principal payments.
Call
Risk and Extension Risk.
Fixed income securities may be subject to both call risk and extension risk.
Call risk exists when the issuer may exercise its right to pay principal on an
obligation earlier than scheduled, which would cause cash flows to be returned
earlier than expected. This typically results when interest rates have declined
and the Socially Responsive Fund will suffer from having to reinvest in lower
yielding securities. Extension risk exists when the issuer may exercise its
right to pay principal on an obligation later than scheduled, which would cause
cash flows to be returned later than expected. This typically results when
interest rates have increased, and the Socially Responsive Fund will suffer from
the inability to invest in higher yield securities.
Below
Investment Grade Fixed Income Securities.
A description of the ratings used by Moody’s Investors Service, Inc. (“Moody’s”)
and S&P Global Ratings, a division of S&P Global Inc. (“S&P”) is set
forth in Appendix A. Securities which are rated BBB by S&P or Baa by Moody’s
are generally regarded as having adequate capacity to pay interest and repay
principal, but may have some speculative characteristics. Securities rated below
BBB by S&P or Baa by Moody’s are considered to have speculative
characteristics, including the possibility of default or bankruptcy of the
issuers of such securities, market price volatility based upon interest rate
sensitivity, questionable creditworthiness and relative liquidity of the
secondary trading market. Because high yield bonds have been found to be more
sensitive to adverse economic changes or individual corporate developments and
less sensitive to interest rate changes than higher-rated investments, an
economic downturn could disrupt the market for high yield bonds and adversely
affect the value of outstanding bonds and the ability of issuers to repay
principal and interest. In addition, in a declining interest rate market,
issuers of high yield bonds may exercise redemption or call provisions, which
may force the Socially Responsive Fund, to the extent it owns such securities,
to replace those securities with lower yielding securities. This could result in
a decreased return.
Investment
Grade Categories.
Fixed income securities rated in the highest four ratings categories for
long-term debt by a Nationally Recognized Statistical Rating Organization
(“NRSRO”) are considered “investment grade.” Obligations rated in the lowest of
the top four ratings (e.g.,
BBB by S&P or Baa by Moody’s) are considered to have some speculative
characteristics. Unrated securities will be considered to be investment grade if
deemed by the Adviser to be comparable in quality to instruments so rated, or if
other outstanding obligations of the issuer of such securities are rated BBB/Baa
or better. A
description of the ratings by Moody’s and S&P is set forth in Appendix A of
this SAI.
Corporate
Debt Obligations. The
Socially
Responsive
Fund may invest in corporate debt obligations and zero coupon securities issued
by financial institutions and corporations. Corporate debt obligations are
subject to the risk of an issuer’s inability to meet principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity. Zero coupon securities are
securities sold at a discount to par value and on which interest payments are
not made during the life of the security. Because zero coupon bonds do not pay
current interest in cash, these securities are subject to greater credit risk
and greater fluctuation in value in response to changes in market interest rates
than debt obligations that pay interest currently.
Mortgage-Backed
and Asset-Backed Securities.
The Socially Responsive Fund may purchase fixed or adjustable rate
mortgage-backed securities (“MBS”) issued by the Government National Mortgage
Association (“Ginnie Mae”), Fannie Mae (formally known as the Federal National
Mortgage Association) or Freddie Mac (formally known as the Federal Home
Loan
Mortgage Corporation), and other asset-backed securities (“ABS”), including
securities backed by automobile loans, equipment leases or credit card
receivables. Ginnie Mae is a wholly owned U.S. government corporation within the
Department of Housing and Urban Development. The mortgage-backed securities
guaranteed by Ginnie Mae are backed by the full faith and credit of the United
States. Fannie Mae and Freddie Mac are stockholder-owned companies chartered by
Congress. Fannie Mae and Freddie Mac guarantee the securities they issue as to
timely payment of principal and interest, but such guarantee is not backed by
the full faith and credit of the United States. These securities directly or
indirectly represent a participation in, or are secured by and payable from,
fixed or adjustable rate mortgage or other loans which may be secured by real
estate or other assets. Unlike traditional debt instruments, payments on these
securities include both interest and a partial payment of principal. Prepayments
of the principal of underlying loans may shorten the effective maturities of
these securities and may result in the Socially Responsive Fund having to
reinvest proceeds at a lower interest rate. The Socially Responsive Fund may
also purchase collateralized mortgage obligations, which are a type of bond
secured by an underlying pool of mortgages, or mortgage pass-through
certificates that are structured to direct payments on underlying collateral to
different series or classes of the obligations.
MBS
may be issued by private companies or by agencies of the U.S. government and
represent direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. ABS represent
participations in, or are secured by and payable from, assets such as
installment sales or loan contracts, leases, credit card receivables and other
categories of receivables. Certain debt instruments may only pay principal at
maturity or may only represent the right to receive payments of principal or
payments of interest on underlying pools of mortgages, assets or government
securities, but not both. The value of these types of instruments may change
more drastically than debt securities that pay both principal and interest. The
Socially Responsive Fund may obtain a below market yield or incur a loss on such
instruments during periods of declining interest rates. Principal only and
interest only instruments are subject to extension risk. For mortgage
derivatives and structured securities that have imbedded leverage features,
small changes in interest or prepayment rates may cause large and sudden price
movements. Mortgage derivatives can also become illiquid and hard to value in
declining markets. Certain MBS or ABS may provide, upon the occurrence of
certain triggering events or defaults, for the investors to become the holders
of the underlying assets. In that case, the Socially Responsive Fund may become
the holder of securities that it could not otherwise purchase, based on its
investment strategies or its investment restrictions and limitations, at a time
when such securities may be difficult to dispose of because of adverse market
conditions.
Commercial
banks, savings and loan institutions, mortgage bankers and other secondary
market issuers, such as dealers, create pass-through pools of conventional
residential mortgage loans. Such issuers also may be the originators of the
underlying mortgage loans. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government guarantees of payments
with respect to such pools. However, timely payment of interest and principal of
these pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies. The
Socially Responsive Fund may buy mortgage-related securities without insurance
or guarantees if, through an examination of the loan experience and practices of
the persons creating the pools, the Adviser determines that the securities are
an appropriate investment for the Socially Responsive Fund.
When-Issued
and Delayed Delivery Transactions.
In order to secure yields or prices deemed advantageous at the time, the
Socially Responsive Fund may purchase or sell securities on a when-issued or
delayed-delivery basis. The Socially Responsive Fund will enter into a
when-issued transaction for the purpose of acquiring portfolio securities and
not for the purpose of leverage. In when-issued or delayed-delivery
transactions, delivery of the securities occurs beyond normal settlement
periods, but no payment or delivery will be made by the Socially Responsive Fund
prior to the actual delivery or payment by the other party to the transaction.
The Socially Responsive Fund will not accrue income with respect to a
when-issued or delayed-delivery security prior to its stated delivery date. In
entering into a when-issued or delayed-delivery transaction, the Socially
Responsive Fund relies on the other party to consummate the transaction and may
be disadvantaged if the other party fails to do so.
Purchasing
such securities involves the risk of loss if the value of the securities
declines prior to settlement date. The sale of securities for delayed delivery
involves the risk that the prices available in the market on the delivery date
may be greater than those obtained in the sale transaction. The Socially
Responsive Fund will at all times maintain in a segregated account at its
custodian cash or liquid assets equal to the amount of the Socially Responsive
Fund’s when-issued or delayed-delivery commitments. For the purpose of
determining the adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If the market or fair value
of such securities declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of such commitments by the Socially Responsive Fund. Placing securities rather
than cash in the account may have a leveraging effect on the Socially Responsive
Fund’s assets. That is, to the extent that the Socially Responsive Fund remains
substantially fully invested in securities at the time that it has committed to
purchase securities on a when-issued basis, there will be greater fluctuation in
its NAV than if it had set aside cash to satisfy its purchase commitments.
On
the settlement date, the Socially Responsive Fund will meet its obligations from
then available cash flow, the sale of securities held in the separate account,
the sale of other securities or, although it normally would not expect to do so,
from the sale of the when-issued or delayed-delivery securities themselves
(which may have a greater or lesser value than the Socially Responsive Fund’s
payment obligations). For transactions in when-issued and delayed-delivery
securities, asset segregation would not be required if (i) the Fund intends to
physically settle the transaction, and (ii) the transaction will settle within
35 days of the trade date.
Other
Fixed Income Securities.
The Socially Responsive Fund may also invest in other types of fixed income
securities which are subordinated or “junior” to more senior securities of the
issuer, or which represent interests in pools of such subordinated or junior
securities. Such securities may include preferred stock. Under the terms of
subordinated securities, payments that would otherwise be made to their holders
may be required to be made to the holders of more senior securities, and/or the
subordinated or junior securities may have junior liens, if they have any rights
at all, in any collateral (meaning proceeds of the collateral are required to be
paid first to the holders of more senior securities). As a result, subordinated
or junior securities will be disproportionately adversely affected by a default
or even a perceived decline in creditworthiness of the issuer.
Credit
Ratings.
The Socially Responsive Fund’s compliance with its investment restrictions and
limitations is usually determined at the time of investment. If the credit
rating on a security is downgraded or the credit quality deteriorates after
purchase by the Socially Responsive Fund, or if the maturity of a security is
extended after purchase by the Socially Responsive Fund, the Adviser will decide
whether the security should be held or sold. Certain MBS or ABS may provide,
upon the occurrence of certain triggering events or defaults, for the investors
to become the holders of the underlying assets. In that case, the Socially
Responsive Fund may become the holder of securities that it could not otherwise
purchase, based on its investment strategies or its investment restrictions and
limitations, at a time when such securities may be difficult to dispose of
because of adverse market conditions.
Floating
and Variable Rate Income Securities. The
Socially
Responsive Fund
may invest in floating and variable rate income securities. Income securities
may provide for floating or variable rate interest or dividend payments. The
floating or variable rate may be determined by reference to a known lending
rate, such as a bank’s prime rate, a certificate of deposit (“CD”) or the London
Inter-Bank Offered Rate (“LIBOR”). Alternatively, the rate may be determined
through an auction or remarketing process. The rate also may be indexed to
changes in the values of interest rate or securities indexes, currency exchange
rates or other commodities. The amount by which the rate paid on an income
security may increase or decrease may be subject to periodic or lifetime caps.
Floating and variable rate income securities include securities whose rates vary
inversely with changes in market rates of interest. Such securities may also pay
a rate of interest determined by applying a multiple to the variable rate. The
extent of increases and decreases in the value of securities whose rates vary
inversely with changes in market rates of interest generally will be larger than
comparable changes in the value of an equal principal amount of a fixed rate
security having similar credit quality, redemption provisions and maturity. Such
securities include variable rate master demand notes.
Zero
Coupon,
Discount and Payment-in-kind Securities.
The Socially Responsive Fund may invest in “zero coupon” and
other deep discount securities of governmental or private issuers.
Zero coupon securities generally pay no cash interest (or dividends in the case
of preferred stock) to their holders prior to maturity. Accordingly, such
securities usually are issued and traded at a deep discount from their face or
par value and generally are subject to greater fluctuations of market value in
response to changing interest rates than securities of comparable maturities and
credit quality that pay cash interest (or dividends in the case of preferred
stock) on a current basis.
The
values of these securities may be highly volatile as interest rates rise or
fall. In addition, the Socially Responsive Fund’s investments in zero coupon
securities will result in special tax consequences. Although zero coupon
securities do not make interest payments, for tax purposes, a portion of the
difference between a zero coupon security’s stated redemption price at maturity
and its issue price is taxable income of the Socially Responsive Fund each year.
The value of zero coupon bonds is subject to greater fluctuation in market value
in response to changes in market interest rates than bonds of comparable
maturity which pay interest currently. Zero coupon bonds allow an issuer to
avoid the need to generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds that pay interest
currently. Even though such bonds do not pay current interest in cash, the
Socially Responsive Fund is nonetheless required to accrue interest income on
such investments and to distribute such amounts at least annually to
shareholders. Accordingly, for the Socially Responsive Fund to continue to
qualify for tax treatment as a RIC and to avoid income and possibly excise tax,
the Socially Responsive Fund may be required to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. These
distributions must be made from the Socially Responsive Fund’s cash assets or,
if necessary, from the proceeds of sales of portfolio securities. The Socially
Responsive Fund will not be able to purchase additional income-producing
securities with cash used to make such distributions and its current income
ultimately may be reduced as a result.
U.S.
Government Securities.
The Socially Responsive Fund may invest in U.S. government securities, which
include (1) U.S. Treasury bills (maturity of one year or less), U.S.
Treasury notes (maturity of one to ten years) and U.S. Treasury
bonds
(maturities generally greater than ten years) and (2) obligations issued or
guaranteed by U.S. government agencies or instrumentalities which are supported
by any of the following: (a) the full faith and credit of the U.S.
government; (b) the right of the issuer to borrow an amount limited to
specific line of credit from the U.S. government (such as obligations of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities
(such as securities issued by Fannie Mae); or (d) only the credit of the
instrumentality (such as securities issued by Freddie Mac). In the case of
obligations not backed by the full faith and credit of the United States, the
Socially Responsive Fund must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the U.S. government itself in the event the
agency or instrumentality does not meet its commitments. Therefore, the Socially
Responsive Fund will invest in obligations issued by such an instrumentality
only if the Socially Responsive Fund’s Adviser determines the credit risk with
respect to the instrumentality does not make its securities unsuitable for
investment by the Socially Responsive Fund. Neither the U.S. government nor any
of its agencies or instrumentalities guarantees the market value of the
securities they issue. Therefore, the market value of such securities will
fluctuate in response to changes in interest rates.
Short-Term
Investments.
When the portfolio managers believe that a defensive investment posture is
warranted or when attractive investment opportunities do not exist, the Socially
Responsive Fund may temporarily invest all or a portion of its assets in
short-term money market instruments. The money market instruments in which the
Socially Responsive Fund may invest are U.S. government securities, certificates
of deposit (“CDs”), time deposits (“TDs”) and bankers’ acceptances issued by
domestic banks (including their branches located outside the United States and
subsidiaries located in Canada), domestic branches of foreign banks, savings and
loan associations and other banking institutions having total assets in excess
of $500 million; high grade commercial paper; and repurchase agreements with
respect to the foregoing types of instruments. To the extent the Socially
Responsive Fund is investing in short-term investments as a temporary defensive
posture, the Socially Responsive Fund’s investment objective may not be
achieved. CDs are short-term negotiable obligations of commercial banks. TDs are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Bankers’ acceptances are time drafts drawn on
commercial banks by borrowers usually in connection with international
transactions.
Domestic
commercial banks organized under federal law are supervised and examined by the
Comptroller of the Currency (the “COTC”) and are required to be members of the
Federal Reserve System and to be insured by the Federal Deposit Insurance
Corporation (the “FDIC”). Domestic banks organized under state law are
supervised and examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most state banks are insured
by the FDIC (although such insurance may not be of material benefit to the
Socially Responsive Fund, depending upon the principal amount of CDs of each
bank held by the Socially Responsive Fund) and are subject to federal
examination and to a substantial body of federal law and regulation. As a result
of governmental regulations, domestic branches of domestic banks are, among
other things, generally required to maintain specified levels of reserves, and
are subject to other supervision and regulation.
Obligations
of foreign branches of domestic banks, such as CDs and TDs, may be general
obligations of the parent bank in addition to the issuing branch or may be
limited by the terms of a specific obligation and government regulation. Such
obligations are subject to different risks than are those of domestic banks or
domestic branches of foreign banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. Foreign
branches of domestic banks are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial
recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank than about a domestic
bank.
Obligations
of domestic branches of foreign banks may be general obligations of the parent
bank in addition to the issuing branch, or may be limited by the terms of a
specific obligation and by governmental regulation as well as governmental
action in the country in which the foreign bank has its head office. A domestic
branch of a foreign bank with assets in excess of $1 billion may or may not
be subject to reserve requirements imposed by the Federal Reserve System or by
the state in which the branch is located if the branch is licensed in that
state. In addition, branches licensed by the COTC and branches licensed by
certain states (“State Branches”) may or may not be required to: (a) pledge
to the regulator by depositing assets with a designated bank within the state,
an amount of its assets equal to 5% of its total liabilities; and
(b) maintain assets within the state in an amount equal to a specified
percentage of the aggregate amount of liabilities of the foreign bank payable at
or through all of its agencies or branches within the state. The deposits of
State Branches may not necessarily be insured by the FDIC. In addition, there
may be less publicly available information about a domestic branch of a foreign
bank than about a domestic bank.
In
view of the foregoing factors associated with the purchase of CDs and TDs issued
by foreign branches of domestic banks or by domestic branches of foreign banks,
the Adviser will carefully evaluate such investments on a case-by-case
basis.
Commercial
Paper.
Commercial paper consists of short-term (usually from 1 to 270 days) unsecured
promissory notes issued by corporations in order to finance their current
operations. The Socially Responsive Fund may invest in short-term debt
obligations of issuers that at the time of purchase are rated A-2, A-1 or A-1+
by S&P or Prime-2 or Prime-1 by Moody’s or, if unrated, are issued by
companies having an outstanding unsecured debt issue currently rated within the
two highest ratings of S&P or Moody’s.
Variable
Rate Demand Notes.
The Socially Responsive Fund may invest in variable rate master demand notes,
which typically are issued by large corporate borrowers providing for variable
amounts of principal indebtedness and periodic adjustments in the interest rate
according to the terms of the instrument. Variable rate demand notes are direct
lending arrangements between the Socially Responsive Fund and an issuer, and are
not normally traded in a secondary market. The Socially Responsive Fund,
however, may demand payment of principal and accrued interest at any time. In
addition, while variable rate demand notes generally are not rated, their
issuers must satisfy the same criteria as those set forth above for issuers of
commercial paper. The Adviser will consider the earning power, cash flow and
other liquidity ratios of issuers of variable rate demand notes and continually
will monitor their financial ability to meet payment on demand.
Derivatives
General.
Rule 18f-4 under the 1940 Act (the “Derivatives Rule”) provides a comprehensive
framework for the Socially Responsive Fund’s use of derivatives. The Derivatives
Rule requires registered investment companies that enter into derivatives
transactions and certain other transactions that create future payment or
delivery obligations to, among other things, (i) comply with a value-at-risk
(“VaR”) leverage limit, and (ii) adopt and implement a comprehensive written
derivatives risk management program. These and other requirements apply unless
the Fund qualifies as a “limited derivatives user,” which the Derivatives Rule
defines as a fund that limits its derivatives exposure to 10% of its net assets.
Each Fund qualifies as a limited derivatives user. Complying with the
Derivatives Rule may increase the cost of the Fund’s investments and cost of
doing business. The Derivatives Rule may not be effective to limit the Fund’s
risk of loss. In particular, measurements of VaR rely on historical data and may
not accurately measure the degree of risk reflected in the Fund’s derivatives or
other investments. Other potentially adverse regulatory obligations can develop
suddenly and without notice.
The
Socially Responsive Fund may utilize a variety of transactions using
derivatives, such as futures and options on securities or securities indexes and
options on these futures and interest rate futures (collectively, “Financial
Instruments”). The Socially Responsive Fund may use Financial Instruments as a
hedging technique in an attempt to manage risk in the Socially Responsive Fund’s
portfolio, as a substitute for buying or selling securities and as a cash flow
management technique. The Socially Responsive Fund may choose not to make use of
derivatives for a variety of reasons, and no assurance can be given that any
derivatives strategy employed will be successful.
The
use of Financial Instruments may be limited by applicable law and any applicable
regulations of the SEC, the Commodity Futures Trading Commission (the “CFTC”),
or the exchanges on which some Financial Instruments may be traded. (Note,
however, that some Financial Instruments that the Socially Responsive Fund may
use may not be listed on any exchange and may not be regulated by the SEC or the
CFTC.) In addition, the Socially Responsive Fund’s ability to use Financial
Instruments may be limited by tax considerations.
In
addition to the instruments and strategies discussed in this section, the
Adviser may discover additional opportunities in connection with Financial
Instruments and other similar or related techniques. These opportunities may
become available as the Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new Financial
Instruments or other techniques are developed. The Adviser may utilize these
opportunities and techniques to the extent that they are consistent with the
Socially Responsive Fund’s investment objective and permitted by its investment
limitations and applicable regulatory authorities. These opportunities and
techniques may involve risks different from or in addition to those summarized
herein.
This
discussion is not intended to limit the Socially Responsive Fund’s investment
flexibility, unless such a limitation is expressly stated, and therefore will be
construed by the Socially Responsive Fund as broadly as possible. Statements
concerning what the Socially Responsive Fund may do are not intended to limit
any other activity. Also, as with any investment or investment technique, even
when the Prospectus or this discussion indicates that the Socially Responsive
Fund may engage in an activity, it may not actually do so for a variety of
reasons, including cost considerations.
Summary
of Certain Risks.
The use of Financial Instruments involves special considerations and risks,
certain of which are summarized below, and may result in losses to the Socially
Responsive Fund. In general, the use of Financial Instruments may increase the
volatility of the Socially Responsive Fund and may involve a small investment of
cash relative to the magnitude of the risk or exposure assumed. Even a small
investment in derivatives may magnify or otherwise increase investment losses to
the Socially Responsive Fund. As noted above, there can be no assurance that any
derivatives strategy will succeed.
•Financial
Instruments are subject to the risk that the market value of the derivative
itself or the market value of underlying instruments will change in a way
adverse to the Socially Responsive Fund’s interest. Many Financial Instruments
are complex, and successful use of them depends in part upon the Adviser’s
ability to forecast correctly future market trends and other financial or
economic factors or the value of the underlying security, index, interest rate,
currency or other instrument or measure. Even if the Adviser’s forecasts are
correct, other factors may cause distortions or dislocations in the markets that
result in unsuccessful transactions. Financial Instruments may behave in
unexpected ways, especially in abnormal or volatile market
conditions.
•The
Socially Responsive Fund may be required to maintain assets as “cover,” maintain
segregated accounts, post collateral or make margin payments when it takes
positions in Financial Instruments. Assets that are segregated or used as cover,
margin or collateral may be required to be in the form of cash or liquid
securities, and typically may not be sold while the position in the Financial
Instrument is open unless they are replaced with other appropriate assets. If
markets move against the Socially Responsive Fund’s position, the Socially
Responsive Fund may be required to maintain or post additional assets and may
have to dispose of existing investments to obtain assets acceptable as
collateral or margin. This may prevent it from pursuing its investment
objective. Assets that are segregated or used as cover, margin or collateral
typically are invested, and these investments are subject to risk and may result
in losses to the Socially Responsive Fund. These losses may be substantial, and
may be in addition to losses incurred by using the Financial Instrument in
question. If the Socially Responsive Fund is unable to close out its positions,
it may be required to continue to maintain such assets or accounts or make such
payments until the positions expire or mature, and the Socially Responsive Fund
will continue to be subject to investment risk on the assets. In addition, the
Socially Responsive Fund may not be able to recover the full amount of its
margin from an intermediary if that intermediary were to experience financial
difficulty. Segregation, cover, margin and collateral requirements may impair
the Socially Responsive Fund’s ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or require
the Socially Responsive Fund to sell a portfolio security or close out a
derivatives position at a disadvantageous time or price.
•The
Socially Responsive Fund’s ability to close out or unwind a position in a
Financial Instrument prior to expiration or maturity depends on the existence of
a liquid market or, in the absence of such a market, the ability and willingness
of the other party to the transaction (the “counterparty”) to enter into a
transaction closing out the position. If there is no market or the Socially
Responsive Fund is not successful in its negotiations, the Socially Responsive
Fund may not be able to sell or unwind the derivative position at a particular
time or at an anticipated price. This may also be the case if the counterparty
to the Financial Instrument becomes insolvent. The Socially Responsive Fund may
be required to make delivery of portfolio securities or other assets underlying
a Financial Instrument in order to close out a position or to sell portfolio
securities or assets at a disadvantageous time or price in order to obtain cash
to close out the position. While the position remains open, the Socially
Responsive Fund continues to be subject to investment risk on the Financial
Instrument. The Socially Responsive Fund may or may not be able to take other
actions or enter into other transactions, including hedging transactions, to
limit or reduce its exposure to the Financial Instrument.
•Certain
Financial Instruments transactions may have a leveraging effect on the Socially
Responsive Fund, and adverse changes in the value of the underlying security,
index, interest rate, currency or other instrument or measure can result in
losses substantially greater than the amount invested in the Financial
Instrument itself. When the Socially Responsive Fund engages in transactions
that have a leveraging effect, the value of the Socially Responsive Fund is
likely to be more volatile and all other risks also are likely to be compounded.
This is because leverage generally magnifies the effect of any increase or
decrease in the value of an asset and creates investment risk with respect to a
larger pool of assets than the Socially Responsive Fund would otherwise have.
Certain Financial Instruments have the potential for unlimited loss, regardless
of the size of the initial investment.
•Many
Financial Instruments may be difficult to value, which may result in increased
payment requirements to counterparties or a loss of value to the Socially
Responsive Fund.
•Liquidity
risk exists when a particular Financial Instrument is difficult to purchase or
sell. If a derivative transaction is particularly large or if the relevant
market is illiquid, the Socially Responsive Fund may be unable to initiate a
transaction or liquidate a position at an advantageous time or price. Certain
Financial Instruments, including certain over-the-counter (“OTC”) options and
swaps, may be considered illiquid and therefore subject to the Socially
Responsive Fund’s limitation on illiquid investments.
•In
a hedging transaction there may be imperfect correlation, or even no
correlation, between the identity, price or price movements of a Financial
Instrument and the identity, price or price movements of the investments being
hedged. This lack of correlation may cause the hedge to be unsuccessful and may
result in the Socially Responsive Fund incurring substantial losses and/or not
achieving anticipated gains. Even if the strategy works
as
intended, the Socially Responsive Fund might have been in a better position had
it not attempted to hedge at all.
•Financial
Instruments used for non-hedging purposes may result in losses which would not
be offset by increases in the value of portfolio holdings or declines in the
cost of securities or other assets to be acquired. In the event that the
Socially Responsive Fund uses a Financial Instrument as an alternative to
purchasing or selling other investments or in order to obtain desired exposure
to an index or market, the Socially Responsive Fund will be exposed to the same
risks as are incurred in purchasing or selling the other investments directly,
as well as the risks of the transaction itself.
•Certain
Financial Instruments involve the risk of loss resulting from the insolvency or
bankruptcy of the counterparty or the failure by the counterparty to make
required payments or otherwise comply with the terms of the contract. In the
event of default by a counterparty, the Socially Responsive Fund may have
contractual remedies pursuant to the agreements related to the transaction,
which may be limited by applicable law in the case of the counterparty’s
bankruptcy.
•Financial
Instruments involve operational risk. There may be incomplete or erroneous
documentation or inadequate collateral or margin, or transactions may fail to
settle. For Financial Instruments not guaranteed by an exchange or
clearinghouse, the Socially Responsive Fund may have only contractual remedies
in the event of a counterparty default, and there may be delays, costs or
disagreements as to the meaning of contractual terms and litigation in enforcing
those remedies.
•Certain
Financial Instruments transactions, including certain options, swaps, forward
contracts, and certain options on foreign currencies, are entered into directly
by the counterparties or through financial institutions acting as market makers
(“OTC derivatives”), rather than being traded on exchanges or in markets
registered with the CFTC or the SEC. Many of the protections afforded to
exchange participants will not be available to participants in OTC derivatives
transactions. For example, OTC derivatives transactions are not subject to the
guarantee of an exchange, and only OTC derivatives that either are required to
be cleared or submitted voluntarily for clearing to a clearinghouse will enjoy
the protections that central clearing provides against default by the original
counterparty to the trade. In an OTC derivatives transaction that is not
cleared, the Socially Responsive Fund bears the risk of default by its
counterparty. In a cleared derivatives transaction, the Socially Responsive Fund
is instead exposed to the risk of default of the clearinghouse and the risk of
default of the broker through which it has entered into the transaction.
Information available on counterparty creditworthiness may be incomplete or
outdated, thus reducing the ability to anticipate counterparty
defaults.
•Financial
Instruments transactions conducted outside the United States may not be
conducted in the same manner as those entered into on U.S. exchanges, and may be
subject to different margin, exercise, settlement or expiration procedures. Many
of the risks of OTC derivatives transactions are also applicable to Financial
Instruments used outside the United States. Financial Instruments used outside
the United States also are subject to the risks affecting foreign securities,
currencies and other instruments.
•Financial
Instruments involving currency are subject to additional risks. Currency related
transactions may be negatively affected by government exchange controls,
blockages, and manipulations. Exchange rates may be influenced by factors
extrinsic to a country’s economy. Also, there is no systematic reporting of last
sale information with respect to foreign currencies. As a result, the
information on which trading in currency derivatives is based may not be as
complete as, and may be delayed beyond, comparable data for other
transactions.
•Use
of Financial Instruments involves transaction costs, which may be significant.
Use of Financial Instruments also may increase the amount of taxable income to
shareholders.
The
Socially Responsive Fund’s ability to close out a position in a Financial
Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and
willingness of the counterparty to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Socially Responsive
Fund.
Options
on Securities.
The Socially Responsive Fund may write covered call options and enter into
closing transactions with respect thereto. The principal reason for writing
covered call options on securities is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the securities alone. In
return for a premium, the writer of a covered call option forfeits the right to
any appreciation in the value of the underlying security above the strike price
for the life of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a decline in the
price of the underlying security. The size of the premiums the Socially
Responsive Fund may receive may be adversely affected as new or existing
institutions, including other investment companies, engage in or increase their
option-writing activities.
Options
written by the Socially Responsive Fund will normally have expiration dates
between one and six months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities at the times options are written. In the case of call
options, these exercise prices are referred to as “in-the-money,” “at-the-money”
and “out-of-the-money,” respectively. The Socially Responsive Fund may write
(a) in-the-money call options when the Adviser expects the price of the
underlying security to remain flat or decline moderately during the option
period, (b) at-the-money call options when the Adviser expects the price of
the underlying security to remain flat or advance moderately during the option
period and (c) out-of-the-money call options when the Adviser expects that
the price of the security may increase but not above a price equal to the sum of
the exercise price plus the premiums received from writing the call option. In
any of the preceding situations, if the market price of the underlying security
declines and the security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the premium received. Writing
out-of-the-money, at-the-money and in-the-money put options (the reverse of call
options as to the relation of exercise price to market price) may be utilized in
the same market environments as such call options are used in equivalent
transactions.
So
long as the obligation of the Socially Responsive Fund as the writer of an
option continues, the Socially Responsive Fund may be assigned an exercise
notice by the broker/dealer through which the option was sold, requiring it to
deliver, in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Socially Responsive Fund effects a
closing purchase transaction. The Socially Responsive Fund can no longer effect
a closing purchase transaction with respect to an option once it has been
assigned an exercise notice. To secure its obligation to deliver the underlying
security when it writes a call option, or to pay for the underlying security
when it writes a put option, the Socially Responsive Fund will be required to
deposit in escrow the underlying security or other assets in accordance with the
rules of the Options Clearing Corporation (“OCC”) or similar clearing
corporation and the securities exchange on which the option is
written.
An
option position may be closed out only where there exists a secondary market for
an option of the same series on a recognized securities exchange or in the OTC
market. The Socially Responsive Fund expects to write options only on national
securities exchanges or in the OTC market. The Socially Responsive Fund may
purchase put options issued by the OCC or in the OTC market. The Socially
Responsive Fund may realize a profit or loss upon entering into a closing
transaction. In cases in which the Socially Responsive Fund has written an
option, it will realize a profit if the cost of the closing purchase transaction
is less than the premium received upon writing the original option and will
incur a loss if the cost of the closing purchase transaction exceeds the premium
received upon writing the original option. Similarly, when the Socially
Responsive Fund has purchased an option and engages in a closing sale
transaction, whether it recognizes a profit or loss will depend upon whether the
amount received in the closing sale transaction is more or less than the premium
the Socially Responsive Fund initially paid for the original option plus the
related transaction costs.
Although
the Socially Responsive Fund generally will purchase or write only those options
for which the Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities exchange will exist
for any particular option or at any particular time, and for some options no
such secondary market may exist or option may cease to exist. In the past, for
example, higher than anticipated trading activity or order flow, or other
unforeseen events, have at times rendered certain of the facilities of the OCC
and national securities exchanges inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers’ orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Socially Responsive Fund is unable to effect a
closing purchase transaction in a secondary market, it will not be able to sell
the underlying security until the option expires or it delivers the underlying
security upon exercise.
Securities
exchanges generally have established limitations governing the maximum number of
calls and puts of each class which may be held or written, or exercised within
certain periods, by an investor or group of investors acting in concert
(regardless of whether the options are written on the same or different
securities exchanges or are held, written or exercised in one or more accounts
or through one or more brokers). It is possible that the Socially Responsive
Fund and other clients of the Adviser and certain of its affiliates may be
considered to be such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits, and it may impose certain
other sanctions.
In
the case of options written by the Socially Responsive Fund that are deemed
covered by virtue of the Socially Responsive Fund’s holding convertible or
exchangeable preferred stock or debt securities, the time required to convert or
exchange and obtain physical delivery of the underlying common stock with
respect to which the Socially Responsive Fund has written options may exceed the
time within which the Socially Responsive Fund must make delivery in accordance
with an exercise notice. In these instances, the Socially Responsive Fund may
purchase or temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, the Socially Responsive Fund will not bear any
market risk because the Socially Responsive Fund will have the absolute right to
receive from the issuer of the
underlying
security an equal number of shares to replace the borrowed stock, but the
Socially Responsive Fund may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Although
the Adviser will attempt to take appropriate measures to minimize the risks
relating to the Socially Responsive Fund’s writing of call options and
purchasing of put and call options, there can be no assurance that the Socially
Responsive Fund will succeed in its option-writing program.
If
positions held by the Socially Responsive Fund were treated as “straddles” for
federal income tax purposes, or the Socially Responsive Fund’s risk of loss with
respect to a position was otherwise diminished as set forth in Treasury
regulations, dividends on stocks that are a part of such positions would not
constitute qualified dividend income subject to such favorable income tax
treatment in the hands of non-corporate shareholders or eligible for the
dividends received deduction for corporate shareholders. In addition, generally,
straddles are subject to certain rules that may affect the amount, character and
timing of the Socially Responsive Fund’s gains and losses with respect to
straddle positions by requiring, among other things, that: (1) any loss realized
on disposition of one position of a straddle may not be recognized to the extent
that the Socially Responsive Fund has unrealized gains with respect to the other
position in such straddle; (2) the Socially Responsive Fund’s holding period in
straddle positions be suspended while the straddle exists (possibly resulting in
a gain being treated as short-term capital gain rather than long-term capital
gain); (3) the losses recognized with respect to certain straddle positions that
are part of a mixed straddle and that are not subject to Section 1256 of the
Code be treated as 60% long-term and 40% short-term capital loss; (4) losses
recognized with respect to certain straddle positions that would otherwise
constitute short-term capital losses be treated as long-term capital losses; and
(5) the deduction of interest and carrying charges attributable to certain
straddle positions may be deferred.
Stock
Index Options.
A stock index fluctuates with changes in the market values of the stocks
included in the index. Some stock index options are based on a broad market
index such as the NYSE Composite Index or the Canadian Market Portfolio Index,
or a narrower market or industry index such as the S&P 100 Index, the NYSE
Arca Oil Index or the NYSE Arca Computer Technology Index.
Options
on stock indexes are generally similar to options on stock except for the
delivery requirements. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder the
right to receive a cash “exercise settlement amount” equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds (in the
case of a put) or is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed “index
multiplier.” Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than, in the case
of a call, or less than, in the case of a put, the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars or
a foreign currency, as the case may be, times a specified multiple. The writer
of the option is obligated, in return for the premium received, to make delivery
of this amount. The writer may offset its position in stock index options prior
to expiration by entering into a closing transaction on an exchange or it may
let the option expire unexercised.
The
effectiveness of purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price movements in the portion of
the securities portfolio of the Socially Responsive Fund being hedged correlate
with price movements of the stock index selected. Because the value of an index
option depends upon movements in the level of the index rather than the price of
a particular stock, whether the Socially Responsive Fund will realize a gain or
loss from the purchase or writing of options on an index depends upon movements
in the level of stock prices in the stock market generally or, in the case of
certain indexes, in an industry or market segment, rather than movements in the
price of a particular stock. Accordingly, successful use by the Socially
Responsive Fund of options on stock indexes will be subject to the Adviser’s
ability to predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual
stocks.
Futures
and Options on Futures.
When deemed advisable by the Adviser, the Socially Responsive Fund may enter
into interest rate futures contracts, stock index futures contracts and related
options that are traded on a domestic exchange or board of trade. These
transactions may, but need not, use derivative contracts, such as futures and
options on securities or securities indices, options on these futures, and
interest rate futures, for the purpose of hedging against the economic impact of
adverse changes in the market value of portfolio securities, because of changes
in interest rates or stock prices, or as a substitute for buying or selling
securities or as a cash flow management technique.
An
interest rate futures contract provides for the future sale by the one party and
the purchase by the other party of a specified amount of a particular financial
instrument (debt security) at a specified price, date, time and place. A stock
index futures contract is an agreement pursuant to which two parties agree to
take or make delivery of an amount of cash equal to the difference between the
value of the index at the close of the last trading day of the contract and the
price at which the index contract was originally entered into. Stock index
futures contracts are based on indexes that reflect the market value of common
stock of the companies included in the indexes. An option on an interest rate or
stock index contract gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract (a long position if
the
option is a call and a short position if the option is a put) at a specified
exercise price at any time prior to the expiration date of the option. When the
Socially Responsive Fund buys or sells a futures contract, it incurs a
contractual obligation to receive or deliver the underlying instrument (or a
cash payment based on the difference between the underlying instrument’s closing
price and the price at which the contract was entered into) at a specified price
on a specified date. For example, in the case of stock index futures contracts,
if the Socially Responsive Fund anticipates an increase in the price of stocks
that it intends to purchase at a later time, the Socially Responsive Fund could
enter into contracts to purchase the stock index (known as taking a “long”
position) as a temporary substitute for the purchase of stocks. If an increase
in the market occurs that influences the stock index as anticipated, the value
of the futures contracts increases and thereby serves as a hedge against the
Socially Responsive Fund’s not participating in a market advance. The Socially
Responsive Fund then may close out the futures contracts by entering into
offsetting futures contracts to sell the stock index (known as taking a “short”
position) as it purchases individual stocks. The Socially Responsive Fund can
accomplish similar results by buying securities with long maturities and selling
securities with short maturities. But by using futures contracts as an
investment tool to reduce risk, given the greater liquidity in the futures
market, it may be possible to accomplish the same result more easily and more
quickly.
