ck0001511699-20231130
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Statement
of Additional Information
March
31, 2024 |
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Principal
Listing Exchange for the Ecofin Global Water ESG Fund and Tortoise North
American Pipeline Fund: NYSE Arca, Inc.
This
Statement of Additional Information (“SAI”) provides general information about
the Ecofin Global Water ESG Fund, (the “Water Fund”) and the Tortoise North
American Pipeline Fund (the “Pipeline Fund”), each a series of Managed Portfolio
Series (the “Trust”). This SAI is not a prospectus and should be read in
conjunction with the Funds’ current prospectus dated March 31, 2024 (the
“Prospectus”), as supplemented and amended from time to time, which is
incorporated herein by reference. In addition, each Fund’s financial statements
for the fiscal year ended November 30, 2023 is incorporated herein by
reference to the Fund’s annual
report
dated November 30, 2023. Capitalized terms used herein that are not defined have
the same meaning as in the Prospectus, unless otherwise noted. To obtain a copy
of the Prospectus and/or Annual Report, when available, free of charge, please
write or call the Funds at the address or toll-free telephone number below, or
visit the Adviser’s website at https://tortoiseadvisors.com/.
TortoiseEcofin
Funds
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
1-844-874-6339
TABLE
OF CONTENTS
The
Trust and the Funds
The
Trust is a Delaware statutory trust organized on January 27, 2011, and is
registered with the U.S. Securities and Exchange Commission (“SEC”) as an
open-end management investment company under the Investment Company Act of 1940,
as amended, (the “1940 Act”) and the offering of the Funds’ shares is registered
under the Securities Act of 1933, as amended (the “Securities Act”). This
Statement of Additional Information relates to two series of the Trust: the
Ecofin Global Water ESG Fund and the Tortoise North American Pipeline Fund (the
“Funds”).
History
of the Funds.
The Funds are series of the Trust. The Water Fund commenced operations as a
series of the Trust on February 14, 2017. The Pipeline Fund commenced operations
as a series of Montage Managers Trust (the “Predecessor Fund”) on June 29, 2015
and reorganized into the Trust on March 20, 2017. The Funds are managed, by
Tortoise Index Solutions, LLC, doing business as TIS Advisors (the “Adviser” or
“TIS Advisors”) and Exchange Traded Concepts, LLC, (the “Sub-Adviser” or “ETC”).
Shares
of other series of the Trust are offered in separate prospectuses and SAIs. The
Funds’ Prospectus and this SAI are a part of the Trust’s Registration Statement
filed with the SEC. Copies of the Trust’s complete Registration Statement may be
obtained from the SEC upon payment of the prescribed fee, or may be accessed
free of charge at the SEC’s website at www.sec.gov. As permitted by Delaware
law, the Trust’s Board of Trustees (the “Board”) may create additional series
(and classes thereof) of the Trust and offer shares of these series and classes
under the Trust at any time without the vote of shareholders.
All
shares of a series shall represent an equal proportionate interest in the assets
held with respect to that series (subject to the liabilities held with respect
to that series and such rights and preferences as may have been established and
designated with respect to classes of shares of such series), and each share of
a series shall be equal to each other share of that series.
Shares
are voted in the aggregate and not by series or class, except in matters where a
separate vote is required by the 1940 Act, or when the matters affect only the
interest of a particular series or class. When matters are submitted to
shareholders for a vote, each shareholder is entitled to one vote for each full
share owned and fractional votes for fractional shares owned.
The
Trust does not normally hold annual meetings of shareholders. Meetings of the
shareholders shall be called by any member of the Board upon written request of
shareholders holding, in the aggregate, not less than 10% of the shares, such
request specifying the purpose or purposes for which such meeting is to be
called.
The
Board has the authority from time to time to divide or combine the shares of any
series into a greater or lesser number of shares of that series without
materially changing the proportionate beneficial interest of the shares of that
series in the assets belonging to that series or materially affecting the rights
of shares of any other series. In case of the liquidation of a series, the
holders of shares of the series being liquidated are entitled to receive a
distribution out of the assets, net of the liabilities, belonging to that
series. Expenses attributable to any series (or class thereof) are borne by that
series (or class). Any general expenses of the Trust not readily identifiable as
belonging to a particular series are allocated by, or under the direction of,
the
Board
to all applicable series (and classes thereof) in such manner and on such basis
as the Board in its sole discretion deems fair and equitable. No shareholder is
liable to further calls for the payment of any sum of money or assessment
whatsoever with respect to the Trust or any series of the Trust without his or
her express consent.
All
consideration received by the Trust for the issue or sale of the Funds’ shares,
together with all assets in which such consideration is invested or reinvested,
and all income, earnings, profits and proceeds thereof, including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds, subject only to the
rights of creditors, shall constitute the underlying assets of the
Funds.
The
Water Fund seeks investment results that correspond (before fees and expenses)
generally to the price and distribution rate (total return) performance of the
Ecofin Global Water ESG Net Total Return IndexSM
(the “Water Index”). The Pipeline Fund seeks investment results that correspond
(before fees and expenses) generally to the price and distribution rate (total
return) performance of the Tortoise North American Pipeline IndexSM
(the “Pipeline Index”). Together, the Water Index and the Pipeline Index are
referred to as the “Underlying Indexes.”
The
Funds offer and issue shares at its net asset value per share (“NAV”) only in
aggregations of a specified number of shares (each a “Creation Unit”). Each Fund
generally offers and issues Shares in exchange for a basket of securities,
assets or other positions included in the Underlying Index (“Deposit
Securities”) together with the deposit of a specified cash payment (“Cash
Component”). The Trust reserves the right to permit or require the substitution
of a “cash in lieu” amount (“Deposit Cash”) to be added to the Cash Component to
replace any Deposit Security. The shares of the Water Fund and Pipeline Fund are
listed on the NYSE Arca, Inc. Exchange. Prior to January 4, 2021, the Water Fund
was listed on the CBOE Bzx Exchange. The NYSE Arca, Inc. Exchange is referred to
as the “Exchange” in this SAI. The Funds each trade on the Exchange at market
prices. These prices may differ from the NAVs of each Fund's shares. The Funds'
shares are also redeemable only in Creation Unit aggregations, and generally in
exchange for portfolio securities and a specified cash payment.
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions including a requirement to maintain on deposit with the Trust cash at
least equal to a specified percentage of the market value of the missing Deposit
Securities as set forth in the Participant Agreement (as defined below). The
Trust may impose a transaction fee for each creation or redemption (the
“Transaction Fee”). In all cases, such fees will be limited in accordance with