Although
futures contracts by their terms call for the delivery or acquisition of the
underlying commodities or a cash payment based on the value of the underlying
commodities, in most cases the contractual obligation is offset before the
delivery date of the contract by buying, in the case of a contractual obligation
to sell, or selling, in the case of a contractual obligation to buy, an
identical futures contract on a commodities exchange. Such a transaction cancels
the obligation to make or take delivery of the commodities. Since all
transactions in the futures market are made through a member of, and are offset
or fulfilled through a clearinghouse associated with, the exchange on which the
contracts are traded, the Socially Responsive Fund will incur brokerage fees
when it buys or sells futures contracts.
No
consideration will be paid or received by the Socially Responsive Fund upon the
purchase or sale of a futures contract. Initially, the Socially Responsive Fund
will be required to deposit with the broker an amount of cash or cash
equivalents equal to approximately 1% to 10% of the contract amount (this amount
is subject to change by the exchange or board of trade on which the contract is
traded and brokers or members of such board of trade may charge a higher
amount). This amount is known as “initial margin” and is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Socially Responsive Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Subsequent payments, known as
“variation margin,” to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as “marking-to-market.” In addition, when the Socially Responsive
Fund enters into a long position in a futures contract or an option on a futures
contract, it must maintain an amount of cash or cash equivalents equal to the
total market value of the underlying futures contract, less amounts held in the
Socially Responsive Fund’s commodity brokerage account at its broker. At any
time prior to the expiration of a futures contract, the Socially Responsive Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Socially Responsive Fund’s existing position in the
contract.
Positions
in futures contracts may be closed out only on the exchange on which they were
entered into (or through a linked exchange) and no secondary market exists for
those contracts. In addition, there is no assurance that an active market will
exist for the contracts at any particular time. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses. In such event, and in the event of adverse price
movements, the Socially Responsive Fund would be required to make daily cash
payments of variation margin; in such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. As described above, however, no assurance
can be given that the price of the securities being hedged will correlate with
the price movements in a futures contract and thus provide an offset to losses
on the futures contract.
Options
on futures contracts are similar to options on securities or currencies except
that options on futures contracts give the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put), rather than
to purchase or sell the futures contract, at a specified exercise price at any
time during the period of the option. Upon exercise of the option, the delivery
of the futures position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the writer’s
futures margin account, which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
level of the securities or currencies upon which the futures contracts are based
on the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Commodity
Exchange Act Regulation.
The Socially Responsive Fund is operated by persons who have claimed an
exclusion, granted to operators of registered investment companies like the
Socially Responsive Fund, from registration as a “commodity pool operator” with
respect to the Socially Responsive Fund under the Commodity Exchange Act (the
“CEA”), and, therefore, are not subject to registration or regulation with
respect to the Socially Responsive Fund under the CEA. As a result, the Socially
Responsive Fund is limited in its ability to trade instruments subject to the
CFTC’s jurisdiction, including commodity futures (which include futures on
broad-based securities indexes, interest rate futures and currency futures),
options on commodity futures, certain swaps or other investments (whether
directly or indirectly through investments in other investment vehicles).
Under
this exclusion, the Socially Responsive Fund must satisfy one of the following
two trading limitations whenever it enters into a new commodity trading
position: (1) the aggregate initial margin and premiums required to
establish the Socially Responsive Fund’s positions in CFTC-regulated instruments
may not exceed 5% of the liquidation value of the Socially Responsive Fund’s
portfolio (after accounting for unrealized profits and unrealized losses on any
such investments); or (2) the aggregate net notional value of such
instruments, determined at the time the most recent position was established,
may not exceed 100% of the liquidation value of the Socially Responsive Fund’s
portfolio (after accounting for unrealized profits and unrealized losses on any
such positions). The Socially Responsive Fund would not be required to consider
its exposure to such instruments if they were held for “bona fide hedging”
purposes, as such term is defined in the rules of the CFTC. In addition to
meeting one of the foregoing trading limitations, the Socially Responsive Fund
may not market itself as a commodity pool or otherwise as a vehicle for trading
in the markets for CFTC-regulated instruments.
Margin
Requirements.
In contrast to the purchase or sale of a security, no price is paid or received
upon the purchase or sale of a futures contract. Initially, the Socially
Responsive Fund will be required to deposit with the broker an amount of cash or
cash equivalents equal to approximately 1% to 10% of the contract amount (this
amount is subject to change by the exchange or board of trade on which the
contract is traded and brokers or members of such board of trade may charge a
higher amount). This amount is known as “initial margin” and is in the nature of
a performance bond or good faith deposit on the contract, which is returned to
the Socially Responsive Fund, upon termination of the futures contract, assuming
all contractual obligations have been satisfied. Subsequent payments, known as
“variation margin,” to and from the broker, will be made daily as the price of
the index or securities underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as “marking-to-market.” In addition, when the Socially Responsive
Fund enters into a long position in a futures contract, it must maintain an
amount of cash or cash equivalents equal to the total market value of the
underlying futures contract, less amounts held in the Socially Responsive Fund’s
commodity brokerage account at its broker. At any time prior to the expiration
of a futures contract, the Socially Responsive Fund may elect to close the
position by taking an opposite position, which will operate to terminate the
Socially Responsive Fund’s existing position in the contract.
For
example, when the Socially Responsive Fund purchases a futures contract and the
price of the underlying security or index rises, that position increases in
value, and the Socially Responsive Fund receives from the broker a variation
margin payment equal to that increase in value. Conversely, where the Socially
Responsive Fund purchases a futures contract and the value of the underlying
security or index declines, the position is less valuable, and the Socially
Responsive Fund is required to make a variation margin payment to the broker.
At
any time prior to expiration of the futures contract, a fund may elect to
terminate the position by taking an opposite position. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Socially Responsive Fund, and the Socially Responsive Fund
realizes a loss or a gain.
When
the Socially Responsive Fund anticipates a significant market or market sector
advance, the purchase of a futures contract affords a hedge against not
participating in the advance (anticipatory hedge). Such purchase of a futures
contract serves as a temporary substitute for the purchase of individual
securities, which may be purchased in an orderly fashion once the market has
stabilized. As individual securities are purchased, an equivalent amount of
futures contracts could be terminated by offsetting sales. The Socially
Responsive Fund may sell futures contracts in anticipation of or in a general
market or market sector decline that may adversely affect the market value of
the Socially Responsive Fund’s securities (defensive hedge). To the extent that
the Socially Responsive Fund’s portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Socially Responsive Fund of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Socially Responsive Fund with attendant transaction
costs.
The
Socially Responsive Fund will be required to deposit initial margin and
maintenance margin with respect to put and call options on futures contracts
described above, and, in addition, net option premiums received will be included
as initial margin deposits.
Use
of Segregated and Other Special Accounts.
Use of many hedging and other strategic transactions including market index
transactions by the Socially Responsive Fund will require, among other things,
that the Socially Responsive Fund
segregate
cash, liquid securities or other assets with its custodian, or a designated
sub-custodian, to the extent the Socially Responsive Fund’s obligations are not
otherwise “covered” through ownership of the underlying security or financial
instrument. In general, either the full amount of any obligation by the Socially
Responsive Fund to pay or deliver securities or assets must be covered at all
times by the securities or instruments required to be delivered, or, subject to
any regulatory restrictions, appropriate securities as required by the 1940 Act
at least equal to the current amount of the obligation must be segregated with
the custodian or sub-custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. A call option on securities written by the
Socially Responsive Fund, for example, will require the Socially Responsive Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option written by the Socially Responsive Fund on an index
will require the Socially Responsive Fund to own portfolio securities that
correlate with the index or to segregate liquid securities equal to the excess
of the index value over the exercise price on a current basis. A put option on
securities written by the Socially Responsive Fund will require the Socially
Responsive Fund to segregate liquid securities equal to the exercise price.
OTC
options entered into by the Socially Responsive Fund, including those on
securities, financial instruments or indexes, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Socially
Responsive Fund may not be required to do so. As a result, when the Socially
Responsive Fund sells these instruments it will segregate an amount of assets
equal to its obligations under the options. OCC-issued and exchange-listed
options sold by the Socially Responsive Fund other than those described above
generally settle with physical delivery, and the Socially Responsive Fund will
segregate an amount of assets equal to the full value of the option. OTC options
settling with physical delivery or with an election of either physical delivery
or cash settlement will be treated the same as other options settling with
physical delivery. If the Socially Responsive Fund enters into OTC options
transactions, it will be subject to counterparty risk.
In
the case of a futures contract or an option on a futures contract, the Socially
Responsive Fund must deposit initial margin and, in some instances, daily
variation margin, typically with third parties such as a clearing organization,
in addition to segregating assets with its custodian sufficient to meet its
obligations to purchase or provide securities, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of cash,
cash equivalents, liquid securities or other acceptable assets.
Hedging
and other strategic transactions may be covered by means other than those
described above when consistent with applicable regulatory policies. The
Socially Responsive Fund may also enter into offsetting transactions so that its
combined position, coupled with any segregated assets, equals its net
outstanding obligation in related options and hedging and other strategic
transactions. The Socially Responsive Fund could purchase a put option, for
example, if the strike price of that option is the same or higher than the
strike price of a put option sold by the Socially Responsive Fund. Moreover,
instead of segregating assets if it holds a futures contract or forward
contract, the Socially Responsive Fund could purchase a put option on the same
futures contract or forward contract with a strike price as high or higher than
the price of the contract held. Other hedging and other strategic transactions
may also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required, but if
it terminates prior to that time, assets equal to any remaining obligation would
need to be segregated.
Special
Risks of Using Futures Contracts.
The prices of futures contracts are volatile and are influenced by, among other
things, actual and anticipated changes in stock market prices or interest rates,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events.
At
best, the correlation between changes in prices of futures contracts and of the
securities being hedged can be only approximate. The degree of imperfection of
correlation depends upon circumstances such as: variations in speculative market
demand for futures and for equity securities or debt securities, including
technical influences in futures trading; and differences between the financial
instruments being hedged and the instruments underlying the standard futures
contracts available for trading, with respect to market values, interest rate
levels, maturities, and creditworthiness of issuers. A decision of whether,
when, and how to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected market behavior
or interest rate trends.
Because
of the low margin deposits required, futures trading involves an extremely high
degree of leverage. As a result, a relatively small price movement in a futures
contract may result in immediate and substantial loss as well as gain to the
investor.
Furthermore,
in the case of a futures contract purchase, in order to be certain that the
Socially Responsive Fund has sufficient assets to satisfy its obligations under
a futures contract, the Socially Responsive Fund segregates and commits to back
the futures contract with an amount of cash and liquid securities from the
Socially Responsive Fund equal in value to the current value of the underlying
instrument less the margin deposit.
Most
U.S. futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day’s settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of futures contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
As
with options on securities, the holder of an option on futures contracts may
terminate the position by selling an option of the same series. There is no
guarantee that such closing transactions can be effected. The Socially
Responsive Fund will be required to deposit initial margin and maintenance
margin with respect to put and call options on futures contracts described
above, and, in addition, net option premiums received will be included as
initial margin deposits.
In
addition to the risks which apply to all option transactions, there are several
special risks relating to options on futures contracts. The ability to establish
and close out positions on such options will be subject to the development and
maintenance of a liquid secondary market. It is not certain that this market
will develop. The Socially Responsive Fund will not purchase options on futures
contracts on any exchange unless and until, in the Adviser’s opinion, the market
for such options has developed sufficiently that the risks in connection with
options on futures contracts are not greater than the risks in connection with
futures contracts. Compared to the use of futures contracts, the purchase of
options on futures contracts involves less potential risk to the Socially
Responsive Fund because the maximum amount of risk is the premium paid for the
options (plus transaction costs). Writing an option on a futures contract
involves risks similar to those arising in the sale of futures contracts, as
described above.
Special
Risks of Writing Options.
Option writing for the Socially Responsive Fund may be limited by position and
exercise limits established by national securities exchanges and by requirements
of the Code for qualification as a RIC In addition to writing covered call
options to generate current income, the Socially Responsive Fund may enter into
options transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain on the portfolio position being offset by a loss on the hedge
position. The Socially Responsive Fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedge. The
Socially Responsive Fund will engage in hedging transactions only when deemed
advisable by the Adviser. Successful use by the Socially Responsive Fund of
options will be subject to the Adviser’s ability to predict correctly movements
in the direction of the stock or index underlying the option used as a hedge.
Losses incurred in hedging transactions and the costs of these transactions will
affect the Socially Responsive Fund’s performance.
The
ability of the Socially Responsive Fund to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market. While
the Socially Responsive Fund generally will write options only if a liquid
secondary market appears to exist for the options purchased or sold, for some
options no such secondary market may exist or the market may cease to exist. If
the Socially Responsive Fund cannot enter into a closing purchase transaction
with respect to a call option it has written, the Socially Responsive Fund will
continue to be subject to the risk that its potential loss upon exercise of the
option will increase as a result of any increase in the value of the underlying
security. The Socially Responsive Fund could also face higher transaction costs,
including brokerage commissions, as a result of its options
transactions.
Other
Investment Practices
Foreign
Securities
The
Socially Responsive Fund may invest a portion of its assets, generally less than
15% (but not more than 25%), in securities of foreign issuers, including those
of issuers in emerging market countries. The Socially Responsive Fund may invest
directly in foreign issuers or invest in depositary receipts. The returns of the
Socially Responsive Fund may be adversely affected by fluctuations in value of
one or more currencies relative to the U.S. dollar. Investing in the securities
of foreign companies involves special risks and considerations not typically
associated with investing in U.S. companies. These include risks resulting from
revaluation of currencies; future adverse political and economic developments;
possible imposition of currency exchange blockages or other foreign governmental
laws or restrictions; reduced availability of public information concerning
issuers; differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; possible
expropriation, nationalization or confiscatory taxation; possible withholding
taxes and limitations on the use or removal of Funds or other assets, including
the withholding of dividends; adverse changes in investment or exchange control
regulations; political instability, which could affect U.S. investments in
foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities often trade with less frequency and
volume than domestic securities and, therefore, may exhibit greater price
volatility
and be less liquid. Foreign securities may not be registered with, nor the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and about the foreign company issuing them than is available about a
U.S. company and its securities. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions. These risks are intensified
when investing in countries with developing economies and securities markets,
also known as emerging market countries.
The
costs associated with investment in the securities of foreign issuers, including
withholding taxes, brokerage commissions and custodial fees, may be higher than
those associated with investment in domestic issuers. In addition, foreign
investment transactions may be subject to difficulties associated with the
settlement of such transactions. Transactions in securities of foreign issuers
may be subject to less efficient settlement practices, including extended
clearance and settlement periods. Delays in settlement could result in temporary
periods when assets of the Socially Responsive Fund are uninvested and no return
can be earned on them. The inability of the Socially Responsive Fund to make
intended investments due to settlement problems could cause the Socially
Responsive Fund to miss attractive investment opportunities. The inability to
dispose of a portfolio security due to settlement problems could result in
losses to the Socially Responsive Fund due to subsequent declines in value of
the portfolio security or, if the Socially Responsive Fund has entered into a
contract to sell the security, could result in liability to the
purchaser.
Since
the Socially Responsive Fund may invest in securities denominated in currencies
other than the U.S. dollar, it may be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rates between such
currencies and the U.S. dollar. Changes in currency exchange rates may influence
the value of the Socially Responsive Fund’s shares and may also affect the value
of dividends and interest earned by the Socially Responsive Fund and gains and
losses realized by the Socially Responsive Fund. Exchange rates are determined
by the forces of supply and demand in the foreign exchange markets. These forces
are affected by the international balance of payments, other economic and
financial conditions, government intervention, speculation and other
factors.
Economic,
Political and Social Factors.
Certain non-U.S. countries, including emerging market countries, may be subject
to a greater degree of economic, political and social instability. Such
instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision making;
(ii) popular unrest associated with demands for improved economic,
political and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection and conflict. Such economic, political and
social instability could significantly disrupt the financial markets in such
countries and the ability of the issuers in such countries to repay their
obligations. In addition, it may be difficult for the Socially Responsive Fund
to pursue claims against a foreign issuer in the courts of a foreign country.
Investing in emerging countries also involves the risk of expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested. In
the event of such expropriation, nationalization or other confiscation in any
emerging country, the Socially Responsive Fund could lose its entire investment
in that country. Certain emerging market countries restrict or control foreign
investment in their securities markets to varying degrees. These restrictions
may limit the Socially Responsive Fund’s investment in those markets and may
increase the expenses of the Socially Responsive Fund. In addition, the
repatriation of both investment income and capital from certain markets in the
region is subject to restrictions such as the need for certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
Socially Responsive Fund’s operation. Economies in individual non-U.S. countries
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rates of inflation, currency valuation,
capital reinvestment, resource self-sufficiency and balance of payments
positions. Many non-U.S. countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been, and may
continue to be, affected adversely and significantly by economic conditions in
the countries with which they trade. Whether or not the Socially Responsive Fund
invests in securities of issuers located in or with significant exposure to
countries experiencing economic, financial and other difficulties, the value and
liquidity of the Socially Responsive Fund’s investments may be negatively
affected by the conditions in the countries experiencing the
difficulties.
Sovereign
Government and Supranational Debt.
The Socially Responsive Fund may invest in all types of debt securities of
governmental issuers in all countries, including emerging markets. These
sovereign debt securities may include: debt securities issued or guaranteed by
governments, governmental agencies or instrumentalities and political
subdivisions located in emerging market countries; debt securities issued by
government owned, controlled or sponsored entities located in emerging market
countries; interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the
above issuers; Brady Bonds, which are debt securities
issued
under the framework of the Brady Plan as a means for debtor nations to
restructure their outstanding external indebtedness; participations in loans
between emerging market governments and financial institutions; or debt
securities issued by supranational entities such as the World Bank. A
supranational entity is a bank, commission or company established or financially
supported by the national governments of one or more countries to promote
reconstruction or development.
Sovereign
debt is subject to risks in addition to those relating to non-U.S. investments
generally. As a sovereign entity, the issuing government may be immune from
lawsuits in the event of its failure or refusal to pay the obligations when due.
The debtor’s willingness or ability to repay in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its non-U.S.
reserves, the availability of sufficient non- U.S. exchange on the date a
payment is due, the relative size of the debt service burden to the economy as a
whole, the sovereign debtor’s policy toward principal international lenders and
the political constraints to which the sovereign debtor may be subject.
Sovereign debtors may also be dependent on disbursements or assistance from
foreign governments or multinational agencies, the country’s access to trade and
other international credits, and the country’s balance of trade. Assistance may
be dependent on a country’s implementation of austerity measures and reforms,
which measures may limit or be perceived to limit economic growth and recovery.
Some sovereign debtors have rescheduled their debt payments, declared moratoria
on payments or restructured their debt to effectively eliminate portions of it,
and similar occurrences may happen in the future. There is no bankruptcy
proceeding by which sovereign debt on which governmental entities have defaulted
may be collected in whole or in part.
Europe—Recent
Events.
In January 2020 the United Kingdom left the European Union (“Brexit”),
highlighting political divisions within the United Kingdom and between the
United Kingdom and European Union. As a consequence of Brexit, there has been
uncertainty in both United Kingdom and European markets and the broader world
economy. Markets, specifically in the United Kingdom and European Union, may be
impacted, leading to increased volatility, lower liquidity, and slower economic
growth that could potentially have an adverse effect on the value of the Fund’s
investments.
Restrictions
on Foreign Investment.
Some countries prohibit or impose substantial restrictions on investments in
their capital markets, particularly their equity markets, by foreign entities
such as the Socially Responsive Fund. For example, certain countries require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular company or limit the investment
by foreign persons to only a specific class of securities of a company that may
have less advantageous terms than securities of the company available for
purchase by nationals or limit the repatriation of Funds for a period of
time.
In
some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or the companies with the most
actively traded securities. Also, the 1940 Act restricts the Socially Responsive
Fund’s investments in any equity security of an issuer which, in its most recent
fiscal year, derived more than 15% of its revenues from “securities related
activities,” as defined by the rules thereunder. These provisions may also
restrict the Socially Responsive Fund’s investments in certain foreign banks and
other financial institutions.
Smaller
capital markets, while often growing in trading volume, have substantially less
volume than U.S. markets, and securities in many smaller capital markets are
less liquid and their prices may be more volatile than securities of comparable
U.S. companies. Brokerage commissions, custodial services and other costs
relating to investment in smaller capital markets are generally more expensive
than in the United States. Such markets have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Further, satisfactory custodial services
for investment securities may not be available in some countries having smaller
capital markets, which may result in the Socially Responsive Fund incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement could result in temporary periods
when assets of the Socially Responsive Fund are uninvested and no return is
earned thereon. The inability of the Socially Responsive Fund to make intended
security purchases due to settlement problems could cause the Socially
Responsive Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security due to settlement problems could result either
in losses to the Socially Responsive Fund due to subsequent declines in value of
the portfolio security or, if the Socially Responsive Fund has entered into a
contract to sell the security, could result in possible liability to the
purchaser. Generally, there is less government supervision and regulation of
exchanges, brokers and issuers in countries having smaller capital markets than
there is in the United States.
Depositary
Receipts.
Generally, American Depositary Receipts (“ADRs”), in registered form, are
denominated in U.S. dollars and are designed for use in the domestic market.
Usually issued by a U.S. bank or trust company, ADRs are receipts that
demonstrate ownership of underlying foreign securities. For purposes of the
Socially Responsive Fund’s investment policies and limitations, ADRs are
considered to have the same characteristics as the securities underlying them.
ADRs may be sponsored or unsponsored; issuers of securities underlying
unsponsored ADRs are not contractually obligated to disclose material
information in the United States.
Accordingly,
there may be less information available about such issuers than there is with
respect to domestic companies and issuers of securities underlying sponsored
ADRs. The Socially Responsive Fund may also invest in Global Depositary Receipts
(“GDRs”), European Depositary Receipts (“EDRs”) and other similar instruments,
which are receipts that are often denominated in U.S. dollars and are issued by
either a U.S. or non-U.S. bank evidencing ownership of underlying foreign
securities. Even where they are denominated in U.S. dollars, depositary receipts
are subject to currency risk if the underlying security is denominated in a
foreign currency. EDRs are issued in bearer form and are designed for use in
European securities markets. GDRs are tradable both in the United States and
Europe and are designed for use throughout the world.
Securities
of Emerging Markets Issuers.
Investors are strongly advised to consider carefully the special risks involved
in emerging markets, which are in addition to the usual risks of investing in
developed foreign markets around the world.
The
risks of investing in securities in emerging countries include: (i) less
social, political and economic stability; (ii) the smaller size of the
markets for such securities and lower volume of trading, which result in a lack
of liquidity and in greater price volatility; (iii) certain national
policies that may restrict the Socially Responsive Fund’s investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign
investment or allowing for judicial redress for injury to private property.
Investors
should note that upon the accession to power of authoritarian regimes, the
governments of a number of emerging market countries previously expropriated
large quantities of real and personal property similar to the property which may
be represented by the securities purchased by the Socially Responsive Fund. The
claims of property owners against those governments were never finally settled.
There can be no assurance that any property represented by securities purchased
by the Socially Responsive Fund will not also be expropriated, nationalized or
otherwise confiscated at some time in the future. If such confiscation were to
occur, the Socially Responsive Fund could lose a substantial portion or all of
its investments in such countries. The Socially Responsive Fund’s investments
would similarly be adversely affected by exchange control regulation in any of
those countries.
Certain
countries in which the Socially Responsive Fund may invest may have vocal
minorities that advocate radical religious or revolutionary philosophies or
support ethnic independence. Any disturbance on the part of such individuals
could carry the potential for widespread destruction or confiscation of property
owned by individuals and entities foreign to such country and could cause the
loss of the Socially Responsive Fund’s investment in those countries.
Settlement
mechanisms in emerging market securities may be less efficient and reliable than
in more developed markets. In such emerging securities markets there may be
delays and failures in share registration and delivery.
Investing
in emerging markets involves risks relating to potential political and economic
instability within such markets and the risks of expropriation, nationalization,
confiscation of assets and property, the imposition of restrictions on foreign
investments and the repatriation of capital invested. In addition, it may be
difficult for the Socially Responsive Fund to pursue claims against a foreign
issuer in the courts of a foreign country.
Inflation
and rapid fluctuations in inflation rates have had, and may continue to have,
very negative effects on the economies and securities markets of certain
emerging markets. Economies in emerging markets generally are heavily dependent
upon international trade and, accordingly, have been and may continue to be
affected adversely and significantly by economic conditions, trade barriers,
exchange controls, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with which they
trade.
While
some emerging market countries have sought to develop a number of corrective
mechanisms to reduce inflation or mitigate its effects, inflation may continue
to have significant effects both on emerging market economies and their
securities markets. In addition, many of the currencies of emerging market
countries have experienced steady devaluations relative to the U.S. dollar, and
major devaluations have occurred in certain countries.
Because
of the high levels of foreign-denominated debt owed by many emerging market
countries, fluctuating exchange rates can significantly affect the debt service
obligations of those countries. This could, in turn, affect local interest
rates, profit margins and exports, which are a major source of foreign exchange
earnings.
To
the extent an emerging market country faces a liquidity crisis with respect to
its foreign exchange reserves, it may increase restrictions on the outflow of
any foreign exchange. Repatriation is ultimately dependent on the ability of the
Socially Responsive Fund to liquidate its investments and convert the local
currency proceeds obtained from such liquidation into U.S. dollars. Where this
conversion must be done through official channels (usually the central bank or
certain authorized commercial banks), the ability to obtain U.S. dollars is
dependent on the availability of such U.S. dollars through those channels and,
if available, upon the willingness of those channels to allocate those U.S.
dollars to the Socially Responsive Fund. The Socially Responsive Fund’s ability
to obtain U.S. dollars may be adversely affected by any increased restrictions
imposed on the outflow of foreign exchange. If the Socially Responsive Fund is
unable to repatriate any amounts due to exchange controls, it may be required to
accept an obligation payable at some future date by the
central
bank or other governmental entity of the jurisdiction involved. If such
conversion can legally be done outside official channels, either directly or
indirectly, the Socially Responsive Fund’s ability to obtain U.S. dollars may
not be affected as much by any increased restrictions except to the extent of
the price which may be required to be paid for in U.S. dollars.
Many
emerging market countries have little experience with the corporate form of
business organization and may not have well-developed corporation and business
laws or concepts of fiduciary duty in the business context.
The
securities markets of emerging markets are substantially smaller, less
developed, less liquid and more volatile than the securities markets of the
United States and other more developed countries. Disclosure and regulatory
standards in many respects are less stringent than in the United States and
other major markets. There also may be a lower level of monitoring and
regulation of emerging markets and the activities of investors in such markets;
enforcement of existing regulations has been extremely limited. Investing in the
securities of companies in emerging markets may entail special risks relating to
the potential political and economic instability and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment, convertibility of currencies into U.S. dollars and on repatriation
of capital invested. In the event of such expropriation, nationalization or
other confiscation by any country, the Socially Responsive Fund could lose its
entire investment in any such country.
Some
emerging markets have different settlement and clearance procedures. In certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. The inability of the Socially Responsive Fund to make intended
securities purchases due to settlement problems could cause the Socially
Responsive Fund to miss attractive investment opportunities. Inability to
dispose of a portfolio security caused by settlement problems could result
either in losses to the Socially Responsive Fund due to subsequent declines in
the value of the portfolio security or, if the Socially Responsive Fund has
entered into a contract to sell the security, in possible liability to the
purchaser. The risk also exists that an emergency situation may arise in one or
more emerging markets as a result of which trading of securities may cease or
may be substantially curtailed and prices for the Socially Responsive Fund’s
portfolio securities in such markets may not be readily available.
Section 22(e) of the 1940 Act permits a registered investment company to
suspend redemption of its shares for any period during which an emergency
exists, as determined by the SEC. Accordingly, if the Socially Responsive Fund
believes that appropriate circumstances warrant, it will promptly apply to the
SEC for a determination that an emergency exists within the meaning of
Section 22(a) of the 1940 Act. During the period commencing from the
Socially Responsive Fund’s identification of such conditions until the date of
SEC action, the portfolio securities in the affected markets will be valued at
fair value as determined in good faith by or under the direction of the Board.
Although
it might be theoretically possible to hedge for anticipated income and gains,
the ongoing and indeterminate nature of the risks associated with emerging
market investing (and the costs associated with hedging transactions) makes it
very difficult to hedge effectively against such risks.
One
or more of the risks discussed above could affect adversely the economy of a
developing market or the Socially Responsive Fund’s investments in such a
market. In Eastern Europe, for example, upon the accession to power of Communist
regimes in the past, the governments of a number of Eastern European countries
expropriated a large amount of property. The claims of many property owners
against those of governments may remain unsettled. There can be no assurance
that any investments that the Socially Responsive Fund might make in such
emerging markets would not be expropriated, nationalized or otherwise
confiscated at some time in the future. In such an event, the Socially
Responsive Fund could lose its entire investment in the market involved.
Moreover, changes in the leadership or policies of such markets could halt the
expansion or reverse the liberalization of foreign investment policies now
occurring in certain of these markets and adversely affect existing investment
opportunities.
Many
of the Socially Responsive Fund’s investments in the securities of emerging
markets may be unrated or rated below investment grade. Securities rated below
investment grade (and comparable unrated securities) are the equivalent of high
yield, high risk bonds, commonly known as “junk bonds.” Such securities are
regarded as predominantly speculative with respect to the issuer’s capacity to
pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse business, financial, economic, or
political conditions.
Currency
Risks.
The U.S. dollar value of securities denominated in a foreign currency will vary
with changes in currency exchange rates, which can be volatile. Accordingly,
changes in the value of the currency in which the Socially Responsive Fund’s
investments are denominated relative to the U.S. dollar will affect the Socially
Responsive Fund’s NAV. Exchange rates are generally affected by the forces of
supply and demand in the international currency markets, the relative merits of
investing in different countries and the intervention or failure to intervene of
U.S. or foreign governments and central banks. However, currency exchange rates
may fluctuate based on factors intrinsic to a country’s economy. Some emerging
market countries also may have managed currencies, which are not free floating
against the U.S. dollar. In addition, emerging markets are subject to the risk
of restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the currencies in
which the Socially Responsive Fund’s securities are quoted would reduce the
Socially Responsive Fund’s NAV per share.
Eurodollar
or Yankee Obligations.
The Socially Responsive Fund may invest in Eurodollar and Yankee obligations.
Eurodollar bank obligations are dollar denominated debt obligations issued
outside the U.S. capital markets by foreign branches of U.S. banks and by
foreign banks. Yankee obligations are dollar denominated obligations issued in
the U.S. capital markets by foreign issuers. Eurodollar (and to a limited
extent, Yankee) obligations are subject to certain sovereign risks. Sovereign
debt is subject to risks in addition to those relating to non-U.S. investments
generally. As a sovereign entity, the issuing government may be immune from
lawsuits in the event of its failure or refusal to pay the obligations when due.
The debtor’s willingness or ability to repay in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its non-U.S.
reserves, the availability of sufficient non-U.S. exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor’s policy toward principal international lenders and the
political constraints to which the sovereign debtor may be subject. Sovereign
debtors may also be dependent on disbursements or assistance from foreign
governments or multinational agencies, the country’s access to trade and other
international credits, and the country’s balance of trade. Assistance may be
dependent on a country’s implementation of austerity measures and reforms, which
measures may limit or be perceived to limit economic growth and recovery. Some
sovereign debtors have rescheduled their debt payments, declared moratoria on
payments or restructured their debt to effectively eliminate portions of it, and
similar occurrences may happen in the future. There is no bankruptcy proceeding
by which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Illiquid
Investments and Restricted Securities
The
Socially Responsive Fund may not acquire an illiquid investment if, immediately
after the acquisition, the Socially Responsive 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 Socially Responsive 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. If illiquid investments exceed 15% of the
Socially Responsive Fund’s net assets, certain remedial actions will be taken as
required by Rule 22e-4 under the 1940 Act and the Socially Responsive Fund’s
policies and procedures.
Restricted
securities are securities subject to legal or contractual restrictions on their
resale, such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when the sale would otherwise be desirable.
Under SEC regulations, certain restricted securities acquired through private
placements can be traded freely among qualified purchasers. While restricted
securities are generally classified as illiquid, the SEC has stated that an
investment company’s board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is “liquid.” The Socially Responsive Fund intends to
rely on this rule, to the extent appropriate, to deem specific securities
acquired through private placement as “liquid.” The Board has delegated to the
Adviser, pursuant to guidelines established by the Board, the responsibility for
determining whether a particular security eligible for trading under this rule
is “liquid.” Investing in these restricted securities could have the effect of
increasing the Socially Responsive Fund’s illiquidity if qualified purchasers
become, for a time, uninterested in buying these securities.
Restricted
securities may be sold only (1) pursuant to SEC Rule 144A or another exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933,
as amended (the “1933” Act). Rule 144A securities, although not registered in
the U.S., may be sold to qualified institutional buyers in accordance with Rule
144A under the 1933 Act. As noted above, the Adviser, acting pursuant to
guidelines established by the Board, may determine that some Rule 144A
securities are liquid. Where registration is required, the Socially Responsive
Fund may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Socially Responsive Fund may be permitted to sell a restricted security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Socially Responsive Fund might obtain a
less favorable price than prevailed when it decided to sell.
Illiquid
investments may be difficult to value, and the Socially Responsive Fund may have
difficulty disposing of such investments promptly. The Socially Responsive Fund
does not consider non-U.S. securities to be restricted if they can be freely
sold in the principal markets in which they are traded, even if they are not
registered for sale in the U.S.
Illiquid
investments may be difficult to value and the Socially Responsive Fund may have
difficulty disposing of such investments promptly. Judgment plays a greater role
in valuing illiquid investments than those securities for which a more active
market exists. The Socially Responsive Fund does not consider non-U.S.
securities to be restricted if they can be freely sold in the principal markets
in which they are traded, even if they are not registered for sale in the United
States.
Securities
of Unseasoned Issuers.
Securities in which the Socially Responsive Fund may invest may have limited
marketability and, therefore, may be subject to wide fluctuations in market
value. In addition, certain securities may be issued by companies that lack a
significant operating history and be dependent on products or services without
an established market share.
Repurchase
Agreements.
Under the terms of a typical repurchase agreement, the Socially Responsive Fund
would acquire one or more underlying debt obligations, frequently obligations
issued by the U.S. government or its agencies or instrumentalities, for a
relatively short period (typically overnight, although the term of an agreement
may be many months), subject to an obligation of the seller to repurchase, and
the Socially Responsive Fund to resell, the obligation at an agreed-upon time
and price. The repurchase price is typically greater than the purchase price
paid by the Socially Responsive Fund, thereby determining the Socially
Responsive Fund’s yield. A repurchase agreement is similar to, and may be
treated as, a secured loan, where the Socially Responsive Fund loans cash to the
counterparty and the loan is secured by the purchased securities as collateral.
All repurchase agreements entered into by the Socially Responsive Fund are
required to be collateralized so that at all times during the term of a
repurchase agreement, the value of the underlying securities is at least equal
to the amount of the repurchase price. Also, the Socially Responsive Fund or its
custodian is required to have control of the collateral, which the Adviser, as
applicable, believe will give the Socially Responsive Fund a valid, perfected
security interest in the collateral.
Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon the Socially
Responsive Fund’s ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period in
which the Socially Responsive Fund seeks to assert its right to them, the risk
of incurring expenses associated with asserting those rights and the risk of
losing all or part of the income from the agreement. If the Socially Responsive
Fund enters into a repurchase agreement involving securities a Fund could not
purchase directly, and the counterparty defaults, the Socially Responsive Fund
may become the holder of securities that it could not purchase. These repurchase
agreements may be subject to greater risks. In addition, these repurchase
agreements may be more likely to have a term to maturity of longer than seven
days.
Repurchase
agreements maturing in more than seven days are considered to be illiquid.
Pursuant
to an exemptive order issued by the SEC, the Socially Responsive Fund, along
with other affiliated entities managed by the Adviser, may transfer uninvested
cash balances into one or more joint accounts for the purpose of entering into
repurchase agreements secured by cash and U.S. government securities, subject to
certain conditions.
Reverse
Repurchase Agreements.
The Socially Responsive Fund may enter into reverse repurchase agreements, which
involve the sale of Socially Responsive Fund securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment and
are considered borrowings. Since the proceeds of borrowings under reverse
repurchase agreements are invested, this would introduce the speculative factor
known as “leverage.” The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have maturity dates
no later than the repayment date. Generally the effect of such a transaction is
that the Socially Responsive Fund can recover all or most of the cash invested
in the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are advantageous only
if the Socially Responsive Fund has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid may not
always be available, and the Socially Responsive Fund intends to use the reverse
repurchase technique only when the Adviser believes it will be advantageous to
the Socially Responsive Fund. The use of reverse repurchase agreements may
exaggerate any interim increase or decrease in the value of the Socially
Responsive Fund’s assets.
Securities
Lending.
Consistent with applicable regulatory requirements, the Socially Responsive Fund
may lend portfolio securities to brokers, dealers and other financial
organizations meeting capital and other credit requirements or other criteria
established by the Board. The Socially Responsive Fund will not lend portfolio
securities to affiliates of the Adviser unless it has applied for and received
specific authority to do so from the SEC. From time to time, the Socially
Responsive Fund may pay to the borrower and/or a third party which is
unaffiliated with the Socially Responsive Fund or the Adviser and is acting as a
“finder” a part of the interest earned from the investment of collateral
received for securities loaned. Although the borrower will generally be required
to make payments to the Socially Responsive Fund in lieu of any dividends the
Socially Responsive Fund would have otherwise received had it not loaned the
shares to the borrower, such payments will not be treated as “qualified dividend
income” for purposes of determining what portion of the Socially Responsive
Fund’s regular dividends (as defined below) received by individuals may be taxed
at the rates generally applicable to long-term capital gains (see “Distributions
and Tax Information” below).
Requirements
of the SEC, which may be subject to future modification, currently provide that
the following conditions must be met whenever the Socially Responsive Fund lends
its portfolio securities: (a) the Socially Responsive Fund must receive at
least 100% cash collateral or U.S.
government securities from
the borrower; (b) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral;
(c) the Socially Responsive Fund must be able to terminate the loan at any
time; (d) the Socially Responsive Fund must receive reasonable interest on
the loan, as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (e) the Socially
Responsive Fund may pay only reasonable custodian fees in connection with the
loan; and (f) voting rights on the loaned securities may pass to the
borrower. However, if a material event adversely
affecting
the investment in the loaned securities occurs, the Socially Responsive Fund
must terminate the loan and regain the right to vote the securities.
The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. The Socially Responsive Fund could also lose
money if its short-term investment of the cash collateral declines in value over
the period of the loan. Loans will be made to firms deemed by the Adviser to be
of good standing and will not be made unless, in the judgment of the Adviser,
the consideration to be earned from such loans would justify the risk.
Venture
Capital Investments.
The Socially Responsive Fund may invest up to 5% of its total assets in venture
capital investments, that is, new and early stage companies whose securities are
not publicly traded. Venture capital investments may present significant
opportunities for capital appreciation but involve a high degree of business and
financial risk that can result in substantial losses. Venture capital
investments may be difficult to value and the Socially Responsive Fund may have
difficulty disposing of such investments promptly. The disposition of U.S.
venture capital investments, which may include limited partnership interests,
normally would be restricted under federal securities laws. Generally,
restricted securities may be sold only in privately negotiated transactions or
in public offerings registered under the 1933 Act. The Socially Responsive Fund
also may be subject to restrictions contained in the securities laws of other
countries in disposing of portfolio securities. As a result of these
restrictions, the Socially Responsive Fund may be unable to dispose of such
investments at times when disposal is deemed appropriate due to investment or
liquidity considerations; alternatively, the Socially Responsive Fund may be
forced to dispose of such investments at less than fair market value. Where
registration is required, the Socially Responsive Fund may be obligated to pay
part or all of the expenses of such registration.
Investments
by Funds of Funds.
Certain investment companies, including those that are affiliated with the
Socially Responsive Fund because they are managed by an affiliate of the
manager, may invest in the Socially Responsive Fund as part of an asset
allocation strategy. These investment companies are referred to as “funds of
funds” because they invest primarily in other investment companies.
From
time to time, the Socially Responsive Fund may experience relatively large
redemptions or investments due to rebalancings of the assets of a fund of funds
invested in the Socially Responsive Fund. In the event of such redemptions or
investments, the Socially Responsive Fund could be required to sell securities
or to invest cash at a time when it is not advantageous to do so. If this were
to occur, the effects of the rebalancing trades could adversely affect the
Socially Responsive Fund’s performance. Redemptions of Socially Responsive Fund
shares due to rebalancings could also accelerate the realization of taxable
capital gains in the Socially Responsive Fund and might increase brokerage
and/or other transaction costs.
The
Socially Responsive Fund’s Adviser may be subject to potential conflicts of
interest in connection with investments by affiliated funds of funds. For
example, the Adviser may have an incentive to permit an affiliated fund of funds
to become a more significant shareholder (with the potential to cause greater
disruption to the Socially Responsive Fund) than would be permitted for an
unaffiliated investor. The Adviser has committed to the Board that it will
resolve any potential conflict in the best interests of the shareholders of the
Socially Responsive Fund in accordance with its fiduciary duty to the Socially
Responsive Fund. As necessary, the Adviser will take such actions as it deems
appropriate to minimize potential adverse impacts, including redemption of
shares in-kind, rather than in cash. Similar issues may result from investment
in the Socially Responsive Fund by Section 529 plans.
1919
SOCIALLY
RESPONSIVE BALANCED FUND - INVESTMENT POLICIES
The
Socially Responsive Fund has adopted the fundamental and non-fundamental
investment policies below for the protection of shareholders. fundamental
investment policies of the Socially Responsive Fund may not be changed without
the vote of a majority of the outstanding shares of the Socially Responsive
Fund, defined under the 1940 Act as the lesser of (a) 67% or more of the
voting power of the Socially Responsive Fund present at a shareholder meeting,
if the holders of more than 50% of the voting power of the Socially Responsive
Fund are present in person or represented by proxy, or (b) more than 50% of
the voting power of the Socially Responsive Fund. The Board may change
non-fundamental investment policies at any time.
Except
with respect to borrowing, if any percentage restriction described below is
complied with at the time of an investment, a later increase or decrease in the
percentage resulting from a change in values or assets will not constitute a
violation of such restriction.
Diversification
The
Socially Responsive Fund is currently classified as a diversified fund under the
1940 Act. This means that the Socially Responsive Fund may not purchase
securities of an issuer (other than obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities) if, with respect to 75% of its
total assets, (a) more than 5% of the Socially Responsive Fund’s total
assets would be invested in securities of that issuer or (b) the Socially
Responsive Fund would
hold
more than 10% of the outstanding voting securities of that issuer. With respect
to the remaining 25% of its total assets, the Socially Responsive Fund can
invest more than 5% of its assets in one issuer. Under the 1940 Act, the
Socially Responsive Fund cannot change its classification from diversified to
non-diversified without shareholder approval.
Fundamental
Investment Policies
The
Socially Responsive Fund’s fundamental investment policies are as
follows:
1)The
Socially Responsive Fund may not borrow money except as permitted by
(i) the 1940 Act or interpretations or modifications by the SEC, SEC staff
or other authority with appropriate jurisdiction, or (ii) exemptive or
other relief or permission from the SEC, SEC staff or other
authority.
2)The
Socially Responsive Fund may not engage in the business of underwriting the
securities of other issuers except as permitted by (i) the 1940 Act or
interpretations or modifications by the SEC, SEC staff or other authority with
appropriate jurisdiction, or (ii) exemptive or other relief or permission
from the SEC, SEC staff or other authority.
3)The
Socially Responsive Fund may lend money or other assets to the extent permitted
by (i) the 1940 Act or interpretations or modifications by the SEC, SEC
staff or other authority with appropriate jurisdiction, or (ii) exemptive
or other relief or permission from the SEC, SEC staff or other
authority.
4)The
Socially Responsive Fund may not issue senior securities except as permitted by
(i) the 1940 Act or interpretations or modifications by the SEC, SEC staff
or other authority with appropriate jurisdiction, or (ii) exemptive or
other relief or permission from the SEC, SEC staff or other
authority.
5)The
Socially Responsive Fund may not purchase or sell real estate except as
permitted by (i) the 1940 Act or interpretations or modifications by the
SEC, SEC staff or other authority with appropriate jurisdiction, or
(ii) exemptive or other relief or permission from the SEC, SEC staff or
other authority.
6)The
Socially Responsive Fund may purchase or sell commodities or contracts related
to commodities to the extent permitted by (i) the 1940 Act or
interpretations or modifications by the SEC, SEC staff or other authority with
appropriate jurisdiction, or (ii) exemptive or other relief or permission
from the SEC, SEC staff or other authority.
7)Except
as permitted by exemptive or other relief or permission from the SEC, SEC staff
or other authority with appropriate jurisdiction, the Socially Responsive Fund
may not make any investment if, as a result, the Socially Responsive Fund’s
investments will be concentrated in any one industry.
8)The
Socially Responsive Fund is a “diversified company” as defined by the 1940
Act.
With
respect to a fundamental policy relating to borrowing money set forth in
(1) above, the 1940 Act permits the Socially Responsive Fund to borrow
money in amounts of up to one-third of the Socially Responsive Fund’s total
assets from banks for any purpose, and to borrow up to 5% of the Socially
Responsive Fund’s total assets from banks or other lenders for temporary
purposes. (The Socially Responsive Fund’s total assets include the amounts being
borrowed.) To limit the risks attendant to borrowing, the 1940 Act requires
a fund to maintain an “asset coverage” of at least 300% of the amount of its
borrowings, provided that in the event that the Socially Responsive Fund’s asset
coverage falls below 300%, the Socially Responsive Fund is required to reduce
the amount of its borrowings so that it meets the 300% asset coverage threshold
within three days (not including Sundays and holidays). Asset coverage means the
ratio that the value of the Socially Responsive Fund’s total assets (including
amounts borrowed), minus liabilities other than borrowings, bears to the
aggregate amount of all borrowings. Certain trading practices and investments,
such as reverse repurchase agreements, dollar rolls and certain derivatives, may
be considered to be borrowings and thus subject to the 1940 Act restrictions.
Borrowing money to increase portfolio holdings is known as “leveraging.”
Borrowing, especially when used for leverage, may cause the value of the
Socially Responsive Fund’s shares to be more volatile than if the Socially
Responsive Fund did not borrow. This is because borrowing tends to magnify the
effect of any increase or decrease in the value of the Socially Responsive
Fund’s portfolio holdings. Borrowed money thus creates an opportunity for
greater gains, but also greater losses. To repay borrowings, the Socially
Responsive Fund may have to sell securities at a time and at a price that is
unfavorable to the Socially Responsive Fund. There also are costs associated
with borrowing money, and these costs would offset and could eliminate the
Socially Responsive Fund’s net investment income in any given period. Currently,
the Socially Responsive Fund has no intention of borrowing money for leverage.
The policy in (1) above will be interpreted to permit the Socially
Responsive Fund to engage in trading practices and investments that may be
considered to be borrowing to the extent permitted by the 1940 Act.
Short-term credits necessary for the settlement of securities transactions and
arrangements with respect to securities lending will not be considered to be
borrowings under the policy. Practices and investments that may involve leverage
but are not considered to be borrowings are not subject to the policy.
With
respect to a fundamental policy relating to underwriting set forth in
(2) above, the 1940 Act does not prohibit the Socially Responsive Fund
from engaging in the underwriting business or from underwriting the securities
of other issuers;
in
fact, the 1940 Act permits the Socially Responsive Fund to have
underwriting commitments of up to 25% of its assets under certain circumstances.
Those circumstances currently are that the amount of the Socially Responsive
Fund’s underwriting commitments, when added to the value of the Socially
Responsive Fund’s investments in issuers where the Socially Responsive Fund owns
more than 10% of the outstanding voting securities of those issuers, cannot
exceed the 25% cap. A fund engaging in transactions involving the acquisition or
disposition of portfolio securities may be considered to be an underwriter under
the 1933 Act. Under the 1933 Act, an underwriter may be liable for
material omissions or misstatements in an issuer’s registration statement or
prospectus. Securities purchased from an issuer and not registered for sale
under the 1933 Act are considered restricted securities. There may be a
limited market for these securities. If these securities are registered under
the 1933 Act, they may then be eligible for sale but participating in the
sale may subject the seller to underwriter liability. These risks could apply to
a fund investing in restricted securities. Although it is not believed that the
application of the 1933 Act provisions described above would cause the
Socially Responsive Fund to be engaged in the business of underwriting, the
policy in (2) above will be interpreted not to prevent the Socially
Responsive Fund from engaging in transactions involving the acquisition or
disposition of portfolio securities, regardless of whether the Socially
Responsive Fund may be considered to be an underwriter under the 1933 Act.
With
respect to a fundamental policy relating to lending set forth in (3) above,
the 1940 Act does not prohibit the Socially Responsive Fund from making
loans; however, SEC interpretations currently prohibit funds from lending more
than one-third of their total assets, except through the purchase of debt
obligations or the use of repurchase agreements. (A repurchase agreement is an
agreement to purchase a security, coupled with an agreement to sell that
security back to the original seller on an agreed-upon date at a price that
reflects current interest rates. The SEC frequently treats repurchase agreements
as loans.) While lending securities may be a source of income to the Socially
Responsive Fund, as with other extensions of credit, there are risks of delay in
recovery or even loss of rights in the underlying securities should the borrower
fail financially. However, loans would be made only when the Socially Responsive
Fund’s Adviser believes the income justifies the attendant risks. The Socially
Responsive Fund also will be permitted by this policy to make loans of money,
including to other funds. The Socially Responsive Fund would have to obtain
exemptive relief from the SEC to make loans to other funds. The policy in
(3) above will be interpreted not to prevent the Socially Responsive Fund
from purchasing or investing in debt obligations and loans. In addition,
collateral arrangements with respect to options, forward currency and futures
transactions and other derivative instruments, as well as delays in the
settlement of securities transactions, will not be considered loans.
With
respect to a fundamental policy relating to issuing senior securities set forth
in (4) above, “senior securities” are defined as Socially Responsive Fund
obligations that have a priority over the Socially Responsive Fund’s shares with
respect to the payment of dividends or the distribution of Socially Responsive
Fund assets. The 1940 Act prohibits the Socially Responsive Fund from issuing
senior securities, except that the Socially Responsive Fund may borrow money
from a bank in amounts of up to one-third of the Socially Responsive Fund’s
total assets from banks for any purpose. The Socially Responsive Fund may also
borrow up to 5% of the Socially Responsive Fund’s total assets from banks or
other lenders for temporary purposes, and these borrowings are not considered
senior securities. The issuance of senior securities by the Socially Responsive
Fund can increase the speculative character of the Socially Responsive Fund’s
outstanding shares through leveraging. Leveraging of the Socially Responsive
Fund’s portfolio through the issuance of senior securities magnifies the
potential for gain or loss on monies, because even though the Socially
Responsive Fund’s net assets remain the same, the total risk to investors is
increased to the extent of the Socially Responsive Fund’s gross assets. The
policy in (4) above will be interpreted not to prevent collateral
arrangements with respect to swaps, options, forward or futures contracts or
other derivatives, or the posting of initial or variation margin.
With
respect to a fundamental policy relating to real estate set forth in
(5) above, the 1940 Act does not prohibit the Socially Responsive Fund from
owning real estate; however, the Socially Responsive Fund is limited in the
amount of illiquid assets it may purchase. Investing in real estate may involve
risks, including that real estate is generally considered illiquid and may be
difficult to value and sell. Owners of real estate may be subject to various
liabilities, including environmental liabilities. To the extent that investments
in real estate are considered illiquid, the current SEC position generally
limits the Socially Responsive Fund’s purchases of illiquid investments to 15%
of net assets. The policy in (5) above will be interpreted not to prevent
the Socially Responsive Fund from investing in real estate-related companies,
companies whose businesses consist in whole or in part of investing in real
estate, instruments (like mortgages) that are secured by real estate or
interests therein, or real estate investment trust securities.
With
respect to a fundamental policy relating to commodities set forth in
(6) above, the 1940 Act does not prohibit the Socially Responsive Fund
from owning commodities, whether physical commodities and contracts related to
physical commodities (such as oil or grains and related futures contracts), or
financial commodities and contracts related to financial commodities (such as
currencies and, possibly, currency futures). However, the Socially Responsive
Fund is limited in the amount of illiquid assets it may purchase. To the extent
that investments in commodities are considered illiquid, the current SEC
position generally limits a fund’s purchases of illiquid investments to 15% of
net assets. If the Socially Responsive Fund was to invest in a physical
commodity or a physical commodity-related instrument, the Socially Responsive
Fund would be subject to the additional risks of the particular physical
commodity and its related market. The
value
of commodities and commodity-related instruments may be extremely volatile and
may be affected either directly or indirectly by a variety of factors. There may
also be storage charges and risks of loss associated with physical commodities.
The policy in (6) above will be interpreted to permit investments in
exchange-traded funds that invest in physical and/or financial commodities.
With
respect to a fundamental policy relating to concentration set forth in
(7) above, the 1940 Act does not define what constitutes
“concentration” in an industry. The SEC has taken the position that investment
of 25% or more of a fund’s total assets in one or more issuers conducting their
principal activities in the same industry or group of industries constitutes
concentration. It is possible that interpretations of concentration could change
in the future. A fund that invests a significant percentage of its total assets
in a single industry may be particularly susceptible to adverse events affecting
that industry and may be more risky than a fund that does not concentrate in an
industry. The policy in (7) above will be interpreted to refer to
concentration as that term may be interpreted from time to time. The policy also
will be interpreted to permit investment without limit in the following:
securities of the U.S. government and its agencies or instrumentalities;
securities of state, territory, possession or municipal governments and their
authorities, agencies, instrumentalities or political subdivisions; and
repurchase agreements collateralized by any such obligations. For purposes of
the Socially Responsive Fund’s concentration limitations, municipal securities
backed principally by the assets and revenues of a non-governmental user, such
as an industrial corporation or a privately owned or operated hospital, are not
subject to this exception. Accordingly, issuers of the foregoing securities will
not be considered to be members of any industry. There also will be no limit on
investment in issuers domiciled in a single jurisdiction or country. The policy
also will be interpreted to give broad authority to the Socially Responsive Fund
as to how to classify issuers within or among industries.
The
Socially Responsive Fund’s fundamental policies will be interpreted broadly. For
example, the policies will be interpreted to refer to the 1940 Act and the
related rules as they are in effect from time to time, and to interpretations
and modifications of or relating to the 1940 Act by the SEC and others as
they are given from time to time. When a policy provides that an investment
practice may be conducted as permitted by the 1940 Act, the policy will be
interpreted to mean either that the 1940 Act expressly permits the practice
or that the 1940 Act does not prohibit the practice.
Non-Fundamental
Investment Policy
The
Socially Responsive Fund’s non-fundamental investment policy is as follows:
The
Socially Responsive Fund may not invest in other registered open-end management
investment companies and registered unit investment trusts in reliance upon the
provisions of subparagraphs (G) or (F) of Section 12(d)(1) of the 1940 Act. The
foregoing investment policy does not restrict the Socially Responsive Fund from
(i) acquiring securities of other registered investment companies in connection
with a merger, consolidation, reorganization, or acquisition of assets, or (ii)
purchasing the securities of registered investment companies, to the extent
otherwise permissible under Section 12(d)(1) of the 1940 Act.
Portfolio
Turnover
For
reporting purposes, the Socially Responsive Fund’s portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
for the fiscal year by the monthly average of the value of the portfolio
securities owned by the Socially Responsive Fund during the fiscal year. In
determining such portfolio turnover, all securities whose maturities at the time
of acquisition were one year or less are excluded. A 100% portfolio turnover
rate would occur, for example, if all of the securities in the Socially
Responsive Fund’s investment portfolio (other than short-term money market
securities) were replaced once during the fiscal year.
In
the event that portfolio turnover increases, this increase necessarily results
in correspondingly greater transaction costs which must be paid by the Socially
Responsive Fund. To the extent the portfolio trading results in realization of
net short-term capital gains, shareholders will be taxed on such gains at
ordinary tax rates (except shareholders who invest through individual retirement
accounts (“IRAs”) and other retirement plans which are not taxed currently on
accumulations in their accounts). Portfolio turnover will not be a limiting
factor should the Adviser deem it advisable to purchase or sell securities.
Following
are the portfolio turnover rates for the fiscal periods indicated
below:
|
|
|
|
|
| |
| December
31, 2022 |
December
31, 2021 |
| 13% |
9% |
1919
MARYLAND
TAX-FREE INCOME FUND - INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The
following information supplements the information concerning the 1919 Maryland
Tax-Free Income Fund’s (the “Maryland Fund”) investment objective, policies and
limitations found in the Prospectus.
The
Maryland Fund’s investment objective is to seek a high level of current income
exempt from federal and Maryland state and local income taxes, consistent with
prudent investment risk and preservation of capital. This investment
objective
is non-fundamental and may be changed by the Board without shareholder approval
upon 60 days’ prior written notice to shareholders.
The
Adviser, on behalf of the Maryland Fund, has claimed an exclusion from the
definition of the term “commodity pool operator” under the Commodity Exchange
Act. As a result, the Maryland Fund is not subject to registration or regulation
as a commodity pool operator under such Act even though it may engage to a
limited extent in certain transactions that might otherwise subject it to such
registration and regulation.
1919
MARYLAND TAX-FREE INCOME FUND - INVESTMENT PRACTICES AND RISK
FACTORS
The
Maryland Fund may use any of the following instruments or techniques, among
others:
Special
Factors Affecting the Maryland Fund
Because
the Maryland Fund focuses investments in a specific state, certain risks
associated with investment in the Maryland Fund are more pronounced than if the
Maryland Fund’s investments were more widely diversified. These risks include
the possible enactment of new legislation in the state of Maryland, which could
affect Maryland municipal obligations, economic factors which could affect these
obligations and varying levels of supply and demand for Maryland municipal
obligations.
The
Maryland Fund assumes no obligation to update the following information relating
to Maryland.
Risk
Factors
— The Maryland Constitution prohibits the contracting of State general
obligation debt unless it is authorized by a law levying an annual tax or taxes
sufficient to pay the debt service within 15 years and prohibiting the repeal of
the tax or taxes or their use for another purpose until the debt is paid. As a
uniform practice, each separate enabling act which authorizes the issuance of
general obligation bonds for a given object or purpose has specifically levied
and directed the collection of an ad
valorem
property tax on all taxable property in the State. The Board of Public Works is
directed by law to fix by May 1 of each year the precise rate of such tax
necessary to produce revenue sufficient for debt service requirements of the
next fiscal year, which begins July 1. However, the taxes levied need not
be collected if or to the extent that funds sufficient for debt service
requirements in the next fiscal year have been appropriated in the annual State
budget. Accordingly, the board, in annually fixing the rate of property tax
after the end of the regular legislative session in April, takes account of
appropriations of general funds for debt service.
There
is no general debt limit imposed by the Maryland Constitution or public general
laws, but a special committee created by statute annually submits to the
Governor an estimate of the maximum amount of new general obligation debt that
prudently may be authorized. Although the committee’s responsibilities are
advisory only, the Governor is required to give due consideration to the
committee’s findings in preparing a preliminary allocation of new general debt
authorization for the ensuing fiscal year. The continuation of the credit
ratings on State debt is dependent upon several economic and political factors,
including the ability to continue to fund a substantial portion of the debt
service on general obligation debt from general fund revenues in the annual
State budget or to raise the rate of State property tax levies, and the ability
to maintain the amount of authorized debt within the range of affordability.
Local
Subdivision Debt. The
counties and incorporated municipalities in Maryland issue general obligation
debt for general governmental purposes. The general obligation debt of the
counties and incorporated municipalities is generally supported by ad
valorem
taxes on real estate, tangible personal property and intangible personal
property subject to taxation. The issuer typically pledges its full faith and
credit and unlimited taxing power to the prompt payment of the maturing
principal and interest on the general obligation debt and to the levy and
collection of the ad
valorem
taxes as and when such taxes become necessary in order to provide sufficient
Funds to meet the debt service requirements. The amount of debt which may be
authorized may in some cases be limited by the requirement that it not exceed a
stated percentage of the assessable base upon which such taxes are levied.
Municipal
Obligations
Municipal
obligations include obligations issued to obtain funds for various public
purposes, including constructing a wide range of public facilities, such as
bridges, highways, housing, hospitals, mass transportation, schools and streets.
Other public purposes for which municipal obligations may be issued include the
refunding of outstanding obligations, the obtaining of funds for general
operating expenses and the making of loans to other public institutions and
facilities. In addition, certain types of private activity bonds issued by
non-governmental users (“PABs”) are issued by or on behalf of public authorities
to finance various privately operated facilities, including certain pollution
control facilities, convention or trade show facilities, and airport, mass
transit, port or parking facilities. Interest on certain tax-exempt PABs will
constitute an item of tax preference (“Tax Preference Item”) for purposes of the
federal alternative minimum tax (“AMT”). Accordingly, under normal
circumstances, a fund’s investment in obligations the interest on which is a Tax
Preference Item, including PABs, will be limited to a maximum of 20% of its net
assets.
Municipal
obligations also include short-term tax anticipation notes, bond anticipation
notes, revenue anticipation notes and other forms of short-term debt
obligations. Such notes may be issued with a short-term maturity in anticipation
of the receipt of tax payments, the proceeds of bond placements or other
revenues.
The
two principal classifications of municipal obligations are “general obligation”
and “revenue” bonds. “General obligation” bonds are secured by the issuer’s
pledge of its faith, credit and taxing power. “Revenue” bonds are payable only
from the revenues derived from a particular facility or class of facilities or
from the proceeds of a special excise tax or other specific revenue source such
as the corporate user of the facility being financed. PABs are usually revenue
bonds and are not payable from the unrestricted revenues of the issuer. The
credit quality of PABs is usually directly related to the credit standing of the
corporate user of the facilities.
The
municipal obligations in which the Maryland Fund may invest include municipal
leases and participation interests therein. These obligations, which may take
the form of a lease, an installment purchase or a conditional sales contract,
are issued by state and local governments and authorities in order to acquire
land and a wide variety of equipment and facilities, such as fire and sanitation
vehicles, telecommunications equipment and other capital assets. Rather than
holding such obligations directly, the Maryland Fund may purchase a
participation interest in a municipal lease obligation from a bank or other
third party. A participation interest gives the Maryland Fund a specified,
undivided pro rata interest in the total amount of the obligation.
Municipal
lease obligations have risks distinct from those associated with general
obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits or public sale requirements.
Leases, installment purchase contracts or conditional sale contracts (which
normally provide for title to the leased asset to pass to the governmental
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting their constitutional and statutory requirements for
the issuance of debt. The debt-issuance limitations are deemed inapplicable
because of the inclusion in many leases and contracts of “non-appropriation”
clauses providing that the governmental user has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
If a governmental user were to invoke a non-appropriation clause, the security
could lose much or all of its value or could be paid in ways that do not entitle
the holder to a tax exemption on the payments.
In
determining the liquidity of a municipal lease obligation, the Adviser will
distinguish between simple or direct municipal leases and municipal lease-backed
securities, the latter of which may take the form of a lease-backed revenue bond
or other investment structure using a municipal lease-purchase agreement as its
base. While the former may present special liquidity issues, the latter are
based on a well-established method of securing payment of a municipal
obligation. The Maryland Fund’s investment in municipal lease obligations and
participation interests therein will be treated as illiquid unless the Adviser
determines, pursuant to guidelines established by the Board that the security
could be disposed of within seven days in the normal course of business at
approximately the amount at which the Maryland Fund has valued the security.
The
municipal obligations in which the Maryland Fund may invest also include zero
coupon bonds and deferred interest bonds, although the Maryland Fund currently
does not intend to invest more than 5% of the value of its total assets in such
instruments during the coming year. Zero coupon and deferred interest bonds are
debt obligations that are issued at a significant discount from face value. Like
other municipal securities, the price can also reflect a premium or discount to
par reflecting the market’s judgment as to the issuer’s creditworthiness, the
interest rate or other similar factors. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity or the first interest payment date at a rate of interest reflecting the
market rate of the security at the time of issuance. While zero coupon bonds do
not require the periodic payment of interest, deferred interest bonds provide
for a delay before the regular payment of interest begins. Such instruments
benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of such cash. Such instruments may experience greater volatility
in market value than debt obligations that provide for regular payments of
interest. The Maryland Fund will accrue income on such investments for
accounting purposes, which income must be distributed to shareholders for tax
purposes.
An
issuer’s obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws that may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of issuers to meet their
obligations for the payment of interest and principal on their municipal
obligations may be materially and adversely affected.
Opinions
relating to the validity of municipal obligations, to the exemption of interest
thereon from federal income tax and Maryland state and local income taxes and in
certain cases, to the lack of treatment of that interest as a Tax Preference
Item,
respectively, are rendered by counsel to the issuers at the time of issuance.
Neither the Maryland Fund nor the Adviser will independently review the basis
for such opinions.
The
United States Supreme Court has held that Congress may subject the interest on
municipal obligations to federal income tax. It can be expected that, as in the
past, proposals will be introduced before Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
municipal obligations. Proposals also may be introduced in state legislatures
that could affect the state tax treatment of the Maryland Fund’s distributions.
If any such proposals were enacted, the availability of municipal obligations
for investment by the Maryland Fund and the value of its assets could be
materially and adversely affected. In such event, the Maryland Fund would
re-evaluate its investment objective and policies and consider changes in its
structure or possible dissolution.
The
municipal obligations in which the Maryland Fund may invest may also include
obligations issued by or on behalf of the Commonwealth of Puerto Rico or its
political subdivisions, agencies or instrumentalities. Such obligations may
present a different set of risks than municipal obligations issued by mainland
United States entities. Generally, not all of the types of municipal obligations
described above may be available in Puerto Rico and the Puerto Rican economy may
be subject to greater volatility due to a lack of market diversification.
Continuing efforts for and against Puerto Rican statehood and the gradual
elimination of special federal tax benefits to corporations operating in Puerto
Rico, among other things, could lead to a weakened Puerto Rican economy and
lower ratings and prices of Puerto Rican municipal obligations held by the
Maryland Fund.
Concentration
The
Maryland Fund may invest 25% or more of its total assets in a particular segment
of the municipal securities market, such as hospital revenue bonds, housing
agency bonds, PABs or airport bonds, or in securities the interest on which is
paid from revenues of a similar type of project. In such circumstances,
economic, business, political or other changes affecting one issue of bonds
(such as proposed legislation affecting healthcare or the financing of a
project, shortages or price increases of needed materials or declining markets
or needs for the projects) would most likely affect other bonds in the same
segment, thereby potentially increasing market risk. As a result, the Maryland
Fund is subject to greater risk than other funds that do not follow this
practice.
When-Issued
Securities
The
Maryland Fund may enter into commitments to purchase municipal obligations or
other securities on a when-issued basis. Such securities are often the most
efficiently priced and have the best liquidity in the bond market. When the
Maryland Fund purchases securities on a when-issued basis, it assumes the risks
of ownership, including the risk of price fluctuation, at the time of purchase,
not at the time of receipt. The Maryland Fund does not expect that its
commitment to purchase when-issued securities will at any time exceed, in the
aggregate, 25% of total assets.
Delivery
of and payment for when-issued securities normally take place 15 to 45 days
after the date of the commitment. Interest rates on when-issued securities are
normally fixed at the time of the commitment. Consequently, increases in the
market rate of interest between the commitment date and settlement date may
result in a market value for the security on the settlement date that is less
than its purchase price. Thus, fluctuation in the value of the security from the
purchase date will affect the Maryland Fund’s NAV and share price. Typically, no
interest accrues to the purchaser until the security is delivered.
With
regard to each such commitment, the Maryland Fund maintains in a segregated
account, or designates on the Maryland Fund’s books as segregated, with the
custodian, commencing on the date of such commitment, cash, U.S. Government
securities or other appropriate liquid securities at least equal in value to the
purchase price for the when-issued securities due on the settlement date. For
transactions in when-issued and delayed-delivery securities, asset segregation
would not be required if (i) the Fund intends to physically settle the
transaction, and (ii) the transaction will settle within 35 days of the trade
date. The Maryland Fund makes when-issued commitments only with the intention of
actually acquiring the securities subject thereto, but the Maryland Fund may
sell these securities before the settlement date if market conditions warrant.
When payment is due for when-issued securities, the Maryland Fund meets its
obligations from then-available cash flow, from the sale of securities or,
although it would not normally expect to do so, from the sale of the when-issued
securities themselves (which may have a market value greater or less than the
Maryland Fund’s payment obligation).
Callable
Bonds
Callable
municipal bonds are municipal bonds that carry a provision permitting the issuer
to redeem the bonds prior to their maturity dates at a specified price, which
typically reflects a premium over the bonds’ original issue price. If the
proceeds of a bond owned by the Maryland Fund called under circumstances
favorable to the issuer are reinvested, the result may be a lower overall yield
on such proceeds upon reinvestment because of lower prevailing interest rates.
If the purchase price of such bonds included a premium related to the
appreciated value of the bonds, some or all of that
premium
may not be recovered by bondholders, such as the Maryland Fund, depending on the
price at which such bonds were redeemed.
Each
callable bond is “marked-to-market” daily based on the bond’s call date so that
the call of some or all of the Maryland Fund’s callable bonds is not expected to
have a material impact on the Maryland Fund’s NAV. In light of the Maryland
Fund’s pricing policies and because the Maryland Fund follows certain
amortization procedures required by the Internal Revenue Service (the “IRS”),
the Maryland Fund does not expect to suffer any material adverse impact in
connection with a call of bonds purchased at a premium. Notwithstanding such
policies, however, as with any investment strategy, a call may have a more
substantial impact than anticipated.
Callable
bonds generally have call-protection (that is, a period of time during which the
bonds may not be called) which usually lasts for 7 to 10 years from the date of
issue, after which time such bonds may be redeemed by the issuer. An issuer may
generally be expected to call its bonds, or a portion of them, during periods of
declining interest rates, when borrowings may be replaced at lower rates than
those obtained in prior years. If interest rates decline as the call-protection
on callable bonds expires, there is an increased likelihood that a number of
such bonds may in fact be redeemed by the issuers.
Stand-By
Commitments
The
Maryland Fund may acquire “stand-by commitments” with respect to its investments
in municipal obligations. A stand-by commitment is a put (that is, the right to
sell the underlying security within a specified period of time at a specified
exercise price that may be sold, transferred or assigned only with the
underlying security) that entitles the Maryland Fund to same-day settlement.
Under a stand-by commitment, a broker, dealer or bank agrees to purchase, at the
Maryland Fund’s option, specified municipal obligations at amortized cost plus
accrued interest. The total amount paid for outstanding stand-by commitments
held by the Maryland Fund will not exceed 25% of the Maryland Fund’s total
assets calculated immediately after each stand-by commitment is acquired.
When
the Maryland Fund exercises a stand-by commitment that it has acquired from a
dealer with respect to municipal obligations held by it, the dealer normally
pays the Maryland Fund an amount equal to (1) the Maryland Fund’s
acquisition cost of the municipal obligations (excluding any accrued interest
which the Maryland Fund paid on its acquisition) less any amortized market
premium or plus any amortized market or original issue discount during the
period the Maryland Fund owned the securities, plus (2) all interest
accrued on the securities since the last interest payment date or the date the
securities were purchased by the Maryland Fund, whichever is later. The Maryland
Fund’s right to exercise stand-by commitments is unconditional and unqualified
and exercisable by the Maryland Fund at any time prior to the underlying
securities’ maturity.
A
stand-by commitment is not transferable by the Maryland Fund without the
underlying securities, although the Maryland Fund could sell the underlying
municipal obligations to a third party at any time. The Maryland Fund may pay
for stand-by commitments either separately in cash or by paying a higher price
for portfolio securities which are acquired subject to such a commitment (thus
reducing the yield to maturity otherwise available for the same securities). The
Maryland Fund intends to enter into stand-by commitments only with those banks,
brokers and dealers that in the adviser’s opinion present minimal credit risks.
The
Maryland Fund intends to acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a stand-by commitment would not ordinarily affect
the valuation or assumed maturity of the underlying municipal obligations.
Stand-by commitments would not affect the average weighted maturity of the
assets of the Maryland Fund.
Fixed,
Variable and Floating Rate Obligations
The
Maryland Fund may invest in fixed, variable and floating rate municipal
obligations. A variable rate obligation differs from an obligation with a fixed
rate coupon, the value of which fluctuates in inverse relation to interest rate
changes; that is, the market value of fixed rate obligations generally declines
when market interest rates increase, and increases when market interest rates
decline. If interest rates decline below the coupon rate, generally the
obligation sells at a premium. If interest rates increase above the coupon rate,
generally the obligation sells at a discount. The magnitude of such fluctuations
is also a function of the period of time remaining until the obligation matures.
Short-term fixed rate obligations are minimally affected by interest rate
changes; the greater the remaining period until maturity, the greater the
fluctuation in value of a fixed rate obligation is likely to be.
Variable
rate obligation coupons are not fixed for the full term of the obligation, but
are adjusted periodically based upon changes in prevailing interest rates. As a
result, the value of variable rate obligations is less affected by changes in
interest rates. The more frequently such obligations are adjusted, the less such
obligations are affected by interest rate changes during the period between
adjustments. The value of a variable rate obligation, however, may fluctuate in
response to market factors and changes in the creditworthiness of the issuer.
There
is no limitation on the percentage of the Maryland Fund’s assets that may be
invested in variable rate obligations. However, the Maryland Fund will limit the
value of its investment in any variable rate securities that are illiquid and in
all other illiquid securities to 15% or less of its net assets.
Floating
rate obligations also are not fixed, but are adjusted as specified benchmark
interest rates change. In other respects, their characteristics are similar to
variable rate obligations, as discussed above.
The
Maryland Fund may also invest in floating rate and variable rate demand notes.
Demand notes provide that the holder may demand payment of the note at its par
value plus accrued interest. These notes may be supported by an unconditional
bank letter of credit guaranteeing payment of the principal or both the
principal and accrued interest. Because the Maryland Fund invests in such
securities backed by banks and other financial institutions, changes in the
credit quality of these institutions could cause losses to the Maryland Fund.
Floating rate demand notes have an interest rate related to a known lending
rate, such as the prime rate, and are automatically adjusted when such lending
rate changes. Such securities often react to changes in market interest rates in
a manner similar to shorter-term securities that mature at the time of the next
interest rate reset for the variable or floating rate instrument. In calculating
its dollar-weighted average maturity, the Maryland Fund may determine the
maturity of a variable or floating rate note according to the interest rate
reset date, or the date principal can be recovered on demand, rather than the
date of ultimate maturity.
Yield
Factors and Ratings
The
yield of a municipal obligation is dependent on a variety of factors, including
general municipal securities market conditions, general fixed-income market
conditions, the financial condition of the issuer, the size of the particular
offering, the maturity of the obligation, the credit quality and rating of the
issue and expectations regarding changes in income tax rates.
Moody’s
Investors Service, Inc. (“Moody’s”), S&P Global Ratings, a division of
S&P Global Inc. (“S&P”), and Fitch Ratings, Inc. (“Fitch”) are private
services that provide ratings of the credit quality of obligations. A
description of the ratings assigned to obligations by Moody’s, S&P and Fitch
is included in Appendix A. The Maryland Fund may consider these ratings in
determining whether to purchase, sell or hold a security. The ratings represent
Moody’s, S&P’s and Fitch’s opinions as to the quality of the obligations
which they undertake to rate. Ratings are general and are not absolute standards
of quality. Consequently, obligations with the same maturity, interest rate and
rating may have different market prices. Credit rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may not make timely
changes in credit ratings in response to subsequent events, so that an issuer’s
current financial condition may be better or worse than the rating indicates.
The
Maryland Fund may only invest in investment grade securities. Investment grade
securities are those rated within the four highest grades by Moody’s, S&P,
or Fitch or, if unrated, deemed by the Adviser to be of comparable quality.
Subsequent to its purchase by the Maryland Fund, an issue of obligations may
cease to be rated or its rating may be reduced below investment grade. If as a
result of such a downgrading, or, for unrated securities, because the Adviser
determines they are no longer of comparable quality to investment grade
securities, more than 5% of the Maryland Fund’s total assets are represented by
securities rated below investment grade or the equivalent, the Adviser will, as
soon as practicable consistent with achieving an orderly disposition of the
securities, sell such holdings until they represent 5% or less of the Maryland
Fund’s total assets. Securities rated below investment grade are subject to
greater fluctuations in value and risk of loss of income and principal due to
default by the issuer, than are higher rated securities. These securities may be
less liquid which means that the Maryland Fund may have difficulty selling them
at times, and may have to apply a greater degree of judgment in establishing a
price. The Adviser will carefully monitor the continuing creditworthiness of
issuers that have been downgraded.
In
addition to the agency ratings, there are other criteria which will be used by
the Adviser in selecting securities for the Maryland Fund. Consideration will be
given to the maturity and duration of each bond as well as its effect on the
overall average maturity and duration of the portfolio. Analysis of the current
and historical yield spreads is done to determine the relative value in any bond
considered for purchase. The coupon level and call features also figure in the
decision on the relative merits of an investment. Consideration is also given to
the type of bond — whether it is a general obligation or a revenue
bond. In addition to this examination of bond characteristics, significant
effort is devoted to analysis of the creditworthiness of the bond issuer at the
time of purchase and on an ongoing basis. The Adviser will also analyze interest
rate trends and developments that may affect individual issuers, including
factors such as liquidity, profitability and asset quality.
Securities
Lending
The
Maryland Fund may engage in securities lending and may invest in zero coupon and
deferred interest bonds. Any income from securities lending will be
taxable.
The
Maryland Fund may lend portfolio securities to dealers in municipal securities,
brokers or dealers in corporate or government securities, banks or other
recognized institutional borrowers of securities, provided that cash or
equivalent
collateral,
equal to at least 100% of the market value of the securities loaned, is
continuously maintained by the borrower with the Maryland Fund’s custodian.
During the time the securities are on loan, the borrower will pay the Maryland
Fund an amount equivalent to any interest paid on such securities, and the
Maryland Fund may invest the cash collateral and earn income, or it may receive
an agreed upon amount of taxable interest income from the borrower who has
delivered equivalent collateral. These loans are subject to termination at the
option of the Maryland Fund or the borrower. The Maryland Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or equivalent
collateral to the borrower or placing broker. The risks of securities lending
are similar to those of reverse repurchase agreements. Because interest from
securities lending is taxable, the Maryland Fund presently does not intend to
loan more than 5% of its portfolio securities at any given time.
Reverse
Repurchase Agreements
The
Maryland Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement has the characteristics of a secured borrowing by the Maryland Fund
and creates leverage in the Maryland Fund’s portfolio. In a reverse repurchase
transaction, the Maryland Fund sells a portfolio instrument to another person,
such as a financial institution or broker/dealer, in return for cash. At the
same time, the Maryland Fund agrees to repurchase the instrument at an
agreed-upon time and at a price that is greater than the amount of cash that the
Maryland Fund received when it sold the instrument, representing the equivalent
of an interest payment by the Maryland Fund for the use of the cash. During the
term of the transaction, the Maryland Fund will continue to receive any
principal and interest payments (or the equivalent thereof) on the underlying
instruments.
The
Maryland Fund may engage in reverse repurchase agreements as a means of raising
cash to satisfy redemption requests or for other temporary or emergency
purposes. Unless otherwise limited in the Prospectus or this Statement of
Additional Information, the Maryland Fund may also engage in reverse repurchase
agreements to the extent permitted by its fundamental investment policies in
order to raise additional cash to be invested by the Maryland Fund’s portfolio
manager in other securities or instruments in an effort to increase the Maryland
Fund’s investment returns.
During
the term of the transaction, the Maryland Fund will remain at risk for any
fluctuations in the market value of the instruments subject to the reverse
repurchase agreement as if it had not entered into the transaction. When the
Maryland Fund reinvests the proceeds of a reverse repurchase agreement in other
securities, the Maryland Fund will also be at risk for any fluctuations in the
market value of the securities in which the proceeds are invested. Like other
leveraging risks, this makes the value of an investment in the Maryland Fund
more volatile and increases the Maryland Fund’s overall investment exposure. In
addition, if the Maryland Fund’s return on its investment of the proceeds of the
reverse repurchase agreement does not equal or exceed the implied interest that
it is obligated to pay under the reverse repurchase agreement, engaging in the
transaction will lower the Maryland Fund’s return.
When
the Maryland Fund enters into a reverse repurchase agreement, it is subject to
the risk that the buyer under the agreement may file for bankruptcy, become
insolvent, or otherwise default on its obligations to the Maryland Fund. In the
event of a default by the counterparty, there may be delays, costs and risks of
loss involved in the Maryland Fund’s exercising its rights under the agreement,
or those rights may be limited by other contractual agreements or obligations or
by applicable law.
In
addition, the Maryland Fund may be unable to sell the instruments subject to the
reverse repurchase agreement at a time when it would be advantageous to do so,
or may be required to liquidate portfolio securities at a time when it would be
disadvantageous to do so in order to make payments with respect to its
obligations under a reverse repurchase agreement. This could adversely affect
the portfolio manager’s strategy and result in lower Maryland Fund returns. At
the time the Maryland Fund enters into a reverse repurchase agreement, the
Maryland Fund is required to set aside cash or other appropriate liquid
securities in the amount of the Maryland Fund’s obligation under the reverse
repurchase agreement or take certain other actions in accordance with SEC
guidelines, which may affect the Maryland Fund’s liquidity and ability to manage
its assets. Although complying with SEC guidelines would have the effect of
limiting the amount of Maryland Fund assets that may be committed to reverse
repurchase agreements and other similar transactions at any time, it does not
otherwise mitigate the risks of entering into reverse repurchase
agreements.
Repurchase
Agreements
Under
the terms of a typical repurchase agreement, the Maryland Fund would acquire one
or more underlying debt obligations, frequently obligations issued by the U.S.
government or its agencies or instrumentalities, for a relatively short period
(typically overnight, although the term of an agreement may be many months),
subject to an obligation of the seller to repurchase, and the Maryland Fund to
resell, the obligation at an agreed-upon time and price. The repurchase price is
typically greater than the purchase price paid by the Maryland Fund, thereby
determining the Maryland Fund’s yield. A repurchase agreement is similar to, and
may be treated as, a secured loan, where the Maryland Fund loans cash to the
counterparty and the loan is secured by the purchased securities as collateral.
All repurchase agreements entered into by the Maryland Fund are required to be
collateralized so that at all times during the term of a repurchase agreement,
the value of the underlying securities is at least equal to the amount of the
repurchase price. Also, the Maryland Fund or its
custodian
is required to have control of the collateral, which the Adviser believes will
give the Maryland Fund a valid, perfected security interest in the collateral.
Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon the Maryland
Fund’s ability to dispose of the underlying securities, the risk of a possible
decline in the value of the underlying securities during the period in which the
Maryland Fund seeks to assert its right to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or part of the
income from the agreement. If the Maryland Fund enters into a repurchase
agreement involving securities the Maryland Fund could not purchase directly,
and the counterparty defaults, the Maryland Fund may become the holder of
securities that it could not purchase. These repurchase agreements may be
subject to greater risks. In addition, these repurchase agreements may be more
likely to have a term to maturity of longer than seven days.
Pursuant
to an exemptive order issued by the SEC, the Maryland Fund, along with other
affiliated entities managed by the Adviser, may transfer uninvested cash
balances into one or more joint accounts for the purpose of entering into
repurchase agreements secured by cash and U.S. government securities, subject to
certain conditions.
Repurchase
agreements maturing in more than seven days are considered to be illiquid. The
Maryland Fund will enter into repurchase agreements only with financial
institutions determined by its Adviser to present minimal risk of default during
the term of the agreement.
Other
Taxable Investments
For
temporary defensive purposes, when, in the Adviser’s opinion, no suitable
municipal securities are available, for liquidity purposes, or pending the
investment of the proceeds of the sale of shares, the Maryland Fund may invest
in taxable short-term investments consisting of: (i) obligations of the
U.S. government, its agencies and instrumentalities; (ii) certificates of
deposit and bankers’ acceptances of U.S. domestic banks with assets of one
billion dollars or more; (iii) commercial paper or other corporate notes of
high quality; and (iv) any of such items subject to short-term repurchase
agreements.
Futures
and Option Strategies
To
protect against the effect of adverse changes in interest rates, the Maryland
Fund may purchase and sell interest rate futures contracts and options on
securities indices and may purchase put options on interest rate futures
contracts (practices known as “hedging”). The Maryland Fund may purchase put
options on interest rate futures contracts or sell interest rate futures
contracts (that is, enter into a futures contract to sell the underlying
financial instrument) to attempt to reduce the risk of fluctuations in its
value. The Maryland Fund may purchase an interest rate futures contract (that
is, enter into a futures contract to purchase the underlying financial
instrument) to attempt to establish more definitely the return on securities the
Maryland Fund intends to purchase. The Maryland Fund may not use these
instruments for speculation or leverage. In addition, the Maryland Fund’s
ability to use these strategies may be limited by market conditions, regulatory
limits and tax considerations. Any gains from futures and options transactions
will be taxable; accordingly, the Adviser may not make extensive use of the
techniques described.
The
success of the Maryland Fund’s strategies in reducing risks depends on many
factors, the most significant of which is the Adviser’s ability to predict
market interest rate changes correctly, which differs from its ability to select
portfolio securities. In addition, a hedge could be unsuccessful if the changes
in the value of the Maryland Fund’s futures contract or option positions do not
correlate to the changes in the value of its investments. It is also possible
that the Maryland Fund may be unable to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or that the Maryland
Fund may need to sell a portfolio security at a disadvantageous time, due to the
need for the Maryland Fund to maintain “cover” or to segregate securities in
connection with hedging transactions. Because the markets for futures and
options are not always liquid, the Maryland Fund may be unable to close out or
liquidate its hedged position and may be locked in during a market decline. The
Adviser attempts to minimize the possible negative effects of these factors
through careful selection and monitoring of the Maryland Fund’s futures and
options positions. The Adviser is of the opinion that the Maryland Fund’s
investments in futures transactions will not have a material adverse effect on
the Maryland Fund’s liquidity or ability to honor redemptions.
The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities and also require different
skills from the Adviser in managing the portfolios. While utilization of
options, future contracts and similar instruments may be advantageous to the
Maryland Fund, if the Adviser is not successful in employing such instruments in
managing the Maryland Fund’s investments or in predicting interest rate changes,
the Maryland Fund’s performance will be worse than if the Maryland Fund did not
use such instruments. In addition, the Maryland Fund will pay commissions and
other costs in connection with such investments, which may increase the Maryland
Fund’s expenses and reduce its yield.
The
Maryland Fund’s current policy is to limit options and futures transactions to
those described above. The Maryland Fund currently does not intend to purchase
put and call options having a value in excess of 5% of its total
assets.
Interest
Rate Futures Contracts
Interest
rate futures contracts, which are traded on commodity futures exchanges, provide
for the sale by one party and the purchase by another party of a specified type
and amount of financial instruments (or an index of financial instruments) at a
specified future date. Interest rate futures contracts currently exist covering
such financial instruments as U.S. Treasury bonds, notes and bills, Ginnie Mae
certificates, bank certificates of deposit and 90-day commercial paper. An
interest rate futures contract may be held until the underlying instrument is
delivered and paid for on the delivery date, but most contracts are closed out
before then by taking an offsetting position on a futures exchange.
The
Maryland Fund may purchase an interest rate futures contract (that is, enter
into a futures contract to purchase an underlying financial instrument) when it
intends to purchase fixed-income securities but has not yet done so. This
strategy is sometimes called an anticipatory hedge. This strategy is intended to
minimize the effects of an increase in the price of the securities the Maryland
Fund intends to purchase (but may also reduce the effects of a decrease in
price), because the value of the futures contract would be expected to rise and
fall in the same direction as the price of the securities the Maryland Fund
intends to purchase. The Maryland Fund could purchase the intended securities
either by holding the contract until delivery and receiving the financial
instrument underlying the futures contract, or by purchasing the securities
directly and closing out the futures contract position. If the Maryland Fund no
longer wished to purchase the securities, it would close out the futures
contract before delivery.
The
Maryland Fund may sell a futures contract (that is, enter into a futures
contract to sell an underlying financial instrument) to offset price changes of
securities it already owns. This strategy is intended to minimize any price
changes in the securities the Maryland Fund owns (whether increases or
decreases) caused by interest rate changes, because the value of the futures
contract would be expected to move in the opposite direction from the value of
the securities owned by the Maryland Fund. The Maryland Fund does not expect
ordinarily to hold futures contracts it has sold until delivery or to use
securities it owns to satisfy delivery requirements. Instead, the Maryland Fund
expects to close out such contracts before the delivery date.
The
prices of interest rate futures contracts depend primarily on the value of the
instruments on which they are based, the price changes of which, in turn,
primarily reflect changes in current interest rates. Because there are a limited
number of types of interest rate futures contracts, it is likely that the
standardized futures contracts available to the Maryland Fund will not exactly
match the securities the Maryland Fund wishes to hedge or intends to purchase,
and consequently, will not provide a perfect hedge against all price
fluctuation. However, since fixed-income instruments all respond similarly to
changes in interest rates, a futures contract, the underlying instrument of
which differs from the securities the Maryland Fund wishes to hedge or intends
to purchase, may still provide protection against changes in interest rate
levels. To compensate for differences in historical volatility between positions
the Maryland Fund wishes to hedge and the standardized futures contracts
available to it, the Maryland Fund may purchase or sell futures contracts with a
greater or lesser value than the securities it wishes to hedge or intends to
purchase.
Futures
Trading
If
the Maryland Fund does not wish to hold a futures contract position until the
underlying instrument is delivered and paid for on the delivery date, it may
attempt to close out the contract by entering into an offsetting position on a
futures exchange that provides a trading venue for the contract. A futures
contract is closed out by entering into an opposite position in an identical
futures contract (for example, by purchasing a contract on the same instrument
and with the same delivery date as a contract the Maryland Fund has sold) at the
current price as determined on the futures exchange. The Maryland Fund’s gain or
loss on closing out a futures contract depends on the difference between the
price at which the Maryland Fund entered into the contract and the price at
which the contract is closed out. Transaction costs in opening and closing
futures contracts must also be taken into account. There can be no assurance
that the Maryland Fund will be able to offset a futures position at the time it
wishes to, or at a price that is advantageous. If the Maryland Fund was unable
to enter into an offsetting position in a futures contract, it might have to
continue to hold the contract until the delivery date, in which case it would
continue to bear the risk of price fluctuation in the contract until the
underlying instrument was delivered and paid for.
At
the time the Maryland Fund enters into an interest rate futures contract, it is
required to deposit with its custodian, in the name of the futures broker (known
as a futures commission merchant, or “FCM”), a percentage of the contract’s
value. This amount, which is known as initial margin, generally equals 5% or
less of the value of the futures contract. Initial margin is in the nature of a
good faith deposit or performance bond and is returned to the Maryland Fund when
the futures position is terminated; after all contractual obligations have been
satisfied. Futures margin does not represent a borrowing by the Maryland Fund,
unlike margin extended by a securities broker, and depositing initial margin in
connection with futures positions does not constitute purchasing securities on
margin for the purposes of the Maryland Fund’s investment limitations. Initial
margin may be maintained either in cash or in appropriate liquid securities such
as U.S. Government securities.
As
the contract’s value fluctuates, payments known as variation margin or
maintenance margin are made to or received from the FCM. If the contract’s value
moves against the Maryland Fund (i.e.,
the
Maryland Fund’s futures position declines in value), the Maryland Fund may be
required to make payments to the FCM, and, conversely, the Maryland Fund may be
entitled to receive payments from the FCM if the value of its futures position
increases. This process is known as marking-to-market and takes place on a daily
and intra-day basis.
In
addition to initial margin deposits, the Maryland Fund will instruct its
custodian to segregate (or it will designate on its books as segregated)
additional cash and appropriate liquid securities to cover its obligations under
futures contracts it has purchased. The value of the assets held in the
segregated account will be equal to the daily market value of all outstanding
futures contracts purchased by the Maryland Fund, less the amount deposited as
initial margin. When the Maryland Fund has sold futures contracts to hedge
securities it owns, it will not sell those securities (or lend to another party)
while the contracts are outstanding, unless it substitutes other similar
securities for the securities sold or lent. The Maryland Fund will not sell
futures contracts with a value exceeding the value of securities it owns, except
that the Maryland Fund may do so to the extent necessary to adjust for
differences in historical volatility between the securities owned and the
contracts used as a hedge.
Risks
of Interest Rate Futures Contracts
By
purchasing an interest rate futures contract, the Maryland Fund in effect
becomes exposed to price fluctuations resulting from changes in interest rates,
and by selling a futures contract the Maryland Fund neutralizes those
fluctuations. If interest rates fall, the Maryland Fund would expect to profit
from an increase in the value of the instrument underlying a futures contract it
had purchased, and if interest rates rise, the Maryland Fund would expect to
offset the resulting decline in the value of the securities it owns by profits
in a futures contract it has sold. If interest rates move in the direction
opposite that which was contemplated at the time of purchase, however, the
Maryland Fund’s positions in futures contracts could have a negative effect on
the Maryland Fund’s NAV. If interest rates rise when the Maryland Fund has
purchased futures contracts, the Maryland Fund could suffer a loss in its
futures positions. Similarly, if interest rates fall, losses in a futures
contract the Maryland Fund has sold could negate gains on securities the
Maryland Fund owns, or could result in a net loss to the Maryland Fund. In this
sense, successful use of interest rate futures contracts by the Maryland Fund
will depend on the Adviser’s ability to hedge the Maryland Fund in the correct
way at the appropriate time.
In
addition, the market value of the futures contracts may not move in concert with
the value of the securities the Maryland Fund wishes to hedge or intends to
purchase. This may result from differences between the instrument underlying the
futures contracts and the securities the Maryland Fund wishes to hedge or
intends to purchase, as would be the case, for example, if the Maryland Fund
hedged U.S. Treasury bonds by selling futures contracts on U.S. Treasury notes.
Even
if the securities that are the objects of a hedge are identical to those
underlying the futures contract, there may not be perfect price correlation
between the two. Although the value of interest rate futures contracts is
primarily determined by the price of the underlying financial instruments, the
value of interest rate futures contracts is also affected by other factors, such
as current and anticipated short-term and long-term interest rates, the time
remaining until expiration of the futures contract, and conditions in the
futures markets, which may not affect the current market price of the underlying
financial instruments in the same way. In addition, futures exchanges establish
daily price limits for interest rate futures contracts, and may halt trading in
the contracts if their prices move upward and downward more than a specified
daily limit on a given day. This could distort the relationship between the
price of the underlying instrument and the futures contract, and could prevent
prompt liquidation of unfavorable futures positions. The value of a futures
contract may also move differently from the price of the underlying financial
instrument because of inherent differences between the futures and securities
markets, including variations in speculative demand for futures contracts and
for debt securities, the differing margin requirements for futures contracts and
debt securities, and possible differences in liquidity between the two markets.
Put
Options on Interest Rate Futures Contracts
Purchasing
a put option on an interest rate futures contract gives the Maryland Fund the
right to assume a seller’s position in the contract at a specified exercise
price at any time up to the option’s expiration date. In return for this right,
the Maryland Fund pays the current market price for the option (known as the
option premium), as determined on the commodity futures exchange where the
option is traded.
The
Maryland Fund may purchase put options on interest rate futures contracts to
hedge against a decline in the market value of securities the Maryland Fund
owns. Because a put option is based on a contract to sell a financial instrument
at a certain price, its value will tend to move in the opposite direction from
the price of the financial instrument underlying the futures contract; that is,
the put option’s value will tend to rise when prices fall, and fall when prices
rise. By purchasing a put option on an interest rate futures contract, the
Maryland Fund would attempt to offset potential depreciation of securities it
owns by appreciation of the put option. This strategy is similar to selling the
underlying futures contract directly.
The
Maryland Fund’s position in a put option on an interest rate futures contract
may be terminated either by exercising the option (and assuming a seller’s
position in the underlying futures contract at the option’s exercise price) or
by closing out the option at the current price as determined on the futures
exchange. If the put option is not exercised or closed out before its expiration
date, the entire premium paid would be lost by the Maryland Fund. The Maryland
Fund could profit from exercising a put option if the current market value of
the underlying futures contract were less than the sum of the exercise price of
the put option and the premium paid for the option because the Maryland Fund
would, in effect, be selling the futures contract at a price higher than the
current market price. The Maryland Fund could also profit from closing out a put
option if the current market price of the option is greater than the premium a
Fund paid for the option. Transaction costs must also be taken into account in
these calculations. The Maryland Fund may close out an option it had purchased
by selling an identical option (that is, an option on the same futures contract,
with the same exercise price and expiration date) in a closing transaction on a
futures exchange that provides a secondary market for the option. The Maryland
Fund is not required to make futures margin payments when it purchases an option
on an interest rate futures contract.
Compared
to the purchase or sale of an interest rate futures contract, the purchase of a
put option on an interest rate futures contract involves a smaller potential
risk to the Maryland Fund because the maximum amount at risk is the premium paid
for the option (plus related transaction costs). If prices of debt securities
remain stable, however, purchasing a put option may involve a greater
probability of loss than selling a futures contract, even though the amount of
the potential loss is limited. The Adviser will consider the different risk and
reward characteristics of options and futures contracts when selecting hedging
instruments.
Risks
of Transactions in Options on Interest Rate Futures Contracts
Options
on interest rate futures contracts are subject to risks similar to those
described above with respect to interest rate futures contracts. These risks
include the risk that the Adviser may not hedge the Maryland Fund in the correct
way at the appropriate time, the risk of imperfect price correlation between the
option and the securities being hedged, and the risk that there may not be an
active secondary market for the option. There is also a risk of imperfect price
correlation between the option and the underlying futures contract.
Although
the Adviser may purchase and write only those options for which there appears to
be a liquid market, there can be no assurance that such a market will exist for
any particular option at any particular time. If there were no liquid market for
a particular option, the Maryland Fund might have to exercise an option it had
purchased in order to realize any profit, and might continue to be obligated
under an option it had written until the option expired or was exercised.
Regulatory
Notification of Futures and Options Strategies
The
Maryland Fund is operated by persons who have claimed an exclusion, granted to
operators of registered investment companies like the Maryland Fund, from
registration as a “commodity pool operator” with respect to a fund under the
Commodity Exchange Act (the “CEA”), and, therefore, are not subject to
registration or regulation with respect to a fund under the CEA. As a result,
the Maryland Fund is limited in its ability to use commodity futures (which
include futures on broad-based securities indexes and interest rate futures) or
options on commodity futures, engage in certain swaps transactions or make
certain other investments whether directly or indirectly through investments in
other investment vehicles.
Under
this exclusion, the Maryland Fund must satisfy one of the following two trading
limitations whenever it enters into a new commodity trading position:
(1) the aggregate initial margin and premiums required to establish the
Maryland Fund’s positions in CFTC-regulated instruments may not exceed 5% of the
liquidation value of the Maryland Fund’s portfolio (after accounting for
unrealized profits and unrealized losses on any such investments); or
(2) the aggregate net notional value of such instruments, determined at the
time the most recent position was established, may not exceed 100% of the
liquidation value of the Maryland Fund’s portfolio (after accounting for
unrealized profits and unrealized losses on any such positions). The Maryland
Fund would not be required to consider its exposure to such instruments if they
were held for “bona fide hedging” purposes, as such term is defined in the rules
of the CFTC. In addition to meeting one of the foregoing trading limitations,
the Maryland Fund may not market itself as a commodity pool or otherwise as a
vehicle for trading in the futures, options or swaps markets for CFTC-regulated
instruments.
Senior
Securities
The
1940 Act prohibits the issuance of senior securities by a registered
open-end fund with one exception. The Maryland Fund may borrow from banks,
provided that immediately after any such borrowing there is an asset coverage of
at least 300% for all borrowings of the Maryland Fund, provided that in the
event that the Maryland Fund’s asset coverage falls below 300%, the Maryland
Fund is required to reduce the amount of its borrowings so that it meets the
300% asset coverage threshold within three days (not including Sundays and
holidays). The Maryland Fund’s non-bank borrowings for temporary purposes only,
in an amount not exceeding 5% of the value of the total assets of that Maryland
Fund at the time the borrowing is made, is not deemed to be an issuance of a
senior security.
There
are various investment techniques that may give rise to an obligation of the
Maryland Fund to make a future payment about which the SEC has stated it would
not raise senior security concerns, provided the Maryland Fund complies with SEC
guidance regarding segregation of assets or cover for these investment
techniques. Such investment techniques include, among other things, when-issued
securities, forward contracts and repurchase agreements. The Maryland Fund is
permitted to engage in these techniques.
Foreign
Securities
Economic,
Political and Social Factors.
Certain non-U.S. countries, including emerging market countries, may be subject
to a greater degree of economic, political and social instability. Such
instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision making;
(ii) popular unrest associated with demands for improved economic,
political and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection and conflict. Such economic, political and
social instability could significantly disrupt the financial markets in such
countries and the ability of the issuers in such countries to repay their
obligations. In addition, it may be difficult for the Maryland Fund to pursue
claims against a foreign issuer in the courts of a foreign country. Investing in
emerging countries also involves the risk of expropriation, nationalization,
confiscation of assets and property or the imposition of restrictions on foreign
investments and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation in any emerging country,
the Maryland Fund could lose its entire investment in that country. Certain
emerging market countries restrict or control foreign investment in their
securities markets to varying degrees. These restrictions may limit the Maryland
Fund’s investment in those markets and may increase the expenses of the Maryland
Fund. In addition, the repatriation of both investment income and capital from
certain markets in the region is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the Maryland Fund’s operation. Economies in individual non-U.S.
countries may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross domestic product, rates of inflation, currency
valuation, capital reinvestment, resource self-sufficiency and balance of
payments positions. Many non-U.S. countries have experienced substantial, and in
some cases extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have, very
negative effects on the economies and securities markets of certain emerging
countries. Economies in emerging countries generally are dependent heavily upon
international trade and, accordingly, have been and may continue to be affected
adversely by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been, and may
continue to be, affected adversely and significantly by economic conditions in
the countries with which they trade. Whether or not the Maryland Fund invests in
securities of issuers located in or with significant exposure to countries
experiencing economic, financial and other difficulties, the value and liquidity
of the Maryland Fund’s investments may be negatively affected by the conditions
in the countries experiencing the difficulties.
Sovereign
Government and Supranational Debt.
The Maryland Fund may invest in all types of debt securities of governmental
issuers in all countries, including emerging markets. These sovereign debt
securities may include: debt securities issued or guaranteed by governments,
governmental agencies or instrumentalities and political subdivisions located in
emerging market countries; debt securities issued by government owned,
controlled or sponsored entities located in emerging market countries; interests
in entities organized and operated for the purpose of restructuring the
investment characteristics of instruments issued by any of the above issuers;
Brady Bonds, which are debt securities issued under the framework of the Brady
Plan as a means for debtor nations to restructure their outstanding external
indebtedness; participations in loans between emerging market governments and
financial institutions; or debt securities issued by supranational entities such
as the World Bank. A supranational entity is a bank, commission or company
established or financially supported by the national governments of one or more
countries to promote reconstruction or development.
Sovereign
debt is subject to risks in addition to those relating to non-U.S. investments
generally. As a sovereign entity, the issuing government may be immune from
lawsuits in the event of its failure or refusal to pay the obligations when due.
The debtor’s willingness or ability to repay in a timely manner may be affected
by, among other factors, its cash flow situation, the extent of its non-U.S.
reserves, the availability of sufficient non-U.S. exchange on the date a payment
is due, the relative size of the debt service burden to the economy as a whole,
the sovereign debtor’s policy toward principal international lenders and the
political constraints to which the sovereign debtor may be subject. Sovereign
debtors may also be dependent on disbursements or assistance from foreign
governments or multinational agencies, the country’s access to trade and other
international credits, and the country’s balance of trade. Assistance may be
dependent on a country’s implementation of austerity measures and reforms, which
measures may limit or be perceived to limit economic growth and recovery. Some
sovereign debtors have rescheduled their debt payments, declared moratoria on
payments or restructured their debt to effectively eliminate portions of it, and
similar occurrences may happen in the future. There is no bankruptcy proceeding
by which sovereign debt on which governmental entities have defaulted may be
collected in whole or in part.
Europe—Recent
Events.
In January 2020 the United Kingdom left the European Union (“Brexit”),
highlighting political divisions within the United Kingdom and between the
United Kingdom and European Union. As a consequence of Brexit, there has been
uncertainty in both United Kingdom and European markets and the broader world
economy. Markets, specifically in the United Kingdom and European Union, may be
impacted, leading to increased volatility, lower liquidity, and slower economic
growth that could potentially have an adverse effect on the value of the Fund’s
investments.
Illiquid
Investments and Restricted Securities
The
Maryland Fund may not acquire an illiquid investment if, immediately after the
acquisition, the Maryland 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 Maryland 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. If
illiquid investments exceed 15% of the Maryland Fund’s net assets, certain
remedial actions will be taken as required by Rule 22e-4 under the 1940 Act and
the Maryland Fund’s policies and procedures.
Restricted
securities are securities subject to legal or contractual restrictions on their
resale, such as private placements. Such restrictions might prevent the sale of
restricted securities at a time when the sale would otherwise be desirable.
Under SEC regulations, certain restricted securities acquired through private
placements can be traded freely among qualified purchasers. While restricted
securities are generally classified as illiquid, the SEC has stated that an
investment company’s board of directors, or its investment adviser acting under
authority delegated by the board, may determine that a security eligible for
trading under this rule is “liquid.” The Maryland Fund intends to rely on this
rule, to the extent appropriate, to deem specific securities acquired through
private placement as “liquid.” The Board has delegated to the Adviser, pursuant
to guidelines established by the Board, the responsibility for determining
whether a particular security eligible for trading under this rule is “liquid.”
Investing in these restricted securities could have the effect of increasing the
Maryland Fund’s illiquidity if qualified purchasers become, for a time,
uninterested in buying these securities.
Restricted
securities may be sold only (1) pursuant to SEC Rule 144A or another exemption,
(2) in privately negotiated transactions or (3) in public offerings with respect
to which a registration statement is in effect under the Securities Act of 1933,
as amended (the “1933” Act). Rule 144A securities, although not registered in
the U.S., may be sold to qualified institutional buyers in accordance with Rule
144A under the 1933 Act. As noted above, the Adviser, acting pursuant to
guidelines established by the Board, may determine that some Rule 144A
securities are liquid. Where registration is required, the Maryland Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Maryland Fund may be permitted to sell a restricted security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Maryland Fund might obtain a less favorable price than prevailed
when it decided to sell.
Illiquid
investments may be difficult to value, and the Maryland Fund may have difficulty
disposing of such investments promptly. The Maryland Fund does not consider
non-U.S. securities to be restricted if they can be freely sold in the principal
markets in which they are traded, even if they are not registered for sale in
the U.S.
Illiquid
investments may be difficult to value and the Maryland Fund may have difficulty
disposing of such investments promptly. Judgment plays a greater role in valuing
illiquid investments than those securities for which a more active market
exists. The Maryland Fund does not consider non-U.S. securities to be restricted
if they can be freely sold in the principal markets in which they are traded,
even if they are not registered for sale in the United States.
1919
MARYLAND TAX-FREE INCOME FUND - INVESTMENT POLICIES
Except
as otherwise stated, if a fundamental or non-fundamental percentage limitation
set forth in the Prospectus or this SAI is complied with at the time an
investment is made, a later increase or decrease in percentage resulting from a
change in the relevant parameters will not be considered to be outside the
limitation. An investment will be deemed to have been made at the time the
Maryland Fund enters into a binding commitment to complete the investment. The
Maryland Fund will monitor the level of borrowing in its portfolio and will make
necessary adjustments to maintain the required asset coverage. If, due to
subsequent fluctuations in value or any other reasons, the value of the Maryland
Fund’s illiquid securities exceeds the percentage limitation applicable at the
time of acquisition, the Maryland Fund will consider what actions, if any, are
necessary to maintain adequate liquidity.
Fundamental
Investment Policies
In
addition to its fundamental investment policy to invest, under normal
circumstances, at least 80% of its net assets (including any borrowings for
investment purposes) in municipal obligations, the interest of which is exempt
from Maryland state and local taxes and is not considered a Tax Preference Item,
the Maryland Fund also has adopted the following fundamental investment
limitations that cannot be changed except by a vote of its
shareholders.
1)Borrowing:
The
Maryland Fund may not borrow money, except (i) in an amount not exceeding 33 1/3
% of the Maryland Fund’s total assets (including the amount borrowed) less
liabilities (other than borrowings) or (ii) by entering into reverse repurchase
agreements or dollar rolls;
2)Underwriting:
The Maryland Fund may not engage in the business of underwriting the securities
of other issuers, except as permitted by the Investment Company Act of 1940, as
amended (the “1940 Act”), and the rules and regulations promulgated thereunder,
as such statute, rules, and regulations are amended from time to time or are
interpreted from time to time by the SEC or SEC staff or to the extent that the
Maryland Fund may be permitted to do so by exemptive order or other relief from
the SEC or SEC staff (collectively, “1940 Act Laws, Interpretations and
Exemptions”). This restriction does not prevent the Maryland Fund from engaging
in transactions involving the acquisition, disposition or resale of portfolio
securities, regardless of whether the Maryland Fund may be considered to be an
underwriter under the Securities Act of 1933, as amended (the “1933
Act”);
3)Loans:
The Maryland Fund may not lend money or other assets, except to the extent
permitted by the 1940 Act Laws, Interpretations and Exemptions. This restriction
does not prevent the Maryland Fund from purchasing debt obligations in pursuit
of its investment program, or for defensive or cash management purposes,
entering into repurchase agreements, loaning its portfolio securities to
financial intermediaries, institutions or institutional investors, or investing
in loans, including assignments and participation interests;
4)Senior
Securities:
The Maryland Fund may not issue senior securities, except as permitted under the
1940 Act Laws, Interpretations and Exemptions;
5)Real
Estate:
The Maryland Fund may not purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments. This restriction does
not prevent the Maryland Fund from investing in issuers that invest, deal, or
otherwise engage in transactions in or hold real estate or interests therein,
investing in instruments that are secured by real estate or interests therein,
or exercising rights under agreements relating to such securities, including the
right to enforce security interests;
6)Commodities:
The Maryland Fund may not purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments. This restriction
does not prevent the Maryland Fund from engaging in transactions involving
foreign currency, futures contracts and options, forward contracts, swaps, caps,
floors, collars, securities purchased or sold on a forward-commitment or
delayed-delivery basis or other similar financial instruments, or investing in
securities or other instruments that are secured by physical
commodities;
7)Concentration:
The Maryland Fund may not make any investment if, as a result, the Maryland
Fund’s investments will be concentrated (as that term may be defined or
interpreted by the 1940 Act Laws, Interpretations and Exemptions) in any one
industry. This restriction does not limit the Maryland Fund’s investment in
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities and repurchase agreements with respect thereto, or securities
of municipal issuers. Municipal securities whose payments of interest and/or
principal are dependent upon revenues from specific projects rather than general
obligations, will be subject to this policy.
With
respect to the fundamental policy related to borrowing set forth in (1) above,
if the Maryland Fund ever entered into a reverse repurchase agreement or dollar
roll, the Maryland Fund would set aside cash or appropriate liquid securities in
the amount of the Maryland Fund’s obligation thereunder or take certain other
actions in accordance with SEC guidelines so that the reverse repurchase
agreement or dollar roll would not be subject to the 1940 Act’s 300% asset
coverage requirement.
With
respect to a fundamental policy relating to issuing senior securities set forth
in (4) above, “senior securities” are defined as fund obligations that have
a priority over the Maryland Fund’s shares with respect to the payment of
dividends or the distribution of Maryland Fund assets. The 1940 Act
prohibits the Maryland Fund from issuing senior securities except that the
Maryland Fund may borrow money in amounts of up to one-third of the Maryland
Fund’s total assets from banks for any purpose. The Maryland Fund may also
borrow up to 5% of the Maryland Fund’s total assets from banks or other lenders
for temporary purposes, and these borrowings are not considered senior
securities. The issuance of senior securities by a fund can increase the
speculative character of a fund’s outstanding shares through leveraging.
Leveraging of the Maryland Fund’s portfolio through the issuance of senior
securities magnifies the potential for gain or loss on monies, because even
though the Maryland Fund’s net assets remain the same, the total risk to
investors is increased to the extent of the Maryland Fund’s gross assets. The
policy in (4) above will be interpreted not to prevent collateral
arrangements with respect to swaps, options, forward or futures contracts or
other derivatives, or the posting of initial or variation margin.
Although
not a part of the Maryland Fund’s fundamental investment limitation on
concentration, it is the current position of the SEC that a fund’s investments
are concentrated in an industry when 25% or more of a fund’s net assets are
invested
in
issuers whose principal business is in that industry. For the purpose of the
Maryland Fund’s fundamental limitation on concentration, PABs will not be
considered municipal obligations.
The
foregoing fundamental investment limitations may be changed only by “the vote of
a majority of the outstanding voting securities” of the Maryland Fund, a term
defined in the 1940 Act to mean the vote (i) of 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Maryland Fund are present, or (ii) of
more than 50% of the outstanding voting securities of the Maryland Fund,
whichever is less.
Non-Fundamental
Investment Policies
Unless
otherwise stated, the Maryland Fund’s investment policies and limitations are
non-fundamental and may be changed by the Board without shareholder approval.
The following are some of the non-fundamental investment limitations that the
Maryland Fund currently observes.
1)Borrowing:
The Maryland Fund will not borrow for investment purposes an amount in excess of
5% of its total assets.
2)Short
Sales:
The Maryland Fund may not sell securities short (unless it owns or has the right
to obtain securities equivalent in kind and amount to the securities sold
short). This restriction does not prevent the Maryland Fund from entering into
short positions in foreign currency, futures contracts, options, forward
contracts, swaps, caps, floors, collars, securities purchased or sold on a
forward commitment or delayed delivery basis or other financial
instruments.
3)Margin
Purchases:
The Maryland Fund may not purchase securities on margin, except that (i) the
Maryland Fund may obtain such short-term credits as are necessary for the
clearance of transactions and (ii) the Maryland Fund may make margin payments in
connection with foreign currency, futures contracts, options, forward contracts,
swaps, caps, floors, collars, securities purchased or sold on a
forward-commitment or delayed-delivery basis or other financial
instruments.
Diversification
The
Maryland Fund is non-diversified under the 1940 Act. However, to qualify for tax
treatment as a RIC under the Code, the Fund intends to comply, as of the end of
each quarter of its taxable year, with the Asset Test described under
“Distributions and Tax Information” in this SAI.
Portfolio
Turnover
For
reporting purposes, the Maryland Fund’s portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of the portfolio securities owned by
the Maryland Fund during the fiscal year. In determining such portfolio
turnover, all securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the Maryland Fund’s investment portfolio
(other than short-term money market securities) were replaced once during the
fiscal year.
In
the event that portfolio turnover increases, this increase necessarily results
in correspondingly greater transaction costs which must be paid by the Maryland
Fund. To the extent the portfolio trading results in realization of net
short-term capital gains, shareholders will be taxed on such gains at ordinary
tax rates (except shareholders who invest through individual retirement accounts
(“IRAs”) and other retirement plans which are not taxed currently on
accumulations in their accounts).
Following
are the portfolio turnover rates for the fiscal periods indicated
below:
|
|
|
|
|
| |
| December
31, 2022 |
December
31, 2021 |
| 33% |
26% |
Risk
Factors Common to All 1919 Funds
Market
risk. Financial
market risks affect the value of individual instruments in which the Funds
invest. When the value of the Funds’ investments goes down, your investment in a
Fund decreases in value and you could lose money. Factors such as economic
growth and market conditions, interest rate levels, and political events affect
the markets. Periods of market volatility may occur in response to market events
and other economic, political, and global macro factors. For example, in recent
years, the COVID-19 pandemic, the large expansion of government deficits and
debt as a result of government actions to mitigate the effects of the pandemic,
Russia’s invasion of Ukraine, and the rise of inflation have resulted in extreme
volatility in the global economy and in global financial markets. These and
other similar events could be prolonged and could adversely affect the value and
liquidity of the Funds’ investments, impair the Funds’ ability to satisfy
redemption requests, and negatively impact the Funds’ performance.
In
the past several years, financial markets, such as those in the United States,
Europe, Asia and elsewhere, have experienced increased volatility, depressed
valuations, decreased liquidity and heightened uncertainty. Governmental and
non-governmental issuers have defaulted on, or been forced to restructure, their
debts. These conditions may continue, recur, worsen or spread.
Economies
and financial markets throughout the world are becoming increasingly
interconnected. As a result, whether or not the Funds 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.
Cyber-Security
Risk. Investment
companies, such as the Funds, and their service providers may be subject to
operational and information security risks resulting from cyber-attacks.
Cyber-attacks include, among other behaviors, stealing or corrupting data
maintained online or digitally, denial of service attacks on websites, the
unauthorized release of confidential information or various other forms of cyber
security breaches. Cyber-attacks affecting the Funds or the Adviser, custodian,
transfer agent, intermediaries and other third-party service providers may
adversely impact the Funds. For instance, cyber-attacks may interfere with the
processing of shareholder transactions, impact the Funds’ ability to calculate
its net asset value, cause the release of private shareholder information or
confidential company information, impede trading, subject the Funds to
regulatory fines or financial losses, and cause reputational damage. The Funds
may also incur additional costs for cyber security risk management purposes.
Similar types of cyber security risks are also present for issuers of securities
in which the Funds invest, which could result in material adverse consequences
for such issuers, and may cause the Funds’ investment in such portfolio
companies to lose value.
TRUSTEES
AND EXECUTIVE OFFICERS
The
overall management of the Trust’s business and affairs is invested 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 Adviser, Administrator, Custodian and Transfer Agent, each of which is
discussed in greater detail in this SAI. The day-to-day operations of the Trust
are delegated to its officers, subject to a Fund’s investment objective,
strategies and policies and to the general supervision of the Board. The
Trustees and officers of the Trust, their ages, birth dates, and positions with
the Trust, terms of office with the Trust and length of time served, their
business addresses and principal occupations during the past five years and
other directorships held are set forth in the table below.
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Name,
Address
and Age |
Position(s)
Held with
Trust |
Term
of
Office(1)
and
Length
of
Time
Served |
Principal
Occupation(s)
During Past 5
Years |
Number
of
Portfolios
in
Fund
Complex(2)
Overseen
by
Trustee |
Other
Directorships(3)
Held
During
Past
5 Years
by
Trustee |
|
Independent
Trustees(4) |
Harry
E. Resis
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1945 |
Trustee |
Since
2012 |
Private
investor. Previously served as Director of US Fixed Income for Henderson
Global Investors |
4 |
None |
Brian
S. Ferrie
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1958 |
Trustee |
Since
2020 |
Chief
Compliance Officer, Treasurer, The Jensen Quality Growth Fund (2004 to
2020); Treasurer, Jensen Investment Management (2003 to 2020) |
4 |
None |
Wan-Chong
Kung
615 E. Michigan Street
Milwaukee, WI 53202
Year of birth:
1960 |
Trustee |
Since
2020 |
Senior
Fund Manager, Nuveen Asset Management (FAF Advisors/First American Funds)
(2011 to 2019) |
4 |
Federal
Home Loan Bank of Des Moines (February 2022 to present); Trustee, Securian
Funds Trust (12 portfolios) (October 2022 to present)
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|
|
|
|
|
| |
Name,
Address
and Age |
Position(s)
Held with
Trust |
Term
of
Office(1)
and
Length
of
Time
Served |
Principal
Occupation(s)
During Past 5
Years |
Number
of
Portfolios
in
Fund
Complex(2)
Overseen
by
Trustee |
Other
Directorships(3)
Held
During
Past
5 Years
by
Trustee |
|
Interested
Trustee(5) |
|
Christopher
E. Kashmerick
615
E. Michigan Street
Milwaukee,
WI 53202
Year
of birth: 1974 |
Trustee |
Since
2018 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2011 to
present) |
4 |
None |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Name,
Address and Age |
Position(s)
Held with Trust |
Term
of Office(1)
and
Length of Time Served |
Principal
Occupation(s)
During Past 5 Years |
| Officers |
|
| |
Russell
B. Simon
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1980 |
President
and Principal Executive Officer |
Since
2022 |
Vice
President, U.S. Bancorp Fund Services, LLC (2011 to present) |
Diane
K. Miller
615 E. Michigan Street
Milwaukee, WI 53202 Year of birth:
1972 |
Chief
Compliance Officer and AML Officer |
Since
January 2023 |
Vice
President, U.S. Bancorp Fund Services, LLC (since January 2023); Chief
Compliance Officer, Christian Brothers Investment Services (2017 -
2022) |
Eric
T. McCormick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1971 |
Treasurer
and Principal Financial Officer |
Since
2022 |
Vice
President, U.S. Bancorp Fund Services, LLC (2005 to present) |
Scott
A. Resnick
615 E. Michigan Street
Milwaukee, WI 53202
Year of
birth: 1983 |
Secretary |
Since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2018 to present);
Associate, Legal & Compliance, PIMCO (2012 to
2018). |
(1)
Each Trustee serves an indefinite term until the
election of a successor; however, under the terms of the Board’s retirement
policy, a Trustee shall retire at the end of the calendar year in which he or
she reaches the age of 75 (this policy does not apply to any Trustee serving at
the time the policy was adopted). Each officer serves an indefinite term until
the election of a successor.
(2) The
Trust is comprised of numerous series managed by unaffiliated investment
advisers. The term “Fund Complex” applies to the Financial Services Fund, the
Socially Responsive Fund, the Maryland Fund and the 1919 Variable Socially
Responsive Balanced Fund (offered in a separate Prospectus and SAI) (the “1919
Funds”). The 1919 Funds do not hold themselves out as related to any other
series within the Trust for purposes of investment and investor services. Nor do
they 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 (that is, “public companies”) or other
investment companies registered under the 1940 Act.
(4)
The Trustees of the Trust who are not “interested
persons” of the Trust as defined under the 1940 Act (“Independent
Trustees”).
(5)
Mr. Kashmerick is deemed to be an “interested person” of
the Trust as defined by the 1940 Act. Mr. Kashmerick is an interested Trustee of
the Trust by virtue of the fact that he is an interested person of U.S. Bancorp
Fund Services, LLC, the Fund’s administrator, fund accountant, and transfer
agent.
Additional
Information Concerning Our Board of Trustees
The
Board has general oversight responsibility with respect to the operation of the
Trust and the Funds. The Board has engaged the Adviser to manage the Funds and
is responsible for overseeing the Adviser and other service providers to the
Trust and the Funds in accordance with the provisions of the 1940 Act and other
applicable laws. The Board has established an Audit Committee to assist the
Board in performing its oversight responsibilities.
The
Trust does not have a lead Independent Trustee. The Chairman of the Board is an
“interested person” of the Trust as defined by the 1940 Act. The Trust has
determined that its leadership structure is appropriate in light of, among other
factors, the asset size and nature of the Trust, the arrangements for the
conduct of the Trust’s operations, the number of Trustees, and the
responsibilities of the Board.
Through
its direct oversight role, and indirectly through the Audit Committee, and
officers of the Funds and service providers, the Board performs a risk oversight
function for the Funds. To effectively perform its risk oversight function, the
Board, among other things, performs the following activities: receives and
reviews reports related to the performance and operations of the Funds; reviews
and approves, as applicable, the compliance policies and procedures of the
Funds; approves each Fund’s principal investment policies; adopts policies and
procedures designed to deter market timing; meets with representatives of
various service providers, including the Adviser, to review and discuss the
activities of the Funds and to provide direction with respect thereto; and
appoints a chief compliance officer of the Funds who oversees the implementation
and testing of the Funds’ compliance program and reports to the Board regarding
compliance matters for the Funds and its service providers.
The
Trust has an Audit Committee, which plays a significant role in the risk
oversight of the Funds as it meets periodically with the auditors of the Funds.
The Board also meets quarterly with the Funds’ chief compliance
officer.
Not
all risks that may affect the Funds can be identified nor can controls be
developed to eliminate or mitigate their occurrence or effects. It may not be
practical or cost effective to eliminate or mitigate certain risks, the
processes and controls employed to address certain risks may be limited in their
effectiveness, and some risks are simply beyond the reasonable control of the
Adviser or other service providers. Moreover, it is necessary to bear certain
risks (such as investment-related risks) to achieve a Fund’s goals. As a result
of the foregoing and other factors, the Funds’ ability to manage risk is subject
to substantial limitations.
Trust
Committees. The
Trust has two standing committees: the Audit Committee, which also serves as the
Qualified Legal Compliance Committee (“QLCC”) and the Governance and Nominating
Committee (the “Nominating Committee”).
The
Audit Committee, comprised entirely of the Independent Trustees, is chaired by
Mr. Ferrie. The primary functions of the Audit Committee are to select the
independent registered public accounting firm to be retained to perform the
annual audit of the Fund, to review the results of the audit, to review the
Fund’s internal controls, to approve in advance all permissible non-audit
services performed by the independent auditors and to review certain other
matters relating to the Fund’s independent registered public accounting firm and
financial records. In its role as the QLCC, its function is to receive reports
from an attorney retained by the Trust of evidence of a material violation by
the Trust or by any officer, director, employee or agent of the Trust. During
the fiscal year ended December 31, 2022, the Audit Committee met two times in
regard to the Fund.
The
Nominating Committee, comprised entirely of the Independent Trustees, is
responsible for seeking and reviewing candidates for consideration as nominees
for Trustees and meets only as necessary. The Nominating Committee will
consider nominees nominated by shareholders. Recommendations by
shareholders for consideration by the Nominating 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 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 offices of the Trust not later
than 120 days and no more than 150 days prior to the shareholder meeting at
which any such nominee would be voted on. During the fiscal year ended
December 31, 2022, the Nominating Committee did not meet in regard to the
Fund.
The
Board has designated the Adviser to perform fair value determinations (the
“Valuation Designee”). The Valuation Designee is subject to Board oversight and
certain reporting and other requirements designed to facilitate the Board's
ability to effectively oversee the Valuation Designee's fair value
determinations.
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 Audit Committee meets regularly with the Chief Compliance
Officer to discuss compliance and operational risks. The Audit Committee also
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 Adviser
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
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.
Harry
E. Resis’ background in fixed income securities analysis, with an emphasis on
high yield securities, provides him with a practical knowledge of the underlying
markets and strategies used by series in the Trust that will be useful to the
Board in their analysis and oversight of the series.
Brian
S. Ferrie’s experience in finance and compliance in the mutual fund
industry gives him a strong understanding of the regulatory requirements of
operating a mutual fund. He also understands the complex nature of the financial
requirements, both from a regulatory and operational perspective, of managing a
mutual fund. Mr. Ferrie’s background and experience provide a unique perspective
to the Board.
Wan-Chong
Kung’s experience managing fixed income mutual funds, with specific experience
in commodities provides a diverse point-of-view for the Board. Ms. Kung also has
unique experience in education as she advises student-managed bond and equity
funds.
Christopher
E. Kashmerick has substantial mutual fund operations and shareholder servicing
experience through his position as Senior Vice President of U.S. Bank Global
Fund Services, and he brings more than 20 years of mutual fund and investment
management experience, which makes him a valuable resource to the Board as they
contemplate various fund and shareholder servicing needs.
Each
of the Trustees takes a conservative and thoughtful approach to addressing
issues facing the Fund. The combination of skills and attributes discussed above
led to the conclusion that each of Messrs. Resis, Ferrie, Kashmerick, and Ms.
Kung should serve as a trustee.
Trustee
Ownership of Fund Shares and Other Interests
No
Trustee owned shares of the Funds as of the calendar year ended December 31,
2022.
As
of December 31, 2022, neither the Independent Trustees nor members of their
immediate family, own securities beneficially or of record in the Adviser, the
Distributor, or an affiliate of the Adviser 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 Adviser, 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
Adviser, the Distributor or any affiliate thereof was a party.
Compensation
Set
forth below is the compensation received by the Independent Trustees from the
Fund for the fiscal year ended December 31, 2022. As of March 1, 2023
the Independent Trustees receive an annual retainer of $64,000 per year, a
$2,000 per regular meeting fee per Independent Trustee, and a $1,000 special
meeting fee per Independent Trustee. Prior to March 1, 2023, the Independent
Trustees received an annual retainer of $56,000 per year and a per meeting fee
of $1,000 for each regular and special meeting of the Board of Trustees
attended. The Audit Committee chair receives a $4,000 annual fee and the
Nominating and Governance Committee chair receives a $2,000 annual fee. The
Independent Trustees also receive reimbursement from the Trust for expenses
incurred in connection with attendance at meetings. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Independent Trustees.
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| |
|
| Aggregate
Compensation
from each Fund |
Pension
or
Retirement
Benefits
Accrued as
Part of Fund
Expenses |
Annual
Benefits
Upon
Retirement |
Total
Compensation
from
Fund
Complex
Paid
to
Trustees(1) |
| Name
of Independent Trustee |
|
|
| |
|
John
C. Chrystal(2) |
$2,875 |
None |
None |
$11,500 |
| Harry
E. Resis |
$3,875 |
None |
None |
$15,500 |
| Brian
S. Ferrie |
$3,938 |
None |
None |
$15,750 |
| Wan-Chong
Kung |
$3,938 |
None |
None |
$15,750 |
| Name
of Interested Trustee |
|
|
| |
| Christopher
E. Kashmerick |
$0 |
None |
None |
$0 |
(1)There
are currently multiple portfolios comprising the Trust. The term “Fund Complex”
applies to the four 1919 Funds. For the fiscal year ended December 31, 2022,
aggregate Independent Trustees’ fees paid by the Trust were in the amount of
$231,000.
(2)John
C. Chrystal retired from the Board of Trustees as of the close of business on
August 26, 2022.
As
of April 1, 2023, the Trustees and officers of the Trust, as a group, did not
own more than 1% of any class of any Fund’s outstanding shares.
CONTROL
PERSONS AND PRINCIPAL SHAREHOLDERS
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of any class of a 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 a Fund.
As
of April 13, 2023, the following shareholders were considered to be either a
control person or principal shareholder of the 1919 Funds.
Financial
Services Fund – Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
NATIONAL
FINANCIAL SERVICES LLC
499 WASHINGTON BLVD
JERSEY CITY NJ
07310-1995 |
N/A |
N/A |
18.03% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
SPECIAL CUSTODY ACCT FOR THE
EXCLUSIVE
BENEFIT OF CUSTOMERS
OF MSSB
1300 THAMES ST FL 6
BALTIMORE MD
21231-3496 |
N/A |
N/A |
16.64% |
Record |
BNY
MELLON INVESTMENT SERVICING (US) INC
FBO PRIMERICA FINANCIAL SERVICES
760 MOORE RD
KING OF PRUSSIA PA 19406-1212 |
N/A |
N/A |
16.48% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY ACCT FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO, CA 94105-1905 |
N/A |
N/A |
14.12% |
Record |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
7.04% |
Record |
Financial
Services Fund – Class C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY ACCT FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO, CA 94105-1905 |
N/A |
N/A |
45.50% |
Record |
WELLS
FARGO CLEARING SERVICES
2801 MARKET ST
SAINT LOUIS MO
63103-2523 |
N/A |
N/A |
16.42% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
SPECIAL CUSTODY ACCT FOR THE
EXCLUSIVE
BENEFIT OF CUSTOMERS
OF MSSB
1300 THAMES ST FL 6
BALTIMORE MD
21231-3496 |
N/A |
N/A |
9.29% |
Record |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
6.47% |
Record |
Financial
Services Fund – Class I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
29.49% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
15.42% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY ACCT FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
14.84% |
Record |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
10.94% |
Record |
NATIONAL
FINANCIAL SERVICES CORP
FBO EXCLUSIVE BENEFIT OF OUR CUST
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR
499 WASHINGTON BLVD
JERSEY CITY NJ
07310-1995 |
N/A |
N/A |
5.79% |
Record |
LPL
FINANCIAL
OMNIBUS CUSTOMER ACCOUNT
4707 EXECUTIVE DR
SAN DIEGO CA
92121-3091 |
N/A |
N/A |
5.01% |
Record |
Socially
Responsive Balanced Fund – Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
21.03% |
Record |
|
BNY
MELLON INVESTMENT SERVICING (US) INC
FBO PRIMERICA FINANCIAL SERVICES
760 MOORE RD
KING OF PRUSSIA PA 19406-1212 |
N/A |
N/A |
20.23% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
13.53% |
Record |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
6.92% |
Record |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
6.39% |
Record |
LPL
FINANCIAL
OMNIBUS CUSTOMER ACCOUNT
ATTN LINDSAY O TOOLE
4707
EXECUTIVE DR
SAN DIEGO CA 92121-3091 |
N/A |
N/A |
6.38% |
Record |
Socially
Responsive Balanced Fund – Class C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
19.17% |
Record |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
14.88% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
13.51% |
Record |
LPL
FINANCIAL
OMNIBUS CUSTOMER ACCOUNT
ATTN LINDSAY O TOOLE
4707
EXECUTIVE DR
SAN DIEGO CA 92121-3091 |
N/A |
N/A |
6.79% |
Record |
Socially
Responsive Balanced Fund – Class I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
AMERIPRISE
FINANCIAL SERVICES
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
18.85% |
Record |
NATIONAL
FINANCIAL SERVICES CORP
FBO EXCLUSIVE BENEFIT OF OUR CUST
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR
499 WASHINGTON BLVD
JERSEY CITY NJ
07310-1995 |
N/A |
N/A |
12.69% |
Record |
LPL
FINANCIAL
OMNIBUS CUSTOMER ACCOUNT
ATTN LINDSAY O TOOLE
4707
EXECUTIVE DR
SAN DIEGO CA 92121-3091 |
N/A |
N/A |
11.73% |
Record
|
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
10.76% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
10.47% |
Record |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
7.18% |
Record |
Maryland
Fund – Class A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
61.44% |
Record |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
15.10% |
Record |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
5.14% |
Record |
Maryland
Fund – Class C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
WELLS
FARGO CLEARING SERVICES LLC
1 N JEFFERSON AVE MSC MO3970
SAINT LOUIS
MO 63103-2254 |
N/A |
N/A |
20.26% |
Record |
RBC
CAPITAL MARKETS LLC
MUTUAL FUND OMNIBUS PROCESSING
OMNIBUS
ATTN
MUTUAL FUND OPS MANAGER
60 S 6TH ST # P08
MINNEAPOLIS MN
55402-4413 |
N/A |
N/A |
14.85% |
Record |
UBS
WM USA
0O0 11011 6100
SPEC CDY A/C EBOC UBSFSI
1000 HARBOR
BLVD
WEEHAWKEN NJ 07086-6761 |
N/A |
N/A |
12.88% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN ST
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
12.57% |
Record |
AMERIPRISE
FINANCIAL SERVICES LLC
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
11.65% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
11.32% |
Record |
Maryland
Fund – Class I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
UBS
WM USA
0O0 11011 6100
SPEC CDY A/C EBOC UBSFSI
1000 HARBOR
BLVD
WEEHAWKEN NJ 07086-6761 |
N/A |
N/A |
34.30% |
Record |
CHARLES
SCHWAB & CO INC
SPECIAL CUSTODY A/C FBO CUSTOMERS
ATTN MUTUAL
FUNDS
211 MAIN STREET
SAN FRANCISCO CA 94105-1905 |
N/A |
N/A |
25.70% |
Record |
MORGAN
STANLEY SMITH BARNEY LLC
FOR THE EXCLUSIVE BENEFIT OF
ITS
CUSTOMERS
1 NEW YORK PLZ FL 12
NEW YORK NY
10004-1965 |
N/A |
N/A |
11.13% |
Record |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
and Address |
Parent
Company |
Jurisdiction |
%
Ownership |
Type
of
Ownership |
AMERIPRISE
FINANCIAL SERVICES LLC
707 2ND AVE S
MINNEAPOLIS MN
55402-2405 |
N/A |
N/A |
8.53% |
Record |
NATIONAL
FINANCIAL SERVICES CORP
FBO EXCLUSIVE BENEFIT OF OUR CUST
ATTN
MUTUAL FUNDS DEPT 4TH FLOOR
499 WASHINGTON BLVD
JERSEY CITY NJ
07310-1995 |
N/A |
N/A |
5.67% |
Record
|
INVESTMENT
ADVISER
1919
Investment Counsel, LLC serves as the Funds’ adviser pursuant to an investment
advisory agreement between the Adviser and the Trust (the “Advisory Agreement”).
1919ic provides the day-to-day portfolio management of the Funds. The Adviser’s
principal office is located at One South Street, Suite 2500, Baltimore, Maryland
21202. The Adviser provides customized investment counsel to individuals, family
groups and institutions. 1919ic seeks to maximize performance while managing
risk through an investment discipline that is supported by fundamental research
and dedicated resources. The Adviser is a wholly owned subsidiary of Stifel
Financial Corp., a financial services holding company. As of
January 31, 2023, the Adviser’s total assets under management were
approximately $17 billion.
Under
the investment advisory agreement with the Trust, 1919ic supervises the
management of each Fund’s investments (including cash and short-term
instruments) and business affairs. At its expense, 1919ic provides office space
and all necessary office facilities, equipment and personnel for servicing the
investments of the Funds. As compensation for its services, each Fund will pay
1919ic a monthly advisory fee at the annual rate shown in the table below, based
on the corresponding Fund’s average daily net assets.
|
|
|
|
|
| |
|
Fund |
Management/Advisory
Fee Rate |
|
Financial
Services Fund |
0.80% |
|
Socially
Responsive Fund |
0.65%
of the Fund’s average daily net assets up to and including $100 million;
0.61% of assets in excess of $100 million and up to and including $200
million; 0.51% of assets in excess of $200 million and up to and including
$300 million; and 0.46% of assets in excess of $300
million |
|
Maryland
Fund |
0.55% |
The
Funds are responsible for their own operating expenses. However, for each Fund,
the Adviser has contractually agreed to reduce its fees and pay expenses of the
Fund to ensure that Total Annual Fund Operating Expenses After Fee
Waiver/Expense Reimbursement (excluding interest, brokerage commissions,
front-end or contingent deferred loads, portfolio transaction expenses, taxes,
extraordinary expenses, and acquired fund fees and expenses) will not exceed the
amounts shown below as a percentage of the Fund’s average daily net assets (the
“Expense Cap”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fund |
Class
A
Expense Cap |
Class
C
Expense Cap |
Class
FI Expense Cap |
Class
R Expense Cap |
Class
I Expense Cap |
|
Financial
Services Fund |
1.50% |
2.25% |
1.50% |
1.75% |
1.25% |
|
Socially
Responsive Fund |
1.25% |
2.00% |
1.25% |
1.50% |
1.00% |
|
Maryland
Fund |
0.75% |
1.30% |
0.85% |
N/A |
0.60% |
These
arrangements are in effect through April 30, 2024. After that date, the
arrangements may be terminated or amended at any time by the Board upon 60 days’
notice to 1919ic or by 1919ic with consent of the Board. These arrangements,
however, may be modified by the Adviser to decrease total annual operating
expenses at any time. 1919ic may be permitted to recapture amounts waived and/or
reimbursed to a class within three years after 1919ic waived the fee or incurred
the expense if the class’ total annual operating expenses have fallen to a level
below the limits described above. In no case will the Adviser recapture any
amount that would result, on any particular business day of the Fund, in the
class’ total annual operating expenses exceeding the lower of: (1) the
applicable expense cap at the time of the waiver and/or reimbursement; or (2)
the applicable expense cap at the time of the recapture. Any such recoupment is
contingent upon the subsequent review and approval of the recouped amounts by
the Board.
The
Financial Services Fund paid management fees to 1919ic for the following fiscal
years listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Financial
Services Fund |
Gross
Management
Fees |
Management
Fees
Waived/Expense
Reimbursements |
Management
Fees
Recaptured |
Net
Management Fees
(After Waivers/Expense
Reimbursements) |
| Fiscal
year ended December 31, 2022 |
$1,523,647 |
$0 |
$0 |
$1,523,647 |
| Fiscal
year ended December 31, 2021 |
$1,681,402 |
$0 |
$0 |
$1,681,402 |
| Fiscal
year ended December 31, 2020 |
$1,219,195 |
$0 |
$0 |
$1,219,195 |
The
Socially Responsive Fund paid management fees to 1919ic for the following fiscal
years listed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Socially
Responsive Fund |
Gross
Management
Fees |
Management
Fees
Waived/Expense
Reimbursements |
Management
Fees
Recaptured |
Net
Management Fees
(After Waivers/
Expense
Reimbursements) |
| Fiscal
year ended December 31, 2022 |
$3,926,727 |
$0 |
$0 |
$3,926,727 |
| Fiscal
year ended December 31, 2021 |
$3,682,737 |
$0 |
$0 |
$3,682,737 |
| Fiscal
year ended December 31, 2020 |
$1,772,503 |
$0 |
$73,608 |
$1,846,111 |
The
Maryland Fund paid management fees to 1919ic for the following fiscal years
listed below:
|
|
|
|
|
|
|
|
|
|
|
| |
| Maryland
Fund |
Gross
Management
Fees |
Management Fees
Waived/Expense
Reimbursements |
Net
Management Fees
(After Waivers/
Expense
Reimbursements) |
| Fiscal
year ended December 31, 2022 |
$427,836 |
| -$278,616 |
| $149,220 |
|
| Fiscal
year ended December 31, 2021 |
$488,561 |
| -$292,964 |
| $195,597 |
|
| Fiscal
year ended December 31, 2020 |
$466,716 |
| -$293,780 |
| $172,936 |
|
Portfolio
Manager – Financial Services Fund
Below
is set forth certain additional information with respect to the portfolio
manager for the Financial Services Fund. All information is provided as of
December 31, 2022.
Portfolio
Manager Compensation
As
compensation for the portfolio management function, the portfolio manager is
paid a competitive base salary, generous employee benefits and is eligible to
receive a discretionary bonus. The base salary is determined using a variety of
factors, including: (i) years of experience; (ii) the overall size of
the assets under management; (iii) type of accounts managed;
(iv) contribution to portfolio performance; (v) contribution to firm
management; (vi) contribution to the research and investment process; and
(vii) compliance with regulatory and prospectus requirements. Compensation
relating to management of the Adviser’s mutual funds and compensation relating
to the management of other accounts are based on the same factors and no one
type of account figures more heavily in the calculation of compensation. A
formula-based scheme directly linking compensation to investment performance as
measured against a benchmark is not currently in place nor is one planned. For
Mr. King, the discretionary bonus is based in part on overall contribution to
the Adviser’s business and on ability to gain new client business and retain
existing business.
Other
Accounts Managed by the Portfolio Manager
The
table below identifies the portfolio manager, the number of accounts (other than
the Financial Service Fund) for which the portfolio manager has day-to-day
management responsibilities and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, other accounts and, if applicable, the number of accounts
and total assets in the accounts where fees are based on
performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed
|
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed for which Advisory Fee is
Performance-
Based |
|
Charles
King, CFA |
Registered
investment companies |
NA |
NA |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
335 |
$1,645,602,221 |
NA |
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed
|
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed for which Advisory Fee is
Performance-
Based |
|
John
Helfst |
Registered
investment companies |
NA |
NA |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
NA |
NA |
NA |
NA |
Portfolio
Manager Securities Ownership
The
table below identifies ownership of the equity securities of the Financial
Services Fund by the portfolio managers responsible for the day-to-day
management of the Financial Services Fund as of December 31, 2022.
|
|
|
|
|
| |
| Portfolio
Manager |
Dollar Range of
Ownership of Securities |
| Charles
King |
$100,001
- $500,000 |
| John
Helfst |
None |
Portfolio
Managers – Socially Responsive Fund
Below
is set forth certain additional information with respect to the portfolio
managers for the Socially Responsive Fund. All information is provided as of
December 31, 2022.
Portfolio
Managers Compensation
As
compensation for the portfolio management function, each portfolio manager is
paid a competitive base salary, generous employee benefits and each is eligible
to receive a discretionary bonus. The base salary is determined using a variety
of factors, including: (i) years of experience; (ii) the overall size
of the assets under management; (iii) type of accounts managed;
(iv) contribution to portfolio performance; (v) contribution to firm
management, in the case of Ronald T. Bates, who leads the Adviser’s Cincinnati
office and is a member of the Adviser’s Executive Committee;
(vi) contribution to the research and investment process; (vii) client
service; and (viii) compliance with regulatory and prospectus requirements.
The discretionary bonus is based in part on the overall contribution to the
Adviser’s business, and on the portfolio manager’s ability to gain new client
business and retain existing business. A formula-based scheme directly linking
compensation to investment performance as measured against a benchmark is not
currently in place nor is one planned. Compensation relating to management of
the Adviser’s mutual funds and compensation relating to the management of other
accounts are based on the same factors and no one type of account figures more
heavily in the calculation of compensation.
Other
Accounts Managed by the Portfolio Managers
The
table below identifies the portfolio managers, the number of accounts (other
than the Socially Responsive Fund) for which each portfolio manager has
day-to-day management responsibilities and the total assets in such accounts,
within each of the following categories: registered investment companies, other
pooled investment vehicles, other accounts and, if applicable, the number of
accounts and total assets in the accounts where fees are based on performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory
Fee is
Performance-
Based |
|
Ronald
T. Bates |
Registered
investment companies |
1 |
$33,113,947 |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
294 |
$1,438,861,065 |
NA |
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory
Fee is
Performance-
Based |
|
Aimee
M. Eudy |
Registered
investment companies |
1 |
$33,113,947 |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
116 |
$907,917,728 |
NA |
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory
Fee is
Performance-
Based |
| Robert
Huesman |
Registered
investment companies |
1 |
$33,113,947 |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
454 |
$301,456,277 |
NA |
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory
Fee is
Performance-
Based |
| Alison
Bevilacqua |
Registered
investment companies |
1 |
$33,113,947 |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
NA |
NA |
NA |
NA |
Portfolio
Manager Securities Ownership
The
table below identifies ownership of the equity securities of the Socially
Responsive Fund by the portfolio managers responsible for the day-to-day
management of the Socially Responsive Fund as of December 31, 2022.
|
|
|
|
|
| |
| Portfolio
Manager |
Dollar Range of
Ownership of Securities |
| Ronald
T. Bates |
$100,001
- $500,000 |
| Aimee
M. Eudy |
$1
- $10,000 |
| Robert
Huesman |
$50,001
- $100,000 |
| Alison
Bevilacqua |
$1
- $10,000 |
Portfolio
Managers – Maryland Fund
Below
is set forth certain additional information with respect to the portfolio
managers for the Maryland Fund. All information is provided as of December 31,
2022.
Portfolio
Managers Compensation
As
compensation for the portfolio management function, each portfolio manager is
paid a competitive base salary, generous employee benefits and is eligible to
receive a discretionary bonus. The base salary is determined using a variety of
factors, including (i) years of experience; (ii) overall size of the assets
under management; (iii) type of accounts managed; (iv) contribution to portfolio
performance; (v) contribution to the research and investment process; (vi)
client service; and (vii) compliance with regulatory and prospectus
requirements. The discretionary bonus is based in part on the overall
contribution to the Adviser’s business, and on the portfolio manager’s ability
to gain new client business and retain existing business. A formula-based scheme
directly linking compensation to investment performance as measured against a
benchmark is not currently in place nor is one planned. Compensation relating to
management of the Adviser’s mutual funds and compensation relating to the
management of other accounts are based on the same factors and no one type of
account figures more heavily in the calculation of compensation.
Other
Accounts Managed by the Portfolio Managers
The
table below identifies the portfolio manager, the number of accounts (other than
the Maryland Fund) for which the portfolio managers have day-to-day management
responsibilities and the total assets in such accounts, within each of the
following categories: registered investment companies, other pooled investment
vehicles, other accounts and, if applicable, the number of accounts and total
assets in the accounts where fees are based on performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory Fee is
Performance- Based |
|
R.
Scott Pierce, CFA
|
Registered
investment companies |
NA |
NA |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
142 |
$705,658,390 |
NA |
NA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Type
of
Account |
Number
of Accounts Managed |
Total
Assets
Managed |
Number
of Accounts Managed for which Advisory Fee is Performance-
Based |
Assets
Managed
for
which
Advisory Fee is
Performance- Based |
|
Lauren
K. Webb, CFA |
Registered
investment companies |
NA |
NA |
NA |
NA |
| Other
pooled investment vehicles |
NA |
NA |
NA |
NA |
Other
accounts |
23 |
$28,326,459 |
NA |
NA |
Portfolio
Managers Securities Ownership
The
table below identifies ownership of the equity securities of the Maryland Fund
by the portfolio managers responsible for the day-to-day management of the
Maryland Fund as of December 31, 2022.
|
|
|
|
|
| |
| Portfolio
Manager |
Dollar Range of
Ownership of Securities |
| R.
Scott Pierce, CFA |
None |
| Lauren
K. Webb, CFA |
None |
Potential
Conflicts of Interest – Financial Services Fund and Socially Responsive
Fund
Potential
conflicts of interest may arise when a Fund portfolio manager also has
day-to-day management responsibilities with respect to one or more other funds
or other accounts.
The
Adviser and the Funds have adopted compliance policies and procedures that are
designed to address various conflicts of interest that may arise for the Adviser
and the individuals that each employs. For example, the Adviser has adopted
trade allocation procedures that are designed to facilitate the fair allocation
of limited investment opportunities among multiple funds and accounts. There is
no guarantee, however, that the policies and procedures adopted by the Adviser
and the Funds will be able to detect and/or prevent every situation in which an
actual or potential conflict may appear.
These
potential conflicts include:
Allocation
of Limited Time and Attention.
A portfolio manager who is responsible for managing multiple funds and/or
accounts may devote unequal time and attention to the management of those funds
and/or accounts. As a result, the portfolio manager may not be able to formulate
as complete a strategy or identify equally attractive investment opportunities
for each of those accounts as might be the case if he or she were to devote
substantially more attention to the management of a single fund. The effects of
this potential conflict may be more pronounced where funds and/or accounts
overseen by a particular portfolio manager have different investment strategies.
Allocation
of Limited Investment Opportunities.
If a portfolio manager identifies a limited investment opportunity that may be
suitable for multiple funds and/or accounts, the opportunity may be allocated
among these several funds or accounts, which may limit a Fund’s ability to take
full advantage of the investment opportunity.
Pursuit
of Differing Strategies.
At times, a portfolio manager may determine that an investment opportunity may
be appropriate for only some of the funds and/or accounts for which he or she
exercises investment responsibility, or may decide that certain of the funds
and/or accounts should take differing positions with respect to a particular
security. In these cases, the portfolio manager may place separate transactions
for one or more funds or accounts which may affect the market price of the
security or the execution of the transaction, or both, to the detriment or
benefit of one or more other funds and/or accounts.
Selection
of Broker/Dealers.
Portfolio managers may be able to select or influence the selection of the
brokers and dealers that are used to execute securities transactions for the
funds and/or accounts that they supervise. In addition to executing trades, some
brokers and dealers provide brokerage and research services (as those terms are
defined in Section 28(e) of the 1934 Act), which may result in the payment
of higher brokerage fees than might have otherwise been available. These
services may be more beneficial to certain funds or accounts than to others.
Although the payment of brokerage commissions is subject to the requirement that
the Adviser determines in good faith that the commissions are reasonable in
relation to the value of the brokerage and research services provided to a fund,
a decision as to the selection of brokers and dealers could yield
disproportionate costs and benefits among the funds and/or accounts managed.
Variation
in Compensation.
A conflict of interest may arise where the financial or other benefits available
to the portfolio manager differ among the funds and/or accounts that he or she
manages. If the structure of the Adviser’s management fee (and the percentage
paid to the Adviser) and/or the portfolio manager’s compensation differs among
funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the Adviser and/or its affiliates have
interests. Similarly, the desire to maintain assets under management or to
enhance the portfolio manager’s performance record or to derive other rewards,
financial or otherwise, could influence the portfolio manager in affording
preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
Related
Business Opportunities.
The Adviser or its affiliates may provide more services (such as distribution or
recordkeeping) for some types of funds or accounts than for others. In such
cases, a portfolio manager may benefit, either directly or indirectly, by
devoting disproportionate attention to the management of funds and/or accounts
that provide greater overall returns to the Adviser and its affiliates.
Potential
Conflicts of Interest - Maryland Fund
The
Adviser has not identified any material conflicts of interest arising in the
connection with the portfolio manger’s simultaneous management of the Maryland
Fund’s investments and the investments of other accounts managed by the adviser.
Other accounts the portfolio manager manages have investment guidelines that
differ significantly from those of the Maryland Fund and also have shorter
average maturity profiles. As a result, the portfolio manager generally is
not presented with investment opportunities that are appropriate both for the
Maryland Fund and the other accounts he manages. Any potential conflicts are
handled in accordance with the Adviser’s trade allocation policy.
Expenses
In
addition to amounts payable under the Advisory Agreement and the 12b-1 Plan (as
discussed below as applicable), each Fund is responsible for its own expenses,
including, among other things: interest; taxes; governmental fees; voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; organization costs of a Fund; the cost
(including brokerage commissions, transaction fees or charges, if any) in
connection with the purchase or sale of a Fund’s securities and other
investments and any losses in connection therewith; fees and expenses of
custodians, transfer agents, registrars, independent pricing vendors or other
agents; legal expenses; loan commitment fees; expenses relating to the issuance
and redemption or repurchase of a Fund’s shares and servicing shareholder
accounts; expenses of registering and qualifying a Fund’s shares for sale under
applicable federal and state law; expenses of preparing, setting in print,
printing and distributing prospectuses and statements of additional information
and any supplements thereto, reports, proxy statements, notices and dividends to
a Fund’s shareholders; costs of stationery; website costs; costs of meetings of
the Board or any committee thereof, meetings of shareholders and other meetings
of a Fund; Board fees; audit fees; travel expenses of officers, Trustees and
employees of a Fund, if any; a Fund’s pro rata portion of premiums on any
fidelity bond and other insurance covering a Fund and its officers, Trustees and
employees; and litigation expenses and any non-recurring or extraordinary
expenses as may arise, including, without limitation, those relating to actions,
suits or proceedings to which a Fund is a party and any legal obligation which a
Fund may have to indemnify a Fund’s Trustees and officers with respect thereto.
The
Adviser may agree to implement an expense cap, waive fees and/or reimburse
operating expenses for one or more classes of shares. Any such waived fees
and/or reimbursed expenses are described in the Funds’ Prospectus. The expense
caps and waived fees and/or reimbursed expenses do not include any shareholder
servicing fees pursuant to a Shareholder Servicing Plan, any front-end or
contingent deferred loads, taxes, leverage interest, brokerage commissions,
acquired fund fees and expenses, expenses incurred in connection with any merger
or reorganization, portfolio transaction expenses, interest expense and
dividends paid on short sales or extraordinary expenses such as litigation.
The
Adviser has implemented the following expense caps:
Financial
Services Fund expense cap
The
Adviser has agreed to waive fees and reimburse operating expenses (other than
interest, brokerage, taxes, extraordinary expenses and acquired fund fees and
expenses) so that total annual operating expenses are not expected to exceed
1.50% for Class A shares, 2.25% for Class C shares, 1.50% for Class FI shares,
1.75% for Class R shares, and 1.25% for Class I shares (the “expense caps”).
This arrangement is in effect through April 30, 2023. After that date, the
arrangement may be terminated or amended at any time by the Board upon 60 days’
notice to the Adviser or by the Adviser with the consent of the Board. The
Adviser may be permitted to recapture amounts waived and/or reimbursed to a
class within three years after the Adviser waived the fee or incurred the
expense if the class’ total annual operating expenses have fallen to a level
below the limits described above. In no case, will the Adviser recapture any
amount that would result, on any particular business day of the Financial
Services Fund, in the class’ total annual operating expenses exceeding the lower
of: (1) the applicable expense cap at the time of the waiver and/or
reimbursement; or (2) the applicable expense cap at the time of the
recapture.
Socially
Responsive Fund expense cap
The
Adviser has agreed to waive fees and reimburse operating expenses (other than
interest, brokerage, taxes, extraordinary expenses and acquired fund fees and
expenses) so that total annual operating expenses are not expected to exceed
1.25% for Class A shares, 2.00% for Class C Shares, 1.25% for Class FI shares,
1.50% for Class R shares and 1.00% for Class I shares (the “expense caps”). This
arrangement is in effect through April 30, 2023. After that date, the
arrangement may be terminated or amended at any time by the Board upon 60 days’
notice to the Adviser or by the Adviser with the consent of the Board. The
Adviser may be permitted to recapture amounts waived and/or reimbursed to a
class within three years after the Adviser waived the fee or incurred the
expense if the class’ total annual operating expenses have fallen to a level
below the limits described above. In no case, will 1919ic recapture any amount
that would result, on any particular business day of the Socially Responsive
Fund, in the class’ total annual operating expenses exceeding the lower of: (1)
the applicable expense cap at the time of the waiver and/or reimbursement; or
(2) the applicable expense cap at the time of the recapture.
Maryland
Fund expense cap
The
Adviser has agreed to waive fees and/or reimburse operating expenses (other than
interest, brokerage commissions, dividend expense on short sales, taxes,
extraordinary expenses and acquired fund fees and expenses) so that total annual
operating expenses are not expected to exceed 0.75% for Class A shares, 1.30%
for Class C shares, 0.85% for Class FI shares, and 0.60% for Class I shares (the
“expense caps”). This arrangement is in effect through April 30, 2023. After
that date, the arrangements may be terminated or amended at any time by the
Board upon 60 days’ notice to the Adviser or by the Adviser with consent of the
Board The Adviser may be permitted to recapture amounts waived and/or reimbursed
to a class within three years after the Adviser waived the fee or incurred the
expense if the class’ total annual operating expenses have fallen to a level
below the limits described above. In no case, will the Adviser recapture any
amount that would result, on any particular business day of the Maryland Fund,
in the class’ total annual operating expenses exceeding the lower of: (1) the
applicable expense cap at the time of the waiver and/or reimbursement; or (2)
the applicable expense cap at the time of the recapture.
Distribution
Plan
The
Funds have adopted a Distribution Plan (the “12b-1 Plan”) pursuant to
Rule 12b-1 under the 1940 Act. The 12b-1 Plan authorizes payments which are
accrued daily and paid monthly at the following rates of the average daily net
assets of each Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Class
A |
Class
C |
Class
I |
Class
FI |
Class
R |
| Financial
Services Fund |
0.25 |
% |
1.00 |
% |
None |
0.25 |
% |
0.50 |
% |
| Socially
Responsive Fund |
0.25 |
% |
1.00 |
% |
None |
0.25 |
% |
0.50 |
% |
| Maryland
Fund |
0.15 |
% |
0.70 |
% |
None |
0.25 |
% |
N/A |
Amounts
paid under the 12b-1 Plan by the Funds may be spent by the Funds on any
activities or expenses primarily intended to result in the sale of shares,
including but not limited to, advertising, compensation for sales and marketing
activities of financial institutions and others such as dealers and
distributors, shareholder account servicing, the printing and mailing of
prospectuses to other than current shareholders and the printing and mailing of
sales literature. Such fees are paid each year only to the extent of such costs
and expenses of the Funds under the Plan actually incurred in that year. To the
extent any activity is one which the Funds may finance without a plan pursuant
to Rule 12b-1, the Funds may also make payments to finance such activity outside
of the 12b-1 Plan and not subject to its limitations.
Under
the12b-1 Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The 12b-1 Plan may be terminated at any time by vote of a
majority of the Trustees of the Trust who are not interested persons.
While
there is no assurance that the expenditures of a Fund’s assets to finance
distribution of shares will have the anticipated results, the Board believes
there is a reasonable likelihood that one or more of such benefits will result,
and because the Board is in a position to monitor the distribution expenses, it
is able to determine the benefit of such expenditures in decision whether to
continue the Plan.
Any
material amendment to the 12b-1 Plan must be approved by the Board, including a
majority of the Independent Trustees, or by a vote of a “majority” (as defined
in the 1940 Act) of the outstanding voting securities of the applicable class or
classes. The 12b‑1 Plan may be terminated, with respect to a class or classes of
a Fund, without penalty at any time: (1) by vote of a majority of the
Board, including a majority of the Independent Trustees; or (2) by a vote
of a “majority” (as defined in the 1940 Act) of the outstanding voting
securities of the applicable class or classes.
For
each class of a 1919 Fund covered by the 12b-1 Plan, the following 12b-1 Plan
expenses were incurred in the fiscal year ended December 31,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund
and Class |
Advertising
/Marketing |
Printing
/Mailing |
Compensation
to underwriter |
Compensation
to broker-dealers |
Compensation
to sales
personnel |
Interest,
carrying, financing charges |
Other |
Total |
| Financial
Services Fund Class A |
$7,410 |
| $0 |
| $0 |
| $186,425 |
| $0 |
| $0 |
| $0 |
| $193,835 |
|
| Financial
Services Fund Class C |
$50,237 |
| $0 |
| $0 |
| $250,095 |
| $0 |
| $0 |
| $9,416 |
$309,748 |
|
| Socially
Responsive Fund Class A |
$34,327 |
| $0 |
| $0 |
| $489,188 |
| $0 |
| $0 |
| $38,119 |
$561,634 |
|
| Socially
Responsive Fund Class C |
$67,050 |
| $0 |
| $0 |
| $861,561 |
| $0 |
| $0 |
| $261,407 |
$1,190,018 |
|
Maryland
Fund
Class A |
$2,042 |
| $0 |
| $0 |
| $69,005 |
| $0 |
| $0 |
| $0 |
| $71,047 |
|
Maryland
Fund
Class C |
$5,166 |
| $0 |
| $0 |
| $63,550 |
| $0 |
| $0 |
| $2331 |
| $71,047 |
|
No
information is presented for Class FI or Class R shares because no shares of
those classes were outstanding during the fiscal periods indicated above.
Sub-Accounting
Service Fees
In
addition to the fees that the Funds may pay to the Transfer Agent, the Board has
authorized the Funds to pay service fees, at the annual rate of up to 0.15% of
applicable average net assets or $20 per account, to intermediaries such as
banks, broker-dealers, financial advisers or other financial institutions for
sub administration, sub-transfer agency, recordkeeping (collectively,
“sub‑accounting services”) and other shareholder services associated with
shareholders whose shares are held of record in omnibus, networked, or other
group accounts or accounts traded through registered securities clearing agents.
Unless a Fund has adopted a specific shareholder servicing plan which is broken
out as a separate expense, a sub-accounting fee paid by a Fund is included in
the total amount of “Other Expenses” listed in the Fund’s Fees and Expenses
table in the Prospectus.
Initial
Sales Charge – Financial Services Fund
Class A
Shares
The
aggregate dollar amounts of initial sales charges on Class A shares and the
amounts retained by the Distributor for the fiscal years listed below were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Initial
Sales Charge – Financial Services Fund
Class
A Shares |
Total
Commissions |
| Amounts
retained by
Distributor |
|
| Fiscal
year ended December 31, 2022 |
$200,786 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$167,426 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$106,617 |
| $0 |
|
Contingent
Deferred Sales Charges – Financial Services Fund
Class A
Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class A
shares and the amounts reimbursed to the Adviser or the fiscal years listed
below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Financial Services Fund
Class
A Shares |
Total
Commissions |
| Amounts
Reimbursed to Adviser |
|
| Fiscal
year ended December 31, 2022 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$0 |
| $0 |
|
Class
C Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class C
shares and the amounts reimbursed to the Adviser for the fiscal years listed
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Financial Services Fund
Class
C Shares |
Total
Commissions |
| Amounts
Reimbursed to Adviser |
|
| Fiscal
year ended December 31, 2022 |
$1,148 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$815 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$1,844 |
| $0 |
|
Initial
Sales Charge – Socially Responsive Fund
Class A
Shares
The
aggregate dollar amounts of initial sales charges on Class A shares and the
amounts retained by the Distributor for the fiscal years listed below were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Initial
Sales Charge – Socially Responsive Fund
Class
A Shares |
Total
Commissions |
| Amounts
retained by
Distributor |
|
| Fiscal
year ended December 31, 2022 |
$618,946 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$1,230,649 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$791,440 |
| $0 |
|
Contingent
Deferred Sales Charges – Socially Responsive Fund
Class
A Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class A
shares and the amounts reimbursed to the Adviser for the fiscal years listed
below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Socially Responsive Fund
Class
A Shares |
Total
Commissions |
| Amounts
Reimbursed to Adviser |
|
| Fiscal
year ended December 31, 2022 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$0 |
| $0 |
|
Class
C Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class C
shares and the amounts reimbursed to the Adviser for the fiscal years listed
below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Socially Responsive Fund
Class
C Shares |
Total
Commissions |
|
Amounts
Reimbursed
to the Adviser |
|
| Fiscal
year ended December 31, 2022 |
$23,154 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$11,478 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$1,572 |
| $0 |
|
Initial
Sales Charge – Maryland Fund
Class A
Shares
The
aggregate dollar amounts of initial sales charges on Class A shares and the
amounts retained by the distributor for the fiscal years listed below were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Initial
Sales Charge – Maryland Fund
Class
A Shares |
Total
Commissions |
| Amounts
retained by
Distributor |
|
| Fiscal
year ended December 31, 2022 |
$3,187 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$52,503 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$42,164 |
| $0 |
|
Contingent
Deferred Sales Charges – Maryland Fund
Class
A Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class A
shares and the amounts reimbursed to the Adviser for the fiscal years listed
below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Maryland Fund
Class
A Shares |
Total
Commissions |
|
Amounts
Reimbursed
to the Adviser |
|
| Fiscal
year ended December 31, 2022 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$0 |
| $0 |
|
Class
C Shares
The
aggregate dollar amounts of contingent deferred sales charges on Class C
shares and the amounts reimbursed to the Adviser for the fiscal years listed
below were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Contingent
Deferred Charge – Maryland Fund
Class
C Shares |
Total
Commissions |
|
Amounts
Reimbursed
to the Adviser |
|
| Fiscal
year ended December 31, 2022 |
$0 |
| $0 |
|
| Fiscal
year ended December 31, 2021 |
$1,423 |
| $0 |
|
| Fiscal
year ended December 31, 2020 |
$2,135 |
| $0 |
|
OTHER
SERVICE PROVIDERS
Distribution
Agreement
The
Trust has entered into a Distribution Agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC, a wholly-owned broker-dealer subsidiary of
Foreside Financial Group, LLC, located at 111 E. Kilbourn Avenue, Suite 2200,
Milwaukee, Wisconsin 53202 (the “Distributor”), pursuant to which the
Distributor acts as the Funds’ distributor, provides certain administration
services and promotes and arranges for the sale of Fund shares. The offering of
a Fund’s shares is continuous. The Distributor is a registered broker-dealer and
member of FINRA.
The
Distribution Agreement has an initial term of up to two years and will continue
in effect only if such continuance is specifically approved at least annually by
the Board or by vote of a majority of a 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 a Fund on 60 days’ written notice when authorized
either by a majority vote of a 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, Transfer Agent and Fund Accountant
Pursuant
to an administration agreement (the “Administration Agreement”), U.S. Bancorp
Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Global
Fund Services” of the “Administrator”), 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as the administrator to the Funds. Global Fund Services
provides certain services to the Funds including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Funds’ 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 Funds with applicable laws and
regulations, excluding those of the securities laws of various states; arranging
for the computation of performance data, including NAV per share and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of the Funds, and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. In this capacity,
Global Fund Services does not have any responsibility or authority for the
management of the Funds, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
Pursuant
to the Administration Agreement, as compensation for its fund administration,
portfolio compliance and fund accounting services, Global Fund Services receives
from each Fund, a fee based on each Fund’s current average daily net assets.
Pursuant to the Administration Agreement, Global Fund Services will receive a
portion of fees from the Fund as part of a bundled-fee agreement for services
performed as Administrator and Fund Accountant and separately as the transfer
agent and dividend disbursing agent (the “Transfer Agent”). Additionally, Global
Fund Services provides Chief Compliance Officer services to the Trust under a
separate agreement. The cost for the Chief Compliance Officer’s services is
charged to the Fund and approved by the Board annually.
For
the fiscal years shown below, the Funds paid the following administration fees
to Global Fund Services pursuant to the Administration Agreement.
|
|
|
|
|
|
|
|
| |
| Fiscal
year ended December 31, 2022 |
$630,217 |
| |
| Fiscal
year ended December 31, 2021 |
$625,462 |
| |
| Fiscal
year ended December 31, 2020 |
$386,230 |
| |
Custodian
Pursuant
to a Custody Agreement between the Trust and U.S. Bank National Association,
located at 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212
(the “Custodian”), the Custodian serves as the custodian of each Fund’s assets,
holds each 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 and Administrator do not participate in decisions relating to the
purchase and sale of securities by the Funds. The Administrator, Transfer Agent,
and Custodian are affiliated entities under the common control of U.S. Bancorp
Fund Services, LLC. The Custodian and its affiliates may participate in revenue
sharing arrangements with the service providers of mutual funds in which the
Funds may invest.
Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd., 1835 Market Street, Suite 310, Philadelphia, Pennsylvania
19103, serves as independent registered public accounting firm to the
Funds.
Legal
Counsel
Morgan,
Lewis & Bockius LLC, 1111 Pennsylvania Avenue NW, Washington, DC 20004,
serves as legal counsel to the Trust.
Codes
of Ethics
The
Trust and the Adviser have each adopted separate Codes of Ethics under Rule
17j-1 of the 1940 Act. These Codes of Ethics permit, subject to certain
conditions, access persons of the Adviser to invest in securities that may be
purchased or held by a Fund.
Proxy
Voting Policies and Procedures
The
Board has adopted Proxy Voting Policies and Procedures (the “Policies”) on
behalf of the Trust which delegate the responsibility for voting proxies to the
Adviser, subject to the Board’s continuing oversight. The Policies require that
the Adviser vote proxies received in a manner consistent with the best interests
of a Fund and its shareholders. The Policies also require the Adviser to present
to the Board, at least annually, the Adviser’s Policies and a record of each
proxy voted by the Adviser on behalf of each Fund, including a report on the
resolution of all proxies identified by the Adviser as involving a conflict of
interest.
A
copy of the Adviser’s policies and procedures used to determine how to vote
proxies related to portfolio securities can be found in Appendix B.
The
Trust is required to file a Form N-PX, with each Fund’s complete proxy voting
record for the 12 months ended June 30, no later than August 31 of each year.
Each Fund’s proxy voting record will be available without charge, upon request,
by calling toll-free 1-844-828-1919 and on the SEC’s website at
www.sec.gov.
PURCHASE
OF SHARES
General
See
the Funds’ Prospectus for a discussion of which classes of shares are available
for purchase and who is eligible to purchase shares of each class.
A
financial intermediary may offer Fund shares subject to variations in or
elimination of the Fund’s sales charges (“variations”), provided such variations
are described in the Fund’s Prospectus. For the variations applicable to shares
offered through specific financial intermediaries, please see Appendix A to the
Fund’s Prospectus - Financial Intermediary Sales Charge Variations (“Appendix A
to the Fund’s Prospectus”). Sales charge variations may apply to purchases,
sales, exchanges and reinvestments of Fund shares and a shareholder transacting
in Fund shares through the financial intermediary identified in Appendix A to
the Fund’s Prospectus should read those terms and conditions carefully. A
variation that is specific to the financial intermediary is not applicable to
shares held directly with the Fund or through another intermediary. Please
consult the financial intermediary with respect to any variations listed on
Appendix A to the Fund’s Prospectus.
Investors
may purchase shares from a Financial Intermediary. In addition, certain
investors, including retirement plans purchasing through certain Financial
Intermediaries, may purchase shares directly from a Fund. When purchasing shares
of a Fund, investors must specify the class of shares being purchased. Financial
Intermediaries may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at the Transfer Agent are not subject to a
maintenance fee.
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of each Fund’s
shares.
How
to Buy Shares
You
may purchase shares of a Fund from securities brokers, dealers or financial
intermediaries (collectively, “Financial Intermediaries”). Investors should
contact their Financial Intermediary directly for appropriate instructions, as
well as information pertaining to accounts and any service or transaction fees
that may be charged. Each Fund may enter into arrangements with certain
Financial Intermediaries whereby such Financial Intermediaries are authorized to
accept your order on behalf of a Fund. If you transmit your order to these
Financial Intermediaries before the close of regular trading (generally 4:00
p.m., Eastern time) on a day that the NYSE is open for business, shares will be
purchased at the appropriate per share price next computed after it is received
by the Financial Intermediary. The Funds will be deemed to have received a
purchase or redemption order when an authorized broker, or, if applicable, a
broker’s designee receives the order.
Investors
should check with their Financial Intermediary to determine if it participates
in these arrangements.
The
public offering price of each Fund shares is the NAV per share next determined
after your order is received, plus a sales charge for classes subject to a sales
charge. Shares are purchased at the public offering price next determined after
the Transfer Agent receives your order in good order,
plus
a sales charge for classes subject to a sales charge. In most cases, in order to
receive that day’s public offering price, the Transfer Agent must receive your
order in good order before the close of regular trading on the NYSE, normally
4:00 p.m., Eastern time.
The
Trust reserves the right in its sole discretion (i) to suspend the continued
offering of a Fund’s shares and (ii) to reject purchase orders in whole or in
part when in the judgment of the Adviser or the Distributor such rejection is in
the best interest of the Fund. The Adviser has the right to reduce or waive the
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of a Fund’s
shares.
In
addition to cash purchases, each Fund’s shares may be purchased by tendering
payment in-kind in the form of shares of stock, bonds or other securities. Any
securities used to buy Fund shares must be readily marketable, their acquisition
consistent with a Fund’s objective and otherwise acceptable to the Adviser and
the Board.
See
the combined Prospectus for a discussion of which classes of shares are
available for purchase and who is eligible to purchase shares of each
class.
Additional
Purchase Information
Class
I Shares.
The following persons are eligible to purchase Class I shares of the Funds:
(i) current employees of the Adviser and its affiliates; (ii) current
and former board members of investment companies managed by affiliates of the
Adviser (iii) current and former board members of the Trust; and
(iv) the immediate families of such persons. Immediate families are such
person’s spouse, including the surviving spouse of a deceased board member, and
children under the age of 21. For such investors, the minimum initial investment
is $1,000 and the minimum for each purchase of additional shares is $50. Current
employees may purchase additional Class I shares through a systematic investment
plan.
Automatic
Investment Plan (“AIP”).
Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Automatic Investment Plan. Under the AIP,
the Transfer Agent is authorized through preauthorized transfers of at least $50
on a monthly, quarterly, every alternate month, semi-annual or annual basis to
charge the shareholder’s account held with a bank or other financial institution
as indicated by the shareholder, to provide for systematic additions to the
shareholder’s Fund account. If you wish to enroll in the AIP, complete the
appropriate section on the Account application. Your signed account application
must be received at least 7 business days prior to the initial transaction. A
$25 fee will be imposed if your AIP transaction is returned for any reason. The
Fund may terminate or modify this privilege at any time. You may terminate your
participation in the AIP at any time by notifying the Transfer Agent
sufficiently in advance of the next withdrawal. Please contact your financial
institution to determine if it is an ACH member. Your financial institution must
be an ACH member in order for you to participate in the AIP.
The
AIP is a method of using dollar cost averaging as an investment strategy that
involves investing a fixed amount of money at regular time intervals. However, a
program of regular investment cannot ensure a profit or protect against a loss
as a result of declining markets. By continually investing the same amount, you
will be purchasing more shares when the price is low and fewer shares when the
price is high. Please call 1-844-828-1919 for additional information regarding
the Fund’s AIP.
For
additional information regarding applicable investment minimums and eligibility
requirements for purchases of Financial Services Fund shares, please see the
Financial Services Fund’s Prospectus.
Sales
Charge Alternatives
The
following classes of Fund shares are available for purchase. See the Prospectus
for a discussion of who is eligible to purchase certain classes and of factors
to consider in selecting which class of shares to purchase.
Class A
Shares.
Class A shares are sold to investors at the public offering price, which is
the NAV plus an initial sales charge, as described in the Funds’ Prospectus.
Members
of the selling group may receive a portion of the sales charge as described in
the Prospectus and may be deemed to be underwriters of the Fund as defined in
the 1933 Act. Sales charges are calculated based on the aggregate of
purchases of Class A shares of the Financial Services Fund made at one time
by any “person,” which includes an individual and his or her spouse and children
under the age of 21, or a trustee or other fiduciary of a single trust estate or
single fiduciary account. For additional information regarding sales charge
reductions, see “Sales Charge Waivers and Reductions” below.
You
do not pay an initial sales charge when you buy $1,000,000 or more of
Class A shares. However, if you redeem these Class A shares within 18
months of purchase, you will pay a contingent deferred sales charge of 1.00%.
The
contingent deferred sales charge is waived in the same circumstances in which
the contingent deferred sales charge applicable to Class C shares is waived. See
“Contingent Deferred Sales Charge Provisions” and “Waivers of Contingent
Deferred Sales Charge” below.
Class
C Shares.
Class C shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge payable upon certain redemptions. See
“Contingent Deferred Sales Charge Provisions” below.
Class
FI, Class R and Class I Shares.
Class FI, Class R and Class I shares are sold at NAV with no initial sales
charge and no contingent deferred sales charge upon redemption.
Sales
Charge Waivers and Reductions
Initial
Sales Charge Waivers.
Purchases of Class A shares may be made at NAV without an initial sales
charge in the following circumstances:
• sales
to (i) current and retired Board Members, (ii) current employees of Adviser and
its subsidiaries, (iii) the “immediate families” of such persons (“immediate
families” are such person’s spouse, including the surviving spouse of a deceased
Board Member, and children under the age of 21) and (iv) a pension,
profit-sharing or other benefit plan for the benefit of such
persons;
•sales
to any employees of Financial Intermediaries having dealer, service or other
selling agreements with the Funds’ Distributor or otherwise having an
arrangement with any such Financial Intermediary with respect to sales of Fund
shares, and by the immediate families of such persons or by a pension,
profit-sharing or other benefit plan for the benefit of such persons (providing
the purchase is made for investment purposes and such securities will not be
resold except through redemption or repurchase);
•offers
of Class A shares to any other investment company to effect the combination of
such company with a Fund by merger, acquisition of assets or
otherwise;
•purchases
by shareholders who have redeemed Class A shares in the Fund (or Class A shares
of another Fund sold by the Adviser that is offered with a sales charge) and who
wish to reinvest their redemption proceeds in the Fund as described in
“Qualifying for a reduced Class A sales charge,” “Reinstatement Privileges”
section of the Prospectus, provided the reinvestment is made within 365 calendar
days of the redemption:
• purchases
by certain separate accounts used to fund unregistered variable annuity
contracts;
• purchases
by investors participating in “wrap fee” or asset allocation programs or other
fee-based arrangements sponsored by broker/dealers and other financial
institutions that have entered into agreements with 1919 Investment Counsel,
LLC; and
•purchases
by direct retail investment platforms through mutual fund “supermarkets,” where
the sponsor links its client’s account (including IRA accounts on such
platforms) to a master account in the sponsor’s name.
For
the sales charge variations applicable to shares offered through specific
financial intermediaries, please see Appendix A to the Fund’s Prospectus.
All
existing retirement plan shareholders who purchased Class A shares at NAV
prior to November 20, 2006, are permitted to purchase additional
Class A shares at NAV. Certain existing programs for current and
prospective retirement plan investors sponsored by financial intermediaries
approved by 1919 Investment Counsel, LLC prior to November 20, 2006 will
also remain eligible to purchase Class A shares at NAV.
Accumulation
Privilege, Rights of Accumulation (“ROA”) —
You
may combine your new purchase of Class A shares with Class A shares you shares
currently own for the purpose of qualifying for the lower initial sales charge
rates that apply to larger purchases. The applicable sales charge for the new
purchase is based on the total of your current purchase and the current value,
calculated using the current day public offering price of all other shares you
own. You may also combine the account value of your spouse and children under
the age of 21. Only the shares held at the intermediary or the Transfer Agent at
which you are making the current purchase can be used for the purposes of a
lower sales charge based on Rights of Accumulation.
Letter
of Intent
(“LOI”) — Helps you take advantage of breakpoints in Class A sales charges.
You may purchase Class A shares of Funds managed by the Adviser over a
13-month period and pay the same sales charge, if any, as if all shares had been
purchased at once. You have a choice of seven Asset Level Goal amounts, as
follows:
|
|
| |
| Asset
Level Goal |
| (1)
$25,000 |
| (2)
$50,000 |
| (3)
$100,000 |
| (4)
$250,000 |
| (5)
$500,000 |
| (6)
$750,000 |
| (7)
$1,000,000 |
By
signing a LOI you can reduce your Class A sales charge. Your individual
purchases will be made at the applicable sales charge based on the amount you
intend to invest over a 13-month period. The LOI will apply to all purchases of
1919 Funds Class A shares. Any shares purchased within 90 days of the date you
sign the letter of intent may be used as credit toward completion, but the
reduced sales charge will only apply to new purchases made on or after that
date.
Purchases
resulting from the reinvestment of dividends and capital gains do not apply
toward fulfillment of the LOI. Shares equal to 5.75% of the amount of the LOI
will be held in escrow during the 13-month period. If, at the end of that time
the total amount of purchases made is less than the amount intended, you will be
required to pay the difference between the reduced sales charge and the sales
charge applicable to the individual purchases had the LOI not been in effect.
This amount will be obtained from redemption of the escrow shares. Any remaining
escrow shares will be released to you.
If
you establish an LOI with 1919 Funds you can aggregate your accounts as well as
the accounts of your spouse and children under age 21. You
will need to provide written instruction with respect to the other accounts
whose purchases should be considered in fulfillment of the LOI. Only the
accounts held at the financial intermediary or the Transfer Agent at which you
are making the purchase can be used toward fulfillment of the LOI.
Increasing
the Amount of the Letter of Intent.
You may at any time increase your Asset Level Goal. You must, however, contact
your Financial Intermediary, or if you purchase your shares directly through the
Transfer Agent, contact the Transfer Agent, prior to making any purchases in an
amount in excess of your current Asset Level Goal. The reduced sales charge will
only apply to new purchases made on or after that date.
Sales
and Exchanges.
Shares acquired pursuant to a Letter of Intent, other than Escrowed Shares as
defined below, may be redeemed or exchanged at any time, although any shares
that are redeemed prior to meeting your Asset Level Goal will no longer count
towards meeting your Asset Level Goal. However, complete liquidation of
purchases made under a Letter of Intent prior to meeting the Asset Level Goal
will result in the cancellation of the Letter. See “Failure to Meet Asset Level
Goal” below. Exchanges in accordance with the Funds’ Prospectus are permitted,
and shares so exchanged will continue to count towards your Asset Level Goal, as
long as the exchange results in an Eligible Fund Purchase.
Cancellation
of Letter of Intent.
You may cancel a Letter of Intent by notifying your Financial Intermediary in
writing, or if you purchase your shares directly through the Transfer Agent, by
notifying the Transfer Agent in writing. The Letter will be automatically
cancelled if all shares are sold or redeemed as set forth above. See “Failure to
Meet Asset Level Goal” below.
Escrowed
Shares.
Shares equal in value to 5.75% of your Asset Level Goal as of the date your
Letter of Intent (or the date of any increase in the amount of the Letter) is
accepted will be held in escrow during the term of your Letter. The Escrowed
Shares will be included in the total shares owned as reflected in your account
statement and any dividends and capital gains distributions applicable to the
Escrowed Shares will be credited to your account and counted towards your Asset
Level Goal or paid in cash upon request. The Escrowed Shares will be released
from escrow if all the terms of your Letter are met.
Failure
to Meet Asset Level Goal.
If the total assets under your Letter of Intent within its 13-month term are
less than your Asset Level Goal whether because you made insufficient Eligible
Fund Purchases, redeemed all of your holdings or cancelled the Letter before
reaching your Asset Level Goal, you will be liable for the difference between:
(a) the sales charge actually paid and (b) the sales charge that would
have applied if you had not entered into the Letter. You may, however, be
entitled to any breakpoints that would have been available to you under the
accumulation privilege. An appropriate number of shares in your account will be
redeemed to realize the amount due. For these purposes, by entering into a
Letter of Intent, you irrevocably appoint your Financial Intermediary, or if you
purchase your shares directly through the Transfer Agent, the Transfer Agent, as
your attorney-in-fact for the purposes of holding the Escrowed Shares and
surrendering shares in your account for redemption. If there are insufficient
assets in your account, you will be liable for the difference. Any Escrowed
Shares remaining after such redemption will be released to your account.
Contingent
Deferred Sales Charge Provisions
“Contingent
deferred sales charge shares” are: (a) Class C shares and (b) Class A
shares that were purchased without an initial sales charge but are subject to a
contingent deferred sales charge. A contingent deferred sales charge may be
imposed on certain redemptions of these shares.
Any
applicable contingent deferred sales charge will be assessed on the NAV at the
time of purchase or redemption, whichever is less.
Class A
shares that are contingent deferred sales charge shares are subject to a 1.00%
contingent deferred sales charge if redeemed within 18 months of purchase. Class
C shares that are contingent deferred sales charge shares are subject to a 1.00%
contingent deferred sales charge if redeemed within 12 months of purchase.
In
determining the applicability of any contingent deferred sales charge, it will
be assumed that a redemption is made first of shares representing capital
appreciation, next of shares representing the reinvestment of dividends and
capital gain distributions, next of shares that are not subject to the
contingent deferred sales charge and finally of other shares held by the
shareholder for the longest period of time. The length of time that contingent
deferred sales charge shares acquired through an exchange have been held will be
calculated from the date the shares exchanged were initially acquired. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss,
as
the case may be, on the amount realized on redemption. The Distributor receives
contingent deferred sales charges in partial consideration for its expenses in
selling shares.
Waivers
of Contingent Deferred Sales Charge
The
contingent deferred sales charge will be waived on: (a) exchanges (see
“Exchange Privilege”); (b) automatic cash withdrawals in amounts equal to
or less than 2.00% per month of the shareholder’s account balance at the
time the withdrawals commence, up to a maximum of 12.00% in one year (see
“Automatic Cash Withdrawal Plan”); (c) redemptions of shares within
12 months following the death or disability (as defined in the Code) of the
shareholder; (d) mandatory post-retirement distributions from retirement
plans or IRAs commencing on or after attainment of age 70 1/2
(except that shareholders who purchased shares subject to a contingent deferred
sales charge prior to May 23, 2005 will be “grandfathered” and will be
eligible to obtain the waiver at age 59 1/2
by demonstrating such eligibility at the time of redemption);
(e) involuntary redemptions; (f) redemptions of shares to effect a
combination of a Fund with any investment company by merger, acquisition of
assets or otherwise; (g) tax-free returns of an excess contribution to any
retirement plan; and (h) certain redemptions of shares of a Fund in
connection with lump-sum or other distributions made by eligible retirement
plans or redemption of shares by participants in certain “wrap fee” or asset
allocation programs sponsored by broker/dealers and other financial institutions
that have entered into agreements with the Distributor or the manager.
The
contingent deferred sales charge is waived on Class C shares purchased by
retirement plan omnibus accounts held on the books of a Fund.
REDEMPTION
OF SHARES
How
to Sell Shares and Delivery of Redemption Proceeds
You
can sell your Fund shares any day the NYSE is open for regular trading, either
directly to a Fund or through your Financial Intermediary.
Payments
to shareholders for shares of a Fund redeemed directly from a Fund will be made
as promptly as possible, but no later than seven days after receipt by the
Transfer Agent of the written request in proper form, with the appropriate
documentation as stated in the Prospectus, except that a 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 a Fund not reasonably practicable; or (c) for such other
period as the SEC may permit for the protection of a Fund’s shareholders. Under
unusual circumstances, a Fund may suspend redemptions, or postpone payment for
more than seven days, but only as authorized by SEC rules.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of a Fund’s portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem
Fund shares by telephone by calling the Funds at 1-844-828-1919. Upon receipt of
any instructions or inquiries by telephone from the shareholder, a Fund or its
authorized agents may carry out the instructions and/or respond to the inquiry
consistent with the shareholder’s previously established account service
options. For joint accounts, instructions or inquiries from either party will be
carried out without prior notice to the other account owners. In acting upon
telephone instructions, a Fund and its agents use procedures that are reasonably
designed to ensure that such instructions are genuine. These include recording
all telephone calls, requiring pertinent information about the account and
sending written confirmation of each transaction to the registered
owner.
Fund
Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If Fund Services fails to employ
reasonable procedures, a Fund and Fund Services may be liable for any losses due
to unauthorized or fraudulent instructions. If these procedures are followed,
however, to the extent permitted by applicable law, neither a 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
additional information, contact Fund Services.
Systematic
Withdrawal Plan (“SWP”)
The
SWP is available to those shareholders who own shares directly with a Fund. You
should contact your Financial Adviser to determine if it offers a similar
service.
Class A
and Class C Shareholders
Class A
and Class C shareholders having an account with a balance of $10,000 or more may
elect to make withdrawals of a minimum of $50 on a monthly basis. There are two
ways to receive payment of proceeds of redemptions made through the SWP:
(1) Check mailed by the Fund to your address of record or, payments sent
directly to a pre-authorized bank
account
by electronic funds transfer via the ACH network. For payment through the ACH
network, your bank must be an ACH member and your bank account information must
be maintained on your Fund account. This SWP may be terminated or modified by a
shareholder or the Fund at any time without charge or penalty. You may also
elect to terminate your participation in this SWP at any time by contacting the
Transfer Agent sufficiently in advance of the next withdrawal. See “Waivers of
Contingent Deferred Sales Charge”, above, for information about application of
the contingent deferred sales charge to withdrawals under the SWP.
Class
FI and Class I Shareholders
Certain
shareholders of a Fund’s Class FI or Class I shares may be eligible to
participate in the 1919 Funds SWP. Receipt of payment of proceeds of redemptions
made through the SWP will be sent via electronic funds transfer through ACH to
your checking or savings account — redemptions of Fund shares may occur on any
business day of the month and the checking or savings account will be credited
with the proceeds in approximately two business days. Requests must be made in
writing to 1919 Funds to participate in, change or discontinue the SWP. You may
change the monthly amount to be paid to you or terminate the SWP at any time,
without charge or penalty, by notifying Shareholder Services at 1-844-828-1919.
The Funds, their Transfer Agent, and 1919 also reserve the right to modify or
terminate the Systematic Withdrawal Plan at any time.
Redemptions
In-Kind
Each
Fund has reserved the right to pay the redemption price of its shares 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 per share for the shares being sold. If a shareholder
receives a distribution in-kind, the shareholder could incur brokerage or other
charges in converting the securities to cash.
EXCHANGE
PRIVILEGE
The
exchange privilege enables shareholders to acquire shares of the same class in
another Fund with different investment objectives when they believe that a shift
between Funds is an appropriate investment decision. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of each
Fund into which an exchange is being considered. The Funds’ Prospectus describes
the requirements for exchanging shares of a Fund.
Upon
receipt of proper instructions and all necessary supporting documents, shares
submitted for exchange are redeemed at the then-current net asset value, and the
proceeds, net of any applicable sales charge, are immediately invested in shares
of a Fund being acquired at that Fund’s then-current net asset value. The Fund
reserves the right to reject any exchange request. The exchange privilege may be
modified or terminated at any time after written notice to shareholders.
Grandfathered
Retirement Program with Exchange Features
Certain
retirement plan programs with exchange features in effect prior to
November 20, 2006 (collectively, the “Grandfathered Retirement Program”),
that are authorized to offer eligible retirement plan investors the opportunity
to exchange all of their Class C shares for Class A shares of an applicable
Fund, are permitted to maintain such share class exchange feature for current
and prospective retirement plan investors. Under the Grandfathered Retirement
Program, Class C shares of a Fund may be purchased by plans investing less
than $3 million. Class C shares are eligible for exchange into Class A
shares not later than eight years after the plan joins the program. They are
eligible for exchange in the following circumstances:
If
a participating plan’s total Class C holdings equal at least $3,000,000 at the
end of the fifth year after the date the participating plan enrolled in the
Grandfathered Retirement Program, the participating plan will be offered the
opportunity to exchange all of its Class C shares for Class A shares
of a Fund. Such participating plans will be notified of the pending exchange in
writing within 30 days after the fifth anniversary of the enrollment date
and, unless the exchange offer has been rejected in writing, the exchange will
occur on or about the 90th day after the fifth anniversary date. If the
participating plan does not qualify for the five-year exchange to Class A
shares, a review of the participating plan’s holdings will be performed each
quarter until either the participating plan qualifies or the end of the eighth
year.
Any
participating plan that has not previously qualified for an exchange into
Class A shares will be offered the opportunity to exchange all of its
Class C shares for Class A shares of the same Fund regardless of asset
size at the end of the eighth year after the date the participating plan
enrolled in the Grandfathered Retirement Program. Such plans will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the enrollment date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the eighth anniversary date. Once
an exchange has occurred, a participating plan will not be eligible to acquire
additional Class C shares, but instead may acquire Class A shares of
the same Fund. Any Class C shares not converted will continue to be subject to
the distribution fee.
For
further information regarding this Program, contact your Financial Intermediary
or the Transfer Agent. Participating plans that enrolled in the Grandfathered
Retirement Program prior to June 2, 2003 should contact the Transfer Agent
for information regarding Class C exchange privileges applicable to their plan.
Additional
Information Regarding the Exchange Privilege
The
Funds are not designed to provide investors with a means of speculation on
short-term market movements. A pattern of frequent exchanges by investors can be
disruptive to efficient portfolio management and, consequently, can be
detrimental to a Fund and its shareholders. See “Tools To Combat Frequent
Transactions” in the Funds’ Prospectus.
During
times of drastic economic or market conditions, a Fund may suspend the exchange
privilege temporarily without notice and treat exchange requests based on their
separate components — redemption orders with a simultaneous request to purchase
the other Fund’s shares. In such a case, the redemption request would be
processed at a Fund’s next determined net asset value but the purchase order
would be effective only at the net asset value next determined after a Fund
being purchased formally accepts the order, which may result in the purchase
being delayed.
The
exchange privilege may be modified or terminated at any time, and is available
only in those jurisdictions where such exchanges legally may be made. Before
making any exchange, shareholders should contact the Transfer Agent or, if they
hold Fund shares through a Financial Intermediary, their Financial Intermediary,
to obtain more information and prospectuses of the Funds to be acquired through
the exchange. An exchange is treated as a sale of the shares exchanged and could
result in taxable gain or loss to the shareholder making the exchange.
CONVERSION
PRIVILEGE
Under
certain circumstances, an investor who purchases 1919 Fund shares pursuant to a
fee-based advisory account program of an Eligible Financial Intermediary as
authorized by the Adviser, may be afforded an opportunity to make a conversion
between one or more share classes owned by the investor in a 1919 Fund to
another class of shares of the same 1919 Fund. The aggregate dollar value of the
shares of the class received upon any such conversion will equal the aggregate
dollar value of the converted shares on the date of the conversion. An investor
whose fund shares are converted from one class to another class will not realize
taxable gain or loss as a result of the conversion. Please refer to the section
of the Prospectus titled “Retirement and Institutional Investors — eligible
investors” or contact your financial intermediary for more
information.
VALUATION
OF SHARES
The
NAV of each Fund is determined as of the close of regular trading on the NYSE
(generally 4:00 p.m., Eastern Time), each day the NYSE is open for trading. The
NYSE annually announces the days on which it will not be open for trading. It is
expected that the NYSE will not be open for trading on the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday/Presidents’
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
NAV
is calculated by adding the value of all securities and other assets
attributable to a Fund (including interest and dividends accrued, but not yet
received), then subtracting liabilities attributable to a Fund (including
accrued expenses).
Generally,
a 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 a Fund’s Adviser with
oversight by the Trust’s Valuation Committee pursuant to procedures adopted by
the Board. Pursuant to those procedures, the Adviser 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
primarily traded in the NASDAQ Global Market®
for which market quotations are readily available shall be valued using the
NASDAQ®
Official Closing Price (“NOCP”). If the NOCP is not available, such securities
shall be valued at the last sale price on the day of valuation, or if there has
been no sale on such day, at the mean between the bid and asked prices. OTC
securities which are not traded in the NASDAQ Global Market®
shall be valued at the most recent sales price. Securities and assets for which
market quotations are not readily available (including restricted securities
which are subject to limitations as to their sale) are valued at fair value as
determined in good faith under procedures adopted by the direction of the
Board.
Short-term
debt obligations with remaining maturities in excess of 60 days are valued at
current market prices, as discussed above.
Each
Fund’s securities, including ADRs, EDRs and GDRs, which are traded on securities
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any reported sales, at the mean between the last
available bid and asked price. Securities that are traded on more than one
exchange are valued on the exchange determined by the Adviser to be the primary
market.
In
the case of foreign securities, the occurrence of certain events after the close
of foreign markets, but prior to the time a Fund’s NAV is calculated (such as a
significant surge or decline in the U.S. or other markets) often will result in
an adjustment to the trading prices of foreign securities when foreign markets
open on the following business day. If such events occur, a Fund will value
foreign securities at fair value, taking into account such events, in
calculating the NAV. In such cases, use of fair valuation can reduce an
investor’s ability to seek to profit by estimating a Fund’s NAV in advance of
the time the NAV is calculated. The Adviser anticipates that a Fund’s portfolio
holdings will be fair valued only if market quotations for those holdings are
considered unreliable or are unavailable.
An
option that is written or purchased by a Fund shall be valued using composite
pricing via the National Best Bid and Offer quotes. Composite pricing looks at
the last trade on the exchange where the option is traded. If there are no
trades for an option on a given business day, as of closing, a Fund will value
the option at the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded. For options where market quotations are
not readily available, fair value shall be determined by a Fund’s Adviser with
oversight by the Trust’s Valuation Committee.
All
other assets of a Fund are valued in such manner as the Board in good faith
deems appropriate to reflect their fair value.
DISTRIBUTIONS
AND TAX INFORMATION
Distributions
The
Financial Services Fund generally declares and pays dividends once annually, in
December. The Socially Responsive Fund generally pays dividends from any net
investment income and net short-term capital gains quarterly. The Maryland Fund
generally declares dividends from any net investment income daily and pays them
monthly. The Funds generally pay any distributions from net long-term capital
gain once annually. The Funds may pay additional distributions and dividends in
order to avoid a federal tax.
Each
distribution by a Fund is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, each Fund will issue to
each shareholder a statement of the amount and federal income tax status of all
distributions.
Tax
Information
The
following is only a summary of certain additional U.S. federal income tax
considerations generally affecting the Funds and their shareholders that is
intended to supplement the discussion contained in the Prospectus. No attempt is
made to present a detailed explanation of the tax treatment of the Funds or
their shareholders, and the discussion here and in the Prospectus is not
intended as a substitute for careful tax planning.
Fund
shares held in a tax-qualified retirement account will generally not be subject
to federal taxation on income and capital gains distributions from a Fund until
a shareholder begins receiving payments from their retirement account. Because
each shareholder’s tax situation is different, shareholders should consult their
tax advisors with specific reference to their own tax situations, including
their state, local, and foreign tax liabilities.
The
following general discussion of certain federal income tax consequences is based
on the Code and the regulations issued thereunder as in effect on the date of
this SAI. New legislation, as well as administrative changes or court decisions,
may significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated
herein.
Qualification
as a Regulated Investment Company
Each
Fund has elected and intends to qualify each year to be treated as a RIC under
Subchapter M of the Code. To qualify as a RIC, each Fund must, among other
things: (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies, and net income derived from interests
in “qualified publicly traded partnerships” (i.e.,
partnerships that are traded on an established securities market or tradable on
a secondary market, other than partnerships that derive 90% of their income from
interest, dividends, capital gains, and other traditionally permitted mutual
fund income (“Qualifying Income Test”); and (b) diversify its holdings so that,
at the end of each quarter of the Fund’s taxable year, (i) at least 50% of
the market value of the Fund’s assets is represented by cash, securities of
other RICs, U.S. government securities and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the Fund’s assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its
assets is invested, including through corporations in which the Fund owns a 20%
or more voting stock interest, in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer, in the securities
(other than the securities of other RICs) of any two or more issuers that the
Fund controls and that are determined to be engaged in the
same
or similar trades or businesses or related trades or businesses, or in the
securities of one or more “qualified publicly traded partnerships” (“Asset
Test”).
As
a RIC, each Fund will not be subject to U.S. federal income tax on the portion
of its taxable investment income and capital gains that it timely distributes to
its shareholders, provided that it satisfies a minimum distribution requirement.
To satisfy the minimum distribution requirement, each Fund must distribute to
its shareholders at least the sum of (i) 90% of its “investment company
taxable income” (i.e.,
generally, its taxable income other than its net capital gain, computed without
regard to the dividends paid deduction, plus or minus certain other
adjustments), and (ii) 90% of its net tax-exempt income for the taxable
year. Each Fund will be subject to income tax at the regular corporate tax rate
on any taxable income or gains that it does not distribute to its shareholders.
Each Fund’s policy is to distribute to its shareholders all of its investment
company taxable income (computed without regard to the dividends paid deduction)
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 each Fund
will not be subject to any federal income or excise taxes. However, a Fund can
give no assurances that distributions will be sufficient to eliminate all taxes.
If,
for any taxable year, a Fund was to fail to qualify as a RIC under the Code or
were to fail to meet the distribution requirement, it would be taxed in the same
manner as an ordinary corporation at the 21% corporate income tax rate and
distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, in the event of a failure to qualify,
a Fund’s distributions, to the extent derived from the Fund’s current and
accumulated earnings and profits, including any distributions of net tax-exempt
interest income and net long-term capital gains, would be taxable to
shareholders as ordinary dividend income for federal income tax purposes.
However, such dividends would be eligible, subject to any generally applicable
limitations, (i) to be treated as qualified dividend income in the case of
shareholders taxed as individuals and (ii) for the dividends received
deduction in the case of corporate shareholders. Moreover, if a Fund were to
fail to qualify as a RIC in any year, it would be required to pay out its
earnings and profits accumulated in that year in order to qualify again as a
RIC. Under certain circumstances, a Fund may cure a failure to qualify as a RIC,
but in order to do so the Fund may incur significant Fund-level taxes and may be
forced to dispose of certain assets. If a Fund failed to qualify as a RIC for a
period greater than two taxable years, the Fund would generally be required to
recognize, and would generally be subject to a corporate-level tax with respect
to, any net built-in gains with respect to certain of its assets upon a
disposition of such assets within five years of qualifying as a RIC in a
subsequent year.
Federal
Excise Tax
Each
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of the calendar year at least 98% of its ordinary
income and 98.2% of its capital gain net income (the excess of short- and
long-term capital gains over short- and long-term capital losses) for the
one-year period ending on October 31 of such year (including any retained amount
from the prior calendar year on which a Fund paid no federal income
tax).
Each
Fund intends to make sufficient distributions to avoid liability for federal
excise tax, but can make no assurances that such tax will be completely
eliminated. A Fund may in certain circumstances be required to liquidate Fund
investments in order to make sufficient distributions to avoid federal excise
tax liability at a time when the investment adviser might not otherwise have
chosen to do so, and liquidation of investments in such circumstances may affect
the ability of the Fund to satisfy the requirements for qualification as a
RIC.
Capital
Losses
Each
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
The
treatment of capital loss carryovers for a Fund is similar to the rules that
apply to capital loss carryovers of individuals, which provide that such losses
are carried over by the Fund indefinitely. If a Fund has a “net capital loss”
(that is, capital losses in excess of capital gains), the excess of the Fund’s
net short-term capital losses over its net long-term capital gains is treated as
a short-term capital loss arising on the first day of the Fund’s next taxable
year, and the excess (if any) of the Fund’s net long-term capital losses over
its net short-term capital gains is treated as a long-term capital loss arising
on the first day of the Fund’s next taxable year. In addition, the carryover of
capital losses may be limited under the general loss limitation rules if a Fund
experiences an ownership change as defined in the Code.
As
of December 31, 2022, the Funds had capital loss carryforwards as shown in the
table below:
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Financial
Services Fund |
Maryland
Fund |
Socially
Responsive Fund |
| Capital
Loss Carryovers - Short-Term |
$— |
$146,181 |
$8,701,911 |
| Capital
Loss Carryovers - Long Term |
$— |
$1,685,774 |
$9,934,782 |
| Total |
$— |
$1,831,955 |
$18,636,693 |
These
capital losses have been deferred in the current year as either short-term or
long-term losses. The losses will be deemed to occur on the first day of the
next taxable year in the same character as they were originally deferred and
will be available to offset future taxable capital gains.
Distributions
to Shareholders
Each
Fund receives income generally in the form of dividends and interest on
investments. This income, plus net short-term capital gains, if any, less
expenses incurred in the operation of a Fund, constitutes the Fund’s net
investment income from which dividends may be paid to you. Net realized capital
gains for a fiscal period are computed by taking into account any capital loss
carryforward of a Fund. Taxable dividends and distributions are subject to tax
whether you receive them in cash or in additional shares. Each shareholder who
receives taxable distributions in the form of additional shares will be treated
for U.S. federal income tax purposes as if receiving a distribution in an amount
equal to the amount of money that the shareholder would have received if he or
she had instead elected to receive cash distributions. The shareholder’s
aggregate tax basis in shares of the applicable Fund will be increased by such
amount.
Subject
to the discussion of exempt-interest dividends below, distributions of net
investment income and net short-term capital gains are taxable to shareholders
as ordinary income or, for non-corporate shareholders, as qualified dividend
income. Distributions from a Fund’s net capital gain (i.e.,
the excess of the Fund’s net long-term capital gains over its net short-term
capital losses) are taxable to shareholders as long-term capital gains
regardless of the length of time shares have been held. In general, to the
extent that a Fund receives qualified dividend income, the Fund may report a
portion of the dividends it pays as qualified dividend income, which for
non-corporate shareholders is subject to U.S. federal income tax rates of up to
20%. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and certain foreign corporations (i.e.,
foreign corporations incorporated in a possession of the United States or in
certain countries with a comprehensive tax treaty with the United States, and
foreign corporations if the stock with respect to which the dividend was paid is
readily tradable on an established securities market in the United States). A
dividend will not be treated as qualified dividend income to the extent that
(i) the shareholder has not held the shares on which the dividend was paid
for more than 60 days during the 121-day period that begins on the date that is
60 days before the date on which the shares become “ex-dividend” with respect to
such dividend, (ii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to
substantially similar or related property, or (iii) the shareholder elects
to treat such dividend as investment income under section 163(d)(4)(B) of the
Code. The holding period requirements described in this paragraph apply to
shareholders’ investments in the Funds and to the Funds’ investments in
underlying dividend-paying stocks. Distributions that a Fund receives from an
ETF, an underlying fund taxable as a RIC or from a REIT will be treated as
qualified dividend income only to the extent so reported by such ETF, underlying
fund or REIT. If 95% or more of a Fund’s gross income (calculated without taking
into account net capital gain derived from sales or other dispositions of stock
or securities) consists of qualified dividend income, the Fund may report all
distributions of such income as qualified dividend income. It
is currently anticipated that only the Financial
Services Fund and Socially Responsive Fund may
make distributions eligible for the reduced rates applicable to qualified
dividend income.
In
the case of corporate shareholders, Fund distributions (other than capital gain
distributions) generally qualify for the dividends received deduction to the
extent such distributions are so reported and do not exceed the gross amount of
qualifying dividends received by such Fund for the year. Generally, and subject
to certain limitations (including certain holding period limitations), a
dividend will be treated as a qualifying dividend if it has been received from a
domestic corporation. It is currently anticipated that only the Financial
Services Fund and Socially Responsive Fund may
make distributions eligible for the dividends received deduction.
A
RIC that receives business interest income may pass through its net business
interest income for purposes of the tax rules applicable to the interest expense
limitations under Section 163(j) of the Code. A RIC’s total “Section 163(j)
Interest Dividend” for a tax year is limited to the excess of the RIC’s business
interest income over the sum of its business interest expense and its other
deductions properly allocable to its business interest income. A RIC may, in its
discretion, designate all or a portion of ordinary dividends as Section 163(j)
Interest Dividends, which would allow the recipient shareholder to treat the
designated portion of such dividends as interest income for purposes of
determining such shareholder’s interest expense deduction limitation under
Section 163(j). This can potentially increase the amount of a shareholder’s
interest expense deductible under Section 163(j). In general, to be eligible to
treat a Section 163(j) Interest Dividend as interest income, you must have held
your shares in a Fund for more than 180 days during the 361-day period beginning
on the
date
that is 180 days before the date on which the share becomes ex-dividend with
respect to such dividend. Section 163(j) Interest Dividends, if so designated by
a Fund, will be reported to your financial intermediary or otherwise in
accordance with the requirements specified by the IRS.
There
is no requirement that a Fund take into consideration any tax implications when
implementing its investment strategy. If a Fund’s distributions exceed its
current and accumulated earnings and profits (as calculated for U.S. federal
income taxes), all or a portion of the distributions may be treated as a return
of capital to shareholders. A return of capital distribution generally will not
be taxable but will reduce each shareholder’s tax basis, resulting in a higher
capital gain or lower capital loss when the shares on which the distribution was
received are sold. After a shareholder’s tax basis in the shares has been
reduced to zero, distributions in excess of earnings and profits will be treated
as gain from the sale of the shareholder’s shares.
A
dividend or distribution received shortly after the purchase of shares reduces
the NAV of the shares by the amount of the dividend or distribution and,
although in effect a return of capital, will be taxable to the shareholder. If
the NAV of shares were reduced below the shareholder’s cost by dividends or
distributions representing gains realized on sales of securities, such dividends
or distributions would be a return of investment though taxable to the
shareholder in the same manner as other dividends or distributions.
A
dividend or other distribution by a Fund is generally treated under the Code as
received by the shareholders at the time the dividend or distribution is made.
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. Under this rule, therefore, a shareholder may be
taxed in one year on dividends or distributions actually received in January of
the following year. In addition, certain distributions made after the close of a
taxable year of a Fund may be “spilled back” and treated for certain non-tax
purposes as paid by the Fund during such taxable year. In such case,
shareholders generally will be treated as having received such dividends in the
taxable year in which the distributions were actually made. For purposes of
calculating the amount of a RIC’s undistributed income and gain subject to the
excise tax described above, such “spilled back” dividends are treated as paid by
the RIC when they are actually paid.
Distributions
are includable in AMT income in computing certain shareholder’s liability for
the federal AMT. Shareholders should note that a Fund may make taxable
distributions of income and capital gains even when share values have
declined.
The
Funds (or their administrative agent) will inform you of the amount of your
ordinary income dividends, qualified dividend income, capital gain distributions
and exempt interest (in the case of the Maryland Fund), if any, and will advise
you of their tax status for federal income tax purposes shortly after the close
of each calendar year. If you have not held your shares for a full year, a Fund
may report and distribute to you, as ordinary income, qualified dividend income
or capital gain, a percentage of income that is not equal to the actual amount
of such income earned during the period of your investment in the
Fund.
Distributions
to Maryland Fund Shareholders
The
Code permits tax-exempt interest received by the Maryland Fund to flow through
as tax-exempt “exempt-interest dividends” to its shareholders, provided that it
qualifies as a RIC and at least 50% of the value of its total assets at the
close of each quarter of its taxable year consists of tax-exempt obligations,
i.e.,
obligations that pay interest excluded from gross income under Section 103(a) of
the Code. That part of the Maryland Fund’s net investment income which is
attributable to interest from tax-exempt obligations and which is distributed to
shareholders will be reported by the Maryland Fund as an exempt-interest
dividend under the Code. Exempt-interest dividends are excluded from a
shareholder’s gross income under the Code but are nevertheless required to be
reported on the shareholder’s U.S. federal income tax return. The percentage of
income reported as exempt-interest dividends for a month may differ from the
percentage of distributions consisting of tax-exempt interest during that month.
That portion of the Maryland Fund’s dividends and distributions not reported as
exempt-interest dividends will be taxable as described above. In
addition, for tax years beginning after December 31, 2022, exempt-interest
dividends may affect the federal corporate AMT for certain corporations. Income
from municipal bonds held by the Maryland Fund could be declared taxable because
of unfavorable changes in tax laws, adverse interpretations by the IRS or state
tax authorities, or noncompliant conduct of a bond issuer. Interest paid on a
municipal bond issued after December 31, 2017 to advance refund another
municipal bond is subject to federal income tax.
Distributions
of capital gains and any investment income that is not exempt from federal
income tax are generally taxable to you regardless of whether you reinvest them
in additional shares of a Fund or receive them in cash.
Exempt-interest
dividends derived from interest on certain PABs will be Tax Preference Items,
which increase AMT income for individuals that are subject to the U.S. federal
AMT. Bonds issued in 2009 or 2010 generally will not be treated as PABs, and
interest earned on such bonds generally will not be treated as a Tax Preference
Item. The Maryland Fund will
annually
provide a report indicating the percentage of the Fund’s income attributable to
municipal securities and the percentage includable in federal alternative
minimum taxable income.
Interest
on indebtedness incurred or continued by a shareholder to purchase or carry
shares of the Maryland Fund will not be deductible for U.S. federal income tax
purposes to the extent it is deemed under the Code and applicable regulations to
relate to exempt-interest dividends received from that Fund. The Maryland Fund
may not be an appropriate investment for persons who are “substantial users” of
facilities financed by industrial revenue or PABs or persons related to
substantial users. Shareholders receiving social security or certain railroad
retirement benefits may be subject to U.S. federal income tax on a portion of
such benefits as a result of receiving exempt-interest dividends paid by the
Maryland Fund. Foreign corporations engaged in a trade or business in the United
States will be subject to a “branch profits tax” on their “dividend equivalent
amount” for the taxable year, which will include exempt-interest dividends.
Certain Subchapter S corporations may also be subject to taxes on their “passive
investment income,” which could include exempt-interest dividends.
The
Maryland Fund may from time to time invest a portion of its portfolio in taxable
obligations and may engage in transactions generating gain or income that is not
tax-exempt, e.g., it may purchase and sell non-municipal securities, sell or
lend portfolio securities, enter into repurchase agreements, dispose of rights
to when-issued securities prior to issuance, acquire debt obligations at a
market discount, acquire certain stripped tax-exempt obligations or their
coupons or enter into options and futures transactions. The Maryland Fund’s
distributions of such gain or income will not be exempt-interest dividends, as
described above, and accordingly will be taxable.
Issuers
of bonds purchased by the Maryland Fund (or the beneficiary of such bonds) may
have made certain representations or covenants in connection with the issuance
of such bonds to satisfy certain requirements of the Code that must be satisfied
subsequent to the issuance of such bonds. Investors should be aware that
exempt-interest dividends derived from such bonds may become subject to federal
income taxation retroactively to the date thereof if such representations are
determined to have been inaccurate or if the issuer of such bonds (or the
beneficiary of such bonds) fails to comply with such covenants.
The
Maryland Fund may not be a suitable investment for IRAs, for other tax-exempt or
tax-deferred accounts or for investors who are not sensitive to the federal
income tax consequences of their investments because such shareholders and plans
would not gain any additional tax benefit from the receipt of exempt-interest
dividends.
The
state and local tax consequences of an investment in the Maryland Fund may
differ from the federal consequences described above and shareholders are urged
to consult their tax advisers with respect to such consequences.
Sales,
Exchanges or Redemptions
Any
gain or loss recognized on a sale, exchange, or redemption of shares of a Fund
by a shareholder who holds Fund shares as capital assets will generally be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise will be treated as a short-term capital
gain or loss.
A
shareholder may recognize a taxable gain or loss on a redemption of Fund shares.
Any loss realized upon redemption of shares within six months from the date of
their purchase be disallowed to the extent of any exempt-interest dividends
received with respect to those shares and, to the extent not disallowed, will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gains with respect to those shares. Any loss
realized upon a redemption may be disallowed under certain wash sale rules to
the extent shares of the applicable Fund are purchased (through reinvestment of
distributions or otherwise) within 30 days before or after the
redemption.
Under
the Code, each Fund will be required to report to the IRS 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. For redemptions of Fund shares, a Fund will also be required to
report cost basis information for such shares and indicate whether these shares
had a short-term or long-term holding period. If a shareholder has a different
basis for different shares of a Fund in the same account (e.g.,
if a shareholder purchased shares in the same account at different times for
different prices), the Fund will calculate the basis of the shares sold using
its default method unless the shareholder has properly elected to use a
different method. The Funds’ default method for calculating basis will be the
average cost basis method, under which the basis per share is reported as the
average cost of all of the shareholder’s Fund shares in the account. A
shareholder may elect, on an account-by-account basis, to use a method other
than average cost basis by following procedures established by a Fund or its
administrative agent. If such an election is made on or prior to the date of the
first exchange or redemption of shares in the account and on or prior to the
date that is one year after the shareholder receives notice of a Fund’s default
method, the new election will generally apply as if the average cost basis
method had never been in effect for such account. If such an election is not
made on or prior to such dates, the shares in the account at the time of the
election will retain their averaged cost bases. Shareholders should consult
their tax advisers concerning the tax consequences of applying the average cost
basis method or electing another method of basis calculation.
Net
Investment Income Tax
A
3.8% tax generally applies to all or a portion of the net investment income of a
shareholder who is an individual and not a nonresident alien for federal income
tax purposes and who has adjusted gross income (subject to certain adjustments)
that exceeds a threshold amount ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases). This 3.8% tax also
applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts. For these purposes, dividends,
interest and certain capital gains (among other categories of income) are
generally taken into account in computing a shareholder’s net investment income,
but exempt-interest dividends are not taken into account.
Tax
Treatment of Complex Securities
The
Funds may invest in complex securities and these investments may be subject to
numerous special and complex tax rules. These rules could affect a Fund’s
ability to qualify as a RIC, affect whether gains and losses recognized by a
Fund are treated as ordinary income or capital gain, accelerate the recognition
of income to the Fund and/or defer a Fund’s ability to recognize losses, and, in
limited cases, subject a Fund to U.S. federal income tax on income from certain
of its foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by a Fund and may require a Fund to
sell securities to mitigate the effect of these rules and prevent
disqualification of the Fund as a RIC at a time when the Adviser might not
otherwise have chosen to do so.
Each
Fund is required for federal income tax purposes to mark-to-market and recognize
as income for each taxable year its net unrealized gains and losses on certain
futures and options contracts subject to section 1256 of the Code (“Section 1256
Contracts”) as of the end of the year as well as those actually realized during
the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. A Fund may be required to defer the recognition
of losses on Section 1256 Contracts to the extent of any unrecognized gains on
offsetting positions held by the Fund. These provisions may also require a Fund
to mark-to-market certain types of positions in its portfolios (i.e., treat them
as if they were closed out), which may cause the Fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the RIC distribution requirement and for avoiding the excise tax
discussed above. Accordingly, in order to avoid certain income and excise taxes,
a Fund may be required to liquidate its investments at a time when the
investment adviser might not otherwise have chosen to do so.
With
respect to investments in STRIPS, TIGRs, CATS, Treasury Receipts, and other zero
coupon securities which are sold at original issue discount and thus do not make
periodic cash interest payments, a Fund will be required to include as part of
its current income the imputed interest on such obligations even though the Fund
has not received any interest payments on such obligations during that period.
Because the Funds intends to distribute all of its net investment income to its
shareholders, a Fund may have to sell Fund securities to distribute such imputed
income which may occur at a time when the Adviser would not have chosen to sell
such securities and which may result in taxable gain or loss.
Any
market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by a Fund to include the market discount in income as it
accrues, gain on the Fund’s disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
The
Funds may invest in, or hold, debt obligations that are in the lowest rating
categories or that are unrated, including debt obligations of issuers not
currently paying interest or that are in default. Investments in debt
obligations that are at risk of or are in default present special tax issues for
the Funds. Federal income tax rules are not entirely clear about issues such as
when a Fund may cease to accrue interest, original issue discount or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and interest and whether certain exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in or holds such securities, in
order to seek to ensure that it distributes sufficient income to preserve its
status as a RIC and does not become subject to U.S. federal income or excise
tax.
If
a Fund owns shares in certain foreign investment entities, referred to as
“passive foreign investment companies” or “PFICs”, the Fund will generally be
subject to one of the following special tax regimes: (i) the Fund may be liable
for U.S. federal income tax, and an additional interest charge, on a portion of
any “excess distribution” from such foreign entity or any gain from the
disposition of such shares, even if the entire distribution or gain is paid out
by the Fund as a dividend to its shareholders; (ii) if the Fund were able and
elected to treat a PFIC as a “qualified electing fund” or “QEF,” the Fund would
be required each year to include in income, and distribute to shareholders in
accordance with the distribution requirements set forth above, the Fund’s pro
rata share of the ordinary earnings and net capital gains of the PFIC, whether
or not such earnings or gains are distributed to the Fund; or (iii) the Fund may
be entitled to mark-to-market annually shares of the PFIC, and in such event
would be required to distribute to shareholders any such mark-to-market
gains
in accordance with the distribution requirements set forth above. Each Fund
intends to make the appropriate tax elections, if possible, and take any
additional steps that are necessary to mitigate the effect of these rules.
Amounts included in income each year by the Fund arising from a QEF election
will be “qualifying income” under the Qualifying Income Test (as described
above) even if not distributed to the Fund, if the Fund derives such income from
its business of investing in stock, securities or currencies.
Foreign
Taxes
The
Funds may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases. Foreign countries generally do not impose taxes on capital gains
with respect to investments by foreign investors. If more than 50% of the value
of a Fund’s total assets at the close of their taxable year consists of stocks
or securities of foreign corporations, the Fund will be eligible to and intends
to file an election with the IRS that may enable shareholders, in effect, to
receive either the benefit of a foreign tax credit, or a deduction from such
taxes, with respect to any foreign and U.S. possessions income taxes paid by the
Fund, subject to certain limitations.
Certain
Foreign Currency Tax Issues
A
Fund’s transactions in foreign currencies and forward foreign currency contracts
will generally be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require a Fund to mark-to-market certain types of positions
in its portfolio (i.e., treat them as if they were closed out), which may cause
the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the distribution requirements and
for avoiding the excise tax described above. The Funds intend to monitor their
transactions, intend to make the appropriate tax elections, and intend to make
the appropriate entries in their books and records when they acquire any foreign
currency or forward foreign currency contract in order to mitigate the effect of
these rules so as to prevent disqualification of a Fund as a RIC and minimize
the imposition of income and excise taxes.
Tax
Shelter Reporting Regulations
Under
Treasury regulations, if a shareholder recognizes a loss with respect to a
Fund’s shares of $2 million or more for an individual shareholder, or
$10 million or more for a corporate shareholder, in any single year (or
certain greater amounts over a combination of years), the shareholder must file
with the IRS a disclosure statement on IRS Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement,
but under current guidance, shareholders of a RIC are not excepted. A
shareholder who fails to make the required disclosure to the IRS may be subject
to substantial penalties. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer’s
treatment of the loss is proper. Shareholders should consult their tax advisors
to determine the applicability of these regulations in light of their individual
circumstances.
Backup
Withholding
Pursuant
to the backup withholding provisions of the Code, distributions (including
exempt-interest dividends) taxable income and capital gains and proceeds from
the redemption of Fund shares may be subject to withholding of federal income
tax at the rate of 24% in the case of non-exempt shareholders who fail to
furnish the applicable Fund with their taxpayer identification numbers or with
required certifications regarding their status under the federal income tax law,
or if the IRS notifies the Fund that such backup withholding is required. If the
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 each Fund in which they invest 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 amounts withheld may be credited against a shareholder’s ultimate
federal income tax liability if proper documentation is provided. The Funds
reserves the right to refuse to open an account for any person failing to
provide a certified taxpayer identification number.
Tax-Exempt
Shareholders
Certain
tax-exempt shareholders, including qualified pension plans, IRAs, salary
deferral arrangements, 401(k)s, and other tax-exempt entities, generally are
exempt from federal income taxation except with respect to their unrelated
business taxable income (“UBTI”). Tax-exempt entities are not permitted to
offset losses from one trade or business against the income or gain of another
trade or business. Certain net losses incurred prior to January 1, 2018 are
permitted to offset gain and income created by an unrelated trade or business,
if otherwise available. Under current law, the Funds generally serve to block
UBTI from being realized by tax-exempt shareholders. However, notwithstanding
that the Funds generally block UBTI, a tax-exempt shareholder could realize UBTI
by virtue of an investment in a Fund where, for example: (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii)
the
Fund
invests in a REIT that is a taxable mortgage pool (“TMP”) or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult their tax advisors regarding these issues.
The
Fund’s shares held in a tax-qualified retirement account will generally not be
subject to federal taxation on income and capital gains distributions from the
Fund until a shareholder begins receiving payments from their retirement
account.
Non-U.S.
Investors
Any
non-U.S. investors in the Funds may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisors prior to investing in a
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income. A
Fund may, under certain circumstances, report all or a portion of a dividend as
an “interest-related dividend” or a “short-term capital gain dividend,” which
would generally be exempt from this 30% U.S. withholding tax, provided certain
other requirements are met. Short-term capital gain dividends received by a
nonresident alien individual who is present in the U.S. for a period or periods
aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders from the sale or
other disposition of shares of a Fund generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from the Funds. Backup withholding will not be applied to payments that are
subject to the 30% (or lower applicable treaty rate) withholding tax described
in this paragraph. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described
above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
each Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by the Funds or its agent on a valid IRS Form W-9 or applicable series of IRS
Form W-8, respectively. Shareholders potentially subject to withholding include
foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an NFFE generally must identify and provide other
required information to the Funds or other withholding agent regarding its U.S.
owners, if any. Such non-U.S. shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by regulations and other
guidance. A non-U.S. shareholder resident or doing business in a country that
has entered into an intergovernmental agreement with the U.S. to implement FATCA
will be exempt from FATCA withholding provided that the shareholder and the
applicable foreign government comply with the terms of the
agreement.
A
non-U.S. entity that invests in a Fund will need to provide the Fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in a Fund should consult their tax
advisors in this regard.
Maryland
Tax Status
The
assets of the Maryland Fund will consist of interest bearing obligations issued
by or on behalf of the State of Maryland and political subdivisions of Maryland
(the “Maryland State Bonds”) or by the government of Puerto Rico, Guam or the
Virgin Islands (the “Possession Bonds,” and, collectively with the Maryland
State Bonds, the “Maryland Bonds”). The discussion in this section is based on
the assumption that: (i) the Maryland Bonds were validly issued by or on behalf
of the State of Maryland or a political subdivision of Maryland, or by the
government of Puerto Rico, Guam or the Virgin Islands, as the case may be, (ii)
the interest on the Maryland Bonds is excludable from gross income for federal
income tax purposes, and (iii) with respect to the Possession Bonds, the
Possession Bonds and the interest thereon are exempt from all state and local
taxation. This disclosure does not address the taxation of persons other than
full-time residents of the State of Maryland.
Exempt-interest
dividends distributed by the Maryland Fund that are excluded from gross income
for federal income tax purposes and that are attributable to interest on the
Maryland Bonds are excluded from taxable income for purposes of the income tax
imposed by the State of Maryland (the “Maryland Income Tax”) on individuals and
certain corporations.
Exempt-interest
dividends attributable to the interest on the Maryland Bonds and capital gain
dividends attributable to profit or gain from the sale of the Maryland Bonds
generally will not be subject to the Maryland Income Tax.
You
generally will be subject to tax for purposes of the Maryland Income Tax on the
gain recognized on the sale or redemption of a share of the Maryland
Fund.
You
should be aware that, generally, interest on indebtedness incurred or continued
to purchase or carry shares of the Maryland Fund is not deductible for purposes
of the Maryland Income Tax.
The
Adviser and its counsel have not independently examined the Maryland Bonds or
the opinions of bond counsel rendered in connection with the issuance of the
Maryland Bonds.
Ownership
of shares in the Maryland Fund may result in other Maryland tax consequences to
certain taxpayers, and prospective investors should consult their tax
advisors.
Other
State Taxes
Depending
upon state and local law, distributions by a Fund to its shareholders and the
ownership of such shares may be subject to state and local taxes. Rules of state
and local taxation of dividend and capital gains distributions from RICs often
differ from the rules for federal income taxation described above. It is
expected that a Fund will not be liable for any corporate excise, income or
franchise tax in Delaware if it qualifies as a RIC for federal income tax
purposes.
Many
states grant tax-free status to dividends paid to you from interest earned on
direct obligations of the U.S. government, subject in some states to minimum
investment requirements that must be met by a Fund. Investment in Ginnie Mae or
Fannie Mae securities, banker’s acceptances, commercial paper, and repurchase
agreements collateralized by U.S. government securities do not generally qualify
for such tax-free treatment. The rules on exclusion of this income are different
for corporate shareholders. Shareholders are urged to consult their tax advisors
regarding state and local taxes applicable to an investment in the
Funds.
This
discussion and the related discussion in the Prospectus have been prepared by
the Funds’ management. The information above is only a summary of some of the
tax considerations generally affecting each Fund and its shareholders. No
attempt has been made to discuss individual tax consequences and this discussion
should not be construed as applicable to all shareholders’ tax situations.
Investors
should consult their own tax advisors to determine the suitability of a Fund and
the applicability of any state, local or foreign taxation.
PORTFOLIO
TRANSACTIONS
Pursuant
to the Advisory Agreement, the Adviser determines which securities are to be
purchased and sold by each Fund and which broker-dealers are eligible to execute
each Fund’s portfolio transactions. Purchases and sales of securities in the
over-the-counter market will generally be executed directly with a
“market-maker” unless, in the opinion of the Adviser, a better price and
execution can otherwise be obtained by using a broker for the
transaction.
Subject
to such policies as may be established by the Board from time to time, the
Adviser is primarily responsible for the Funds’ portfolio decisions, the placing
of the Funds’ portfolio transactions, as well as managing the cash and
short-term instruments of the Funds.
The
cost of securities purchased from underwriters includes an underwriting
commission, concession or a net price. Debt securities purchased and sold by the
Funds generally are traded on a net basis (i.e.,
without a commission) through dealers acting for their own account and not as
brokers, or otherwise involve transactions directly with the issuer of the
instrument. This means that a dealer makes a market for securities by offering
to buy at one price and selling the security at a slightly higher price. The
difference between the prices is known as a “spread.” Other portfolio
transactions may be executed through brokers acting as agents. The Funds will
pay a spread or commission in connection with such transactions. Commissions are
negotiated with brokers on such transactions. The aggregate brokerage
commissions paid by a Fund for the three most recent fiscal years are set forth
below under “Aggregate Brokerage Commissions Paid.”
Pursuant
to the Advisory Agreement, the Adviser is authorized to place orders pursuant to
its investment determinations for the Funds with any brokers or dealers selected
by it. The general policy of the Adviser in selecting brokers and dealers is to
obtain the best results achievable in the context of a number of factors which
are considered both in relation to individual trades and broader trading
patterns, including the reliability of the broker/dealer, the competitiveness of
the price and the commission, the research services received and whether the
broker/dealer commits its own capital.
In
connection with the selection of such brokers or dealers and the placing of such
orders, subject to applicable law, brokers or dealers may be selected who also
provide brokerage and research services (as those terms are defined in Section
28(e) of the 1934 Act) to the Funds and/or the other accounts over which the
Adviser or its affiliates exercise investment discretion. The Adviser is
authorized to pay a broker or dealer that provides such brokerage and research
services a commission for executing a portfolio transaction for a Fund which is
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if the Adviser determines in good faith
that
such
amount of commission is reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer. Investment research
services include (i) fundamental, quantitative and technical issuer, industry,
sector, market, economic and policy research reports and analyses, (ii)
portfolio strategy research, (iii) meetings and calls with company management
representatives and analysts, and (iv) similar services. If a research service
also assists the Adviser in a non-research capacity (such as bookkeeping or
other administrative functions), then only the percentage or component that
provides assistance to the Adviser in the investment decision making process may
be paid in commission dollars. This determination may be viewed in terms of
either that particular transaction or the overall responsibilities that the
Adviser and its affiliates have with respect to accounts over which they
exercise investment discretion. The
Adviser
may also have arrangements with brokers pursuant to which such brokers provide
research services to the Adviser in exchange for a certain volume of brokerage
transactions to be executed by such brokers. The payment of higher commissions
increases a Fund’s costs. Arrangements for the receipt of research services from
brokers create conflicts of interest.
Research
services furnished to the Adviser by brokers that effect securities transactions
for the Funds may be used by the Adviser in servicing other investment companies
and accounts which the Adviser manages. Similarly, research services furnished
to the Adviser by brokers that effect securities transactions for other
investment companies and accounts which the Adviser manages may be used by the
Adviser in servicing the Funds. Not all of these research services are used by
the Adviser in managing any particular account, including the
Funds.
The
Fund contemplates that, consistent with the policy of obtaining the best net
results, brokerage transactions may be conducted through “affiliated
broker/dealers,” as defined in the 1940 Act. The Fund’s Board has adopted
procedures in accordance with Rule 17e-1 under the 1940 Act to ensure
that all brokerage commissions paid to such affiliates are reasonable and fair
in the context of the market in which such affiliates operate.
The
Financial Services Fund paid
the following aggregate brokerage commissions for the fiscal years set forth in
the table below:
|
|
|
|
|
|
|
|
| |
| Financial
Services Fund |
| Aggregate Brokerage
Commissions Paid |
| Fiscal
year ended December 31, 2022 |
| $25,282 |
| Fiscal
year ended December 31, 2021 |
| $22,253 |
| Fiscal
year ended December 31, 2020 |
| $47,822 |
For
the fiscal year ended December 31, 2022, the Adviser directed Financial Services
Fund commissions to brokers as part of understandings related to the provision
of research services as follows:
|
|
|
|
|
| |
Total
Dollar Amount of
Brokerage Transactions
Related to Research
Services |
Total
Dollar Amount of
Brokerage Commissions
Paid on Transactions
Related to Research Services |
| $9,317,689 |
$7,526 |
For
the fiscal years ended December 31, 2022, December 31, 2021, and December 31,
2020, the Financial Services Fund did not pay any brokerage commissions to
affiliates.
As
of December 31, 2022, the Financial Services Fund held the following securities
issued by its regular broker/dealers:
|
|
|
|
|
|
|
|
| |
|
Issuer |
Value |
|
|
JPMorgan
Chase & Co. |
$9,199,260 |
|
The
Socially Responsive Fund paid
the following aggregate brokerage commissions for the fiscal years set forth in
the table below:
|
|
|
|
|
|
|
|
| |
|
Socially
Responsive Fund |
| Aggregate Brokerage
Commissions Paid |
| Fiscal
year ended December 31, 2022 |
| $63,044 |
| Fiscal
year ended December 31, 2021 |
| $64,901 |
| Fiscal
year ended December 31, 2020 |
| $81,518 |
For
the fiscal year ended December 31, 2022, the Adviser directed Socially
Responsive Fund commissions to brokers as part of understandings related to the
provision of research services as follows:
|
|
|
|
|
| |
Total
Dollar Amount of
Brokerage Transactions
Related to Research
Services |
Total
Dollar Amount of
Brokerage Commissions
Paid on Transactions
Related to Research Services |
| $52,706,485 |
$23,700 |
For
the fiscal years ended December 31, 2022, December 31, 2021, and December 31,
2020, the Socially Responsive Fund did not pay any brokerage commissions to
affiliates.
As
of December 31, 2022, the Socially Responsive Fund held the following securities
issued by its regular broker/dealers:
|
|
|
|
|
|
|
|
| |
|
Issuer |
Value |
|
|
Goldman
Sachs & Co. |
$2,768,653 |
|
| JP
Morgan Chase & Co. |
$1,929,614 |
|
For
the fiscal years ended December 31, 2022, December 31, 2021, and December 31,
2020, the Maryland Fund did not pay any brokerage commissions.
For
the fiscal year ended December 31, 2022, the Maryland Fund did not use directed
brokerage.
For
the fiscal years ended December 31, 2022, December 31, 2021, and December 31,
2020, the Maryland Fund did not pay any brokerage commissions to
affiliates.
As
of December 31, 2022, the Maryland Fund did not hold securities issued by its
regular broker/dealers.
DISCLOSURE
OF PORTFOLIO HOLDINGS
The
Funds maintain portfolio holdings disclosure policies that govern the timing and
circumstances of disclosure to shareholders and third parties of information
regarding the portfolio investments held by a Fund. These portfolio holdings
disclosure policies have been approved by the Board. Disclosure of a 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 as an exhibit to its reports
on Form N-PORT. These reports are available, free of charge, on the EDGAR
database on the SEC’s website at www.sec.gov.
Pursuant
to the Trust’s portfolio holdings disclosure policies, non-public information
about the Fund’s portfolio holdings generally is not distributed to any person,
unless by explicit agreement or by virtue of their respective duties to the
Fund, such persons are subject to a duty to maintain the confidentiality of the
information disclosed and have a duty not to trade on non-public information.
Examples of disclosure by the Trust include instances in which:
▪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;
▪The
disclosure is made to internal parties involved in the investment process,
administration, operation or custody of the Fund, including, but not limited to
the Fund’s Administrator, Fund Services and the Trust’s 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 or his or her designee.
Certain
of the persons listed above receive information about a Fund’s portfolio
holdings on an ongoing basis without lag as part of the normal investment
activities of the Fund. The Funds believe that these third parties have
legitimate objectives in requesting such portfolio holdings information and
operate in the best interest of a Fund’s shareholders. These persons include
internal parties involved in the investment process, administration, operation
or custody of the Fund, specifically: Fund Services; the Trust’s Board; and the
Trust’s attorneys and independent registered public accounting firm, all of
which typically receive such information after it is generated. In no event
shall the Adviser, its affiliates or employees, the Funds, or any other party
receive any direct or indirect compensation in connection with the disclosure of
information about a Fund’s holdings.
Portfolio
holdings information posted on the Funds’ website may be separately provided to
any person, after it is first published on the Funds’ website. Shareholders can
access the Funds’ website at www.1919funds.com for additional information about
the Funds, including, without limitation, the periodic disclosure of its
portfolio holdings.
Any
disclosures to additional parties not described above is made with the prior
written approval of either the Trust’s Chief Compliance Officer or his or her
designee, pursuant to the Trust’s Policy on Disclosure of Portfolio
Holdings.
The
Chief Compliance Officer or designated officer of the Trust will approve the
furnishing of non-public portfolio holdings to a third party only if they
consider the furnishing of such information to be in the best interest of the
Fund and its shareholders and if no material conflict of interest exists
regarding such disclosure between shareholders interest and those of the
Adviser, Distributor or any affiliated person of a Fund. No consideration may be
received by a Fund, the Adviser, any affiliate of the Adviser or their employees
in connection with the disclosure of portfolio holdings information. The Board
receives and reviews annually a list of the persons who receive non-public
portfolio holdings information and the purpose for which it is furnished.
GENERAL
TRUST
INFORMATION
The
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 a Fund. Each share represents an interest
in a Fund proportionately equal to the interest of each other share. Upon a
Fund’s liquidation, all shareholders would share pro rata in the net assets of a
Fund available for distribution to shareholders.
With
respect to each Fund, the Trust may offer more than one class of shares. The
Trust reserves 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.
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 (i) upon the merger or consolidation with, or the
sale or disposition of all or substantially all of its assets to, another
entity, if approved by the vote of the holders of two thirds of its outstanding
shares, except that if the Board recommends such merger, consolidation or sale
or disposition of assets, the approval by vote of the holders of a majority of
the series’ or class’ outstanding shares will be sufficient, or (ii) by the
vote of the holders of a majority of its outstanding shares, or (iii) by
the Board by written notice to the series’ or class’ shareholders. Unless each
series and class 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. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and the
Trust itself was unable to meet its obligations.
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 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.
FINANCIAL
STATEMENTS
The
financial statements and the report of the Independent Registered Public
Accounting Firm, as required to be included in the Statement of Additional
Information, are incorporated herein by reference to the Funds’ Annual
Report
to Shareholders for the fiscal period ended December 31, 2022. You can obtain
the Annual Report without charge on the SEC’s website at www.sec.gov, upon
written request, or request by telephone at 1-844-828-1919.
APPENDIX
A
DESCRIPTION
OF RATINGS
The
ratings of Moody’s Investors Service, Inc., Standard & Poor’s Ratings
Group and Fitch Ratings represent their opinions as to the quality of various
debt obligations. It should be emphasized, however, that ratings are not
absolute standards of quality. Consequently, debt obligations with the same
maturity, coupon and rating may have different yields while debt obligations of
the same maturity and coupon with different ratings may have the same yield. As
described by the rating agencies, ratings are generally given to securities at
the time of issuances. While the rating agencies may from time to time revise
such ratings, they undertake no obligation to do so.
Description
of Moody’s Investors Service, Inc.’s Long-Term Obligation Ratings:
Moody’s
long-term obligation ratings are opinions of the relative credit risk of fixed
income obligations with an original maturity of one year or more. They address
the possibility that a financial obligation will not be honored as promised.
Such ratings reflect both the likelihood of default and any financial loss
suffered in the event of default.
Aaa
- Obligations rated Aaa are judged to be of the highest quality, with minimal
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 considered upper-medium grade and are subject to low
credit risk.
Baa
- Obligations rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative characteristics.
Ba
- Obligations rated Ba are judged to have speculative elements 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 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 class of bonds 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.
Description
of Moody’s Investors Service, Inc.’s US Municipal and Tax Exempt Ratings:
Municipal
Ratings are opinions of the investment quality of issuers and issues in the US
municipal and tax-exempt markets. As such, these ratings incorporate Moody’s
assessment of the default probability and loss severity of these issuers and
issues. The default and loss content for Moody’s municipal long-term rating
scale differs from Moody’s general long-term rating scale.
Municipal
Ratings are based upon the analysis of four primary factors relating to
municipal finance: economy, debt, finances, and administration/management
strategies. Each of the factors is evaluated individually and for its effect on
the other factors in the context of the municipality’s ability to repay its
debt. Municipal Long-Term Rating Definitions: Aaa
- Issuers or issues rated Aaa demonstrate the strongest creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
Aa
- Issuers or issues rated Aa demonstrate very strong creditworthiness relative
to other US municipal or tax-exempt issuers or issues.
A
- Issuers or issues rated A present above-average creditworthiness relative to
other US municipal or tax-exempt issuers or issues.
Baa
- Issuers or issues rated Baa represent average creditworthiness relative to
other US municipal or tax- exempt issuers or issues.
Ba
- Issuers or issues rated Ba demonstrate below-average creditworthiness relative
to other US municipal or tax-exempt issuers or issues.
B
- Issuers or issues rated B demonstrate weak creditworthiness relative to other
US municipal or tax- exempt issuers or issues.
Caa
- Issuers or issues rated Caa demonstrate very weak creditworthiness relative to
other US municipal or tax-exempt issuers or issues.
Ca
- Issuers or issues rated Ca demonstrate extremely weak creditworthiness
relative to other US municipal or tax-exempt issuers or issues.
C
- Issuers or issues rated C demonstrate the weakest creditworthiness relative to
other US municipal or tax-exempt issuers or issues.
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.
Description
of Moody’s Investors Service, Inc.’s US Municipal Short-Term Debt And Demand
Obligation Ratings:
There
are three rating categories for short-term municipal obligations that are
considered investment grade. These ratings are designated as Municipal
Investment Grade (“MIG”) and are divided into three levels — “MIG 1” through
“MIG 3.” In addition, those short-term obligations that are of speculative
quality are designated “SG,” or speculative grade. MIG ratings expire at the
maturity of the obligation.
MIG
1
- This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG
2
- This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG
3
- This designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to be less
well-established.
SG
- This designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of protection.
Description
of Moody’s Investors Service, Inc.’s Demand Obligation Ratings:
In
the case of variable rate demand obligations (“VRDOs”), a two-component rating
is assigned; a long or short-term debt rating and a demand obligation rating.
The first element represents Moody’s evaluation of the degree of risk associated
with scheduled principal and interest payments. The second element represents
Moody’s evaluation of the degree of risk associated with the ability to receive
purchase price upon demand (“demand feature”), using a variation of the MIG
rating scale, the Variable Municipal Investment Grade or VMIG rating. When
either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function
of each issue’s specific structural or credit features.
VMIG
1
- This designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG
2
- This designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and structural
and legal protections that ensure the timely payment of purchase price upon
demand.
VMIG
3
- This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG
- This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
Description
of Moody’s Investors Service, Inc.’s Short-Term Prime Ratings:
Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term programs
or to individual short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless explicitly noted.
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.
Note: Canadian
issuers rated P-1 or P-2 have their short-term ratings enhanced by the
senior-most long-term rating of the issuer, its guarantor or support-provider.
Description
of Standard & Poor’s Ratings Group’s Long-Term Issue Credit Ratings:
Issue
credit ratings are based, in varying degrees, on the following considerations:
(1) likelihood of payment — capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and
(3) protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors’ rights.
The
issue rating definitions are expressed in terms of default risk. As such, they
pertain to senior obligations of an entity. Junior obligations are typically
rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA
- An obligation rated ‘AAA’ has the highest rating assigned by
Standard & Poor’s. The obligor’s capacity to meet its financial
commitments 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 obligations 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.
C
- A subordinated debt or preferred stock obligation rated ‘C’ is currently
highly vulnerable to nonpayment. The ‘C’ rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A ‘C’ also will be assigned to a
preferred stock issue in arrears on dividends or sinking Fund payments, but that
is currently paying.
D
- An obligation rated ‘D’ is in payment default. The ‘D’ rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor’s
believes that such payments will be made during such grace period. The ‘D’
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
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.
N.R.:
This indicates that no rating has been requested, 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.
Active
Qualifiers (Currently applied and/or outstanding)
i:
This subscript is used for issues in which the credit factors, terms, or both,
that determine the likelihood of receipt of payment of interest are different
from the credit factors, terms or both that determine the likelihood of receipt
of principal on the obligation. The ‘i’ subscript indicates that the rating
addresses the interest portion of the obligation only. The ‘i’ subscript will
always be used in conjunction with the ‘p’ subscript, which addresses likelihood
of receipt of principal. For example, a rated obligation could be assigned
ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and
the interest portion of the obligation is not rated.
L:
Ratings qualified with ‘L’ apply only to amounts invested up to federal deposit
insurance limits.
p:
This subscript is used for issues in which the credit factors, the terms, or
both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The ‘p’ subscript indicates that the
rating addresses the principal portion of the obligation only. The ‘p’ subscript
will always be used in conjunction with the ‘i’ subscript, which addresses
likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of “AAAp NRi” indicating that the principal portion is rated
“AAA” and the interest portion of the obligation is not rated.
pi:
Ratings with a ‘pi’ subscript are based on an analysis of an issuer’s published
financial information, as well as additional information in the public domain.
They do not, however, reflect in-depth meetings with an issuer’s management and
are therefore based on less comprehensive information than ratings without a
‘pi’ subscript. Ratings with a ‘pi’ subscript are reviewed annually based on a
new year’s financial statements, but may be reviewed on an interim basis if a
major event occurs that may affect the issuer’s credit quality.
pr:
The letters ‘pr’ indicate that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
preliminary:
Preliminary ratings are assigned to issues, including financial programs, in the
following circumstances. Preliminary ratings may be assigned to obligations,
most commonly structured and project finance issues, pending receipt of final
documentation and legal opinions. Assignment of a final rating is conditional on
the receipt and approval by Standard & Poor’s of appropriate
documentation. Changes in the information provided to Standard & Poor’s
could result in the assignment of a different rating. In addition,
Standard & Poor’s reserves the right not to issue a final rating.
Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific
issues, with defined terms, are offered from the master registration, a final
rating may be assigned to them in accordance with Standard & Poor’s
policies. The final rating may differ from the preliminary rating.
t:
This symbol indicates termination structures that are designed to honor their
contracts to full maturity or, should certain events occur, to terminate and
cash settle all their contracts before their final maturity date.
Local
Currency and Foreign Currency Risks: Country risk considerations are a standard
part of Standard & Poor’s analysis for credit ratings on any issuer or
issue. Currency of repayment is a key factor in this analysis. An obligor’s
capacity to repay foreign currency obligations may be lower than its capacity to
repay obligations in its local currency due to the sovereign government’s own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Description
of Standard & Poor’s Ratings Group’s Ratings of Notes:
A
Standard & Poor’s U.S. municipal note rating reflects the liquidity
factors and market access risks unique to notes. Notes due in three years or
less will likely receive a note rating. Notes maturing beyond three years will
most likely receive a long-term debt rating. The following criteria will be used
in making that assessment:
—
Amortization schedule — the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
—
Source of payment — the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note
rating symbols are as follows:
SP-1
- Strong capacity to pay principal and interest. An issue determined to possess
a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
- Satisfactory capacity to pay principal and interest, with some vulnerability
to adverse financial and economic changes over the term of the notes.
SP-3
- Speculative capacity to pay principal and interest.
Description
of Standard & Poor’s Ratings Group’s Short-Term Issue Credit Ratings:
A-1
- Short-term obligation rated “A-1” is rated in the highest category by
Standard & Poor’s. 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 commitments is extremely strong.
A-2
- 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
- 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 having significant
speculative characteristics. Ratings of ‘B-1’, ‘B-2’, and ‘B-3’ may be assigned
to indicate finer distinctions within the ‘B’ category. The obligor currently
has the capacity to meet its financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to the obligor’s inadequate
capacity to meet its financial commitment on the obligation.
B-1
- A short-term obligation rated ‘B-1’ is regarded as having significant
speculative characteristics, but the obligor has a relatively stronger capacity
to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-2
- A short-term obligation rated ‘B-2’ is regarded as having significant
speculative characteristics, and the obligor has an average speculative-grade
capacity to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3
- A short-term obligation rated ‘B-3’ is regarded as having significant
speculative characteristics, and the obligor has a relatively weaker capacity to
meet its financial commitments over the short-term compared to other
speculative-grade obligors.
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 payment default. The ‘D’ rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor’s believes that such payments will be made during such grace period. The
‘D’ rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
Active
Qualifiers (Currently applied and/or outstanding)
i:
This subscript is used for issues in which the credit factors, terms, or both,
that determine the likelihood of receipt of payment of interest are different
from the credit factors, terms or both that determine the likelihood of receipt
of principal on the obligation. The ‘i’ subscript indicates that the rating
addresses the interest portion of the obligation only. The ‘i’ subscript will
always be used in conjunction with the ‘p’ subscript, which addresses likelihood
of receipt of principal. For example, a rated obligation could be assigned
ratings of “AAAp NRi” indicating that the principal portion is rated “AAA” and
the interest portion of the obligation is not rated.
L:
Ratings qualified with ‘L’ apply only to amounts invested up to federal deposit
insurance limits.
p:
This subscript is used for issues in which the credit factors, the terms, or
both, that determine the likelihood of receipt of payment of principal are
different from the credit factors, terms or both that determine the likelihood
of receipt of interest on the obligation. The ‘p’ subscript indicates that the
rating addresses the principal portion of the obligation only. The ‘p’ subscript
will always be used in conjunction with the ‘i’ subscript, which addresses
likelihood of receipt of interest. For example, a rated obligation could be
assigned ratings of “AAAp NRi” indicating that the principal portion is rated
“AAA” and the interest portion of the obligation is not rated.
pi:
Ratings with a ‘pi’ subscript are based on an analysis of an issuer’s published
financial information, as well as additional information in the public domain.
They do not, however, reflect in-depth meetings with an issuer’s management and
are therefore based on less comprehensive information than ratings without a
‘pi’ subscript. Ratings with a ‘pi’ subscript are reviewed annually based on a
new year’s financial statements, but may be reviewed on an interim basis if a
major event occurs that may affect the issuer’s credit quality.
pr:
The letters ‘pr’ indicate that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
preliminary:
Preliminary ratings are assigned to issues, including financial programs, in the
following circumstances. Preliminary ratings may be assigned to obligations,
most commonly structured and project finance issues, pending receipt of final
documentation and legal opinions. Assignment of a final rating is conditional on
the receipt and approval by Standard & Poor’s of appropriate
documentation. Changes in the information provided to Standard & Poor’s
could result in the assignment of a different rating. In addition,
Standard & Poor’s reserves the right not to issue a final rating.
Preliminary ratings are assigned to Rule 415 Shelf Registrations. As specific
issues, with defined terms, are offered from the master registration, a final
rating may be assigned to them in accordance with Standard & Poor’s
policies. The final rating may differ from the preliminary rating.
t:
This symbol indicates termination structures that are designed to honor their
contracts to full maturity or, should certain events occur, to terminate and
cash settle all their contracts before their final maturity date. Local Currency
and Foreign Currency Risks: Country risk considerations are a standard part of
Standard & Poor’s analysis for credit ratings on any issuer or issue.
Currency of repayment is a key factor in this analysis. An obligor’s capacity to
repay foreign currency obligations may be lower than its capacity to repay
obligations in its local currency due to the sovereign government’s own
relatively lower capacity to repay external versus domestic debt. These
sovereign risk considerations are incorporated in the debt ratings assigned to
specific issues. Foreign currency issuer ratings are also distinguished from
local currency issuer ratings to identify those instances where sovereign risks
make them different for the same issuer.
Description
of Standard & Poor’s Ratings Group’s Ratings of Commercial Paper:
A
Standard & Poor’s commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from “A” for
the highest-quality obligations to “D” for the lowest. These categories are as
follows:
A-1
- This designation indicates that the degree of safety regarding timely payment
is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2
- Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
‘A-1’.
A-3
- Issues carrying this designation have an adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B
- Issues rated ‘B’ are regarded as having only speculative capacity for timely
payment.
C
- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D
- Debt rated ‘D’ is in payment default. The ‘D’ rating category is used when
interest payments of principal payments are not made on the date due, even if
the applicable grace period has not expired, unless Standard & Poor’s
believes such payments will be made during such grace period.
Description
of Standard & Poor’s Ratings Group’s Dual Ratings:
Standard &
Poor’s assigns “dual” ratings to all debt issues that have a put option or
demand feature as part of their structure.
The
first rating addresses the likelihood of repayment of principal and interest as
due, and the second rating addresses only the demand feature. The long-term debt
rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, “AAA/A-1+”).
With short-term demand debt, Standard & Poor’s note rating symbols are
used with the commercial paper rating symbols (for example, “SP-1+/A-1+”).
International
Long-Term Credit Ratings (“LTCR”) may also be referred to as “Long-Term
Ratings.” When assigned to most issuers, it is used as a benchmark measure of
probability of default and is formally described as an Issuer Default Rating
(IDR). The major exception is within Public Finance, where IDRs will not be
assigned as market convention has always focused on timeliness and does not draw
analytical distinctions between issuers and their underlying obligations. When
applied to issues or securities, the LTCR may be higher or lower than the issuer
rating (IDR) to reflect relative differences in recovery expectations. The
following rating scale applies to foreign currency and local currency ratings.
Investment
Grade
AAA
- Highest credit quality. “AAA” ratings denote the lowest expectation of credit
risk. They are assigned only in case of exceptionally strong capacity for
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
- Very high credit quality. “AA” ratings denote expectations of very low credit
risk. They indicate very strong capacity for payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A
- High credit quality. “A” ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB
- Good credit quality. “BBB” ratings indicate that there is currently
expectations of low credit risk. The capacity for payment of financial
commitments is considered adequate, but adverse changes in circumstances and
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative
Grade
BB
- Speculative. “BB” ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.
B
- Highly speculative. For issuers and performing obligations, ‘B’ ratings
indicate that significant credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met; however, capacity for
continued payment is contingent upon a sustained, favorable business and
economic environment. For individual obligations, ‘B’ ratings may indicate
distressed or defaulted obligations with potential for extremely high
recoveries. Such obligations would possess a Recovery Rating of ‘R1’
(outstanding).
CCC
- For issuers and performing obligations, default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon sustained,
favorable business or economic conditions. For individual obligations, may
indicate distressed or defaulted obligations with potential for average to
superior levels of recovery. Differences in credit quality may be denoted by
plus/minus distinctions. Such obligations typically would possess a Recovery
Rating of ‘R2’ (superior), or ‘R3’ (good) or ‘R4’ (average).
CC
- For issuers and performing obligations, default of some kind appears probable.
For individual obligations, may indicate distressed or defaulted obligations
with a Recovery Rating of ‘R4’ (average) or ‘R5’ (below average).
C
- For issuers and performing obligations, default is imminent. For individual
obligations, may indicate distressed or defaulted obligations with potential for
below-average to poor recoveries. Such obligations would possess a Recovery
Rating of ‘R6’ (poor).
RD
- Indicates an entity that has failed to make due payments (within the
applicable grace period) on some but not all material financial obligations, but
continues to honor other classes of obligations.
D
- Indicates an entity or sovereign that has defaulted on all of its financial
obligations. Default generally is defined as one of the following:
(i) failure of an obligor to make timely payment of principal and/or
interest under the contractual terms of any financial obligation; (ii) the
bankruptcy filings, administration, receivership, liquidation or other
winding-up or cessation of business of an obligor; or (iii) the distressed
or other coercive exchange of an obligation, where creditors were offered
securities with diminished structural or economic terms compared with the
existing obligation.
Default
ratings are not assigned prospectively; within this context, non-payment on an
instrument that contains a deferral feature or grace period will not be
considered a default until after the expiration of the deferral or grace period.
Issuers
will be rated ‘D’ upon a default. Defaulted and distressed obligations typically
are rated along the continuum of ‘C’ to ‘B’ ratings categories, depending upon
their recovery prospects and other relevant characteristics. Additionally, in
structured finance transactions, where analysis indicates that an instrument is
irrevocably impaired such that it is not expected to meet pay interest and/or
principal in full in accordance with the terms of the obligation’s documentation
during the life of the transaction, but where no payment default in accordance
with the terms of the documentation is imminent, the obligation may be rated in
the ‘B’ or ‘CCC-C’ categories.
Default
is determined by reference to the terms of the obligations’ documentation. Fitch
will assign default ratings where it has reasonably determined that payment has
not been made on a material obligation in accordance with the requirements of
the obligation’s documentation, or where it believes that default ratings
consistent with Fitch’s published definition of default are the most appropriate
ratings to assign.
Description
of Fitch Ratings International Short-Term Credit Ratings:
International
Short-Term Credit Ratings may also be referred to as “Short-Term Ratings.” The
following ratings scale applies to foreign currency and local currency ratings.
A short-term rating has a time horizon of less than 13 months for most
obligations, or up to three years for U.S. public finance, in line with industry
standards, to reflect unique characteristics of bond, tax, and revenue
anticipation notes that are commonly issued with terms up to three years.
Short-term ratings thus places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
F1
- Highest credit quality. Indicates the strongest capacity for timely payment of
financial commitments; may have an added “+” to denote any exceptionally strong
credit feature.
F2
- Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
F3
- Fair credit quality. The capacity for timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
B
- Speculative. Minimal capacity for timely payment of financial commitments,
plus vulnerability to near-term adverse changes in financial and economic
conditions.
C
- High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D
- Default. Indicates an entity or sovereign that has defaulted on all of its
financial obligations.
Notes
to Fitch Ratings International Long-Term and Short-Term Credit Ratings:
The
modifiers “+” or “–” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
Long-term rating category, to categories below ‘CCC’, or to Short-term ratings
other than ‘F1’. (The +/– modifiers are only used to denote issues within the
CCC category, whereas issuers are only rated CCC without the use of modifiers.)
Rating
Watch: Ratings are placed on Rating Watch to notify investors that there is a
reasonable probability of a rating change and the likely direction of such
change. These are designated as “Positive”, indicating a potential upgrade,
“Negative”, for a potential downgrade, or “Evolving”, if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
Rating
Outlook: An Outlook indicates the direction a rating is likely to move over a
one to two-year period. Outlooks may be positive, stable or negative. A positive
or negative Rating Outlook does not imply a rating change is inevitable.
Similarly, ratings for which outlooks are ‘stable’ could be upgraded or
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify a
fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
Program
ratings (such as those assigned to MTN shelf registrations) relate only to
standard issues made under the program concerned; it should not be assumed that
these ratings apply to every issue made under the program. In particular, in the
case of non-standard issues, i.e.
those that are linked to the credit of a third party or linked to the
performance of an index, ratings of these issues may deviate from the applicable
program rating.
Variable
rate demand obligations and other securities which contain a short-term ‘put’ or
other similar demand feature will have a dual rating, such as AAA/F1+. The first
rating reflects the ability to meet long-term principal and interest payments,
whereas the second rating reflects the ability to honor the demand feature in
full and on time.
Interest
Only: Interest Only ratings are assigned to interest strips. These ratings do
not address the possibility that a security holder might fail to recover some or
all of its initial investment due to voluntary or involuntary principal
repayments.
Principal
Only: Principal Only ratings address the likelihood that a security holder will
receive their initial principal investment either before or by the scheduled
maturity date.
Rate
of Return: Ratings also may be assigned to gauge the likelihood of an investor
receiving a certain predetermined internal rate of return without regard to the
precise timing of any cash flows.
‘PIF’:
Paid-in -Full; denotes a security that is paid-in-full, matured, called, or
refinanced.
‘NR’
indicates that Fitch Ratings does not rate the issuer or issue in question.
‘Withdrawn’:
A rating is withdrawn when Fitch Ratings deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced, or for any other reason Fitch Ratings deems
sufficient.
APPENDIX
B
June
2017
PROXY
VOTING
Client
Accounts for which 1919ic Votes Proxies
1919ic
shall vote proxies for each client account for which the client:
A. has
specifically authorized 1919ic to vote proxies in the applicable investment
advisory agreement or other written instrument; or
B. without
specifically authorizing 1919ic to vote proxies, has granted general investment
discretion to 1919ic in the applicable investment advisory agreement.
Also,
1919ic shall vote proxies for employee benefit plan clients subject to the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”), unless
the investment advisory agreement specifically reserves proxy voting
responsibility to the plan trustees or other named fiduciary.
At
or prior to inception of each client account, 1919ic shall determine whether it
has proxy voting authority over the account. If 1919ic has authority to vote
proxies for a client’s account but the account custodian does not provide 1919ic
with the materials necessary to vote proxies, 1919ic will be unable to vote
proxies for the client and will so notify the client.
General
Principles
In
exercising discretion to vote proxies for securities held in client accounts,
1919ic is guided by general fiduciary principles. 1919ic’s goal in voting
proxies is to act prudently and solely in the best economic interest of its
clients for which it is voting proxies.
For
securities for which 1919ic has proxy voting authority, 1919ic will not decline
to vote proxies except in extraordinary circumstances where 1919ic believes
refraining from voting is in the client’s best interest.
Service
Firm -- Proxy Voting Guidelines
1919ic
contracts with an independent proxy service firm, currently Institutional
Shareholder Services Inc. (the “Service Firm”), to provide 1919ic with proxy
voting guidelines and administrative proxy voting services.
As
part of these services, the Service Firm prepares and periodically updates proxy
voting guidelines which 1919ic’s Proxy Voting Committee (the “Committee”)
periodically reviews and approves. These include standard domestic and foreign
guidelines and also domestic and foreign Socially Responsible guidelines. The
Service Firm generally updates all guidelines each year.
For
client accounts that are not receiving 1919ic socially responsive investment
advisory services, 1919ic generally votes proxies (including on matters such as
election of directors, appointment of auditors, granting or repricing of
options, mergers and other material issues) in accordance with the Service
Firm’s standard proxy voting guidelines, which seek to maximize value for
shareholders.
For
client accounts receiving socially responsive investment advisory services,
1919ic generally votes proxies in accordance with the Service Firm’s Socially
Responsible guidelines. These guidelines reflect the dual objectives of economic
gain and having companies conduct their businesses in a socially and
environmentally responsible manner. According to the Service Firm, on matters of
social and environmental import, the guidelines seek to reflect a broad
consensus of the socially responsible investing community, referring to policies
that have been developed by groups such as the Interfaith Center on Corporate
Responsibility and other leading socially responsible investors. Additionally,
the Service Firm says its Socially Responsible guidelines incorporate the active
ownership and investment philosophies of leading globally recognized initiatives
such as the United Nations Environment Programme Finance Initiative (“UNEP FI”),
the United Nations Principles for Responsible Investment (“UNPRI”), the United
Nations Global Compact, and environmental and social European Union Directives.
On proxy votes involving corporate governance, executive
compensation,
and corporate structure, the Service Firm says the guidelines are based on a
commitment to create and preserve economic value and to advance principles of
good corporate governance consistent with responsibilities to society as a
whole.
Because
different guidelines apply to different accounts, the same proxies may be voted
differently for different client accounts. In addition, a client’s 1919ic
portfolio manager may vote a proxy contrary to the otherwise applicable
guidelines for one more accounts if he or she believes such a vote is more
consistent with the client’s investment guidelines or best interests. For proxy
votes that vary from otherwise applicable Service Firm guidelines or for which
the Service Firm does not issue a voting recommendation, the portfolio manager
must follow the procedures described below in the “Process for Voting Proxies
Other than in Accordance with Guidelines” section of this Policy.
1919ic’s
use of the Service Firm and its proxy voting guidelines does not relieve 1919ic
of its ultimate fiduciary responsibility to ensure that proxies are voted in
clients’ best interests.
Service
Firm – Administrative Services
As
part of the Service Firm’s administrative services, the Service Firm votes
proxies on 1919ic’s behalf in accordance with the applicable guidelines the
Committee has approved, unless 1919ic decides to vote a proxy contrary to the
guidelines (as described in the “Process for Voting Proxies Other than in
Accordance with Guidelines” section of this Policy) and communicates that
decision to the Service Firm prior to the vote. The Service Firm also keeps
certain proxy voting records for 1919ic, as described in the “Voting Records”
section below.
1919ic
Review of Service Firm
The
Committee shall periodically review its retention of the Service Firm. The
review shall include consideration of whether the Service Firm has the capacity
and competency to adequately analyze proxy issues, including the ability to make
voting recommendations based on materially accurate information. The review
shall also include consideration of any conflicts of interest that may affect
the nature and quality of the proxy-related services provided to 1919ic by the
Service Firm. Consideration of any such conflicts shall include a review of how
the Service Firm addresses the conflicts. 1919ic shall keep records evidencing
the Committee’s review of the Service Firm.
Process
for Voting Proxies Other than in Accordance with Guidelines
1919ic
may decide to vote proxies contrary to recommendations issued by the Service
Firm in accordance with applicable guidelines, or in situations where the
Service Firm does not issue recommendations, if it follows the procedures set
forth below. Where proxies are voted in accordance with Service Firm guidelines
the Committee has approved, 1919ic takes the position that any conflict between
client interests and interests of 1919ic or the 1919ic portfolio manager for the
account is rendered irrelevant and without effect on the voting decision (since
the decision is dictated by guidelines previously approved by the Committee
without reference to any particular proxy vote).
In
addition, if the Service Firm defers to 1919ic to vote a proxy, 1919ic and the
portfolio managers for affected client accounts shall follow the procedures set
forth below in determining how to vote.
1.Any
one or more portfolio managers may vote a proxy if they determine doing so (i)
would better serve the economic interests of the affected client(s), and/or (ii)
is more consistent with the investment and/or proxy voting guidelines of the
affected client(s), provided that in each case the portfolio manager proposes
the vote to the Committee and the Committee pre-approves the vote.
2.In
proposing a vote to the Committee, the portfolio manager shall (i) state the
rationale for the vote, (ii) complete and submit to the Committee and 1919ic’s
CCO (or designee) a questionnaire designed to elicit information about conflicts
of interest to which the portfolio manager may be subject, and (iii) certify in
writing that the vote does not involve a conflict between the interests of
affected client(s) and the portfolio manager’s interests.
3.In
deciding whether to approve such a proxy vote, the Committee shall review the
completed questionnaire and consult with 1919ic’s CCO (or designee) to consider
whether the vote involves a conflict between the interests of the affected
client(s) and the interests of the portfolio manager and 1919ic or its
affiliates.
4.If
the Committee determines that a proposed proxy vote does not involve a conflict
of interest and is otherwise appropriate, the Committee shall approve and
authorize the vote.
5.If
the Committee determines that a proposed proxy vote does involve a conflict of
interest, it shall consult with 1919ic’s CCO (or designee) to determine if the
conflict is material. Materiality determinations shall be made based on the
particular facts and circumstances involved, including whether the outcome of
the vote may have a significant effect on 1919ic, any 1919ic client representing
more than 5% of 1919ic’s business, or any of 1919ic’s affiliates. A conflict of
interest shall be considered material if it is likely to influence, or appear to
influence, the voting decision.
6.If
the Committee determines a conflict of interest is not material, and determines
the proposed vote is otherwise appropriate, the Committee shall approve and
authorize the vote.
7.If
the Committee determines a conflict of interest is material, the Committee shall
resolve the situation in one of the following ways, as the Committee in
consultation with the CCO (or designee) deems appropriate:
(i)obtain
and document informed client consent to the proposed vote notwithstanding the
material conflict;
(ii)vote
the proxy in accordance with applicable Service Firm guidelines (if any);
(iii)in
the case of a conflict between client interests and a portfolio manager’s
interests, remove the portfolio manager from the voting decision;
or
(iv)such
other method as the Committee and the CCO (or designee) determine to be
effective in eliminating the material conflict.
The
above procedures do not need to be adhered to for specific proxy votes that are
directed by clients.
Proxy
Voting Independence
1919ic
exercises proxy voting authority independently of other firms affiliated with
1919ic’s parent company, Stifel Financial Corp. Accordingly, 1919ic will not
consult or enter into agreements with officers, directors or employees of such
affiliated firms regarding the voting of proxies for securities owned by 1919ic
clients.
Proxy
Voting Disclosures
1919ic’s
CCO (or designee) shall ensure that this Policy is summarized in 1919ic’s Form
ADV Brochure and shall review such summary at least annually to ensure its
continued accuracy.
Upon
receipt of a client request for information on how 1919ic voted proxies for the
client’s account, 1919ic must promptly provide the client with the requested
information in writing.
Proxy
Voting Records
In
addition to all other records required by this Policy, 1919ic shall maintain the
following records relating to proxy voting:
i.a
copy of this Policy, including any and all amendments that may be
adopted;
ii.a
copy of each proxy statement that 1919ic receives regarding client
securities;
iii.a
record of each vote cast by 1919ic for a client;
iv.documentation
relating to the identification and resolution of conflicts of
interest;
v.any
documents created by 1919ic that were material to a proxy voting decision or
that memorialized the basis for that decision;
vi.a
copy of each written client request for information on how 1919ic voted proxies
on behalf of the client, and a copy of any written response by 1919ic to any
written or oral client request for information on how 1919ic voted proxies for
the requesting client; and
vii.records
showing whether 1919ic has proxy voting authority for each client
account.
All
required records shall be maintained and preserved in an easily accessible place
for a period of not less than six years from the end of the fiscal year during
which the last entry was made on such record, the first two years in an
appropriate office of 1919ic. 1919ic also shall maintain a copy of any proxy
voting policies and procedures that were in effect at any time within the last
five years.
In
lieu of keeping copies of proxy statements, 1919ic may rely on proxy statements
filed on the EDGAR system as well as on Service Firm records of proxy statements
if the Service Firm provides an undertaking to provide copies of such proxy
statements promptly upon request. 1919ic may rely on the Service Firm to make
and retain, on 1919ic’s behalf, records of votes cast for clients if the Service
Firm provides an undertaking to provide a copy of such records promptly upon
request.
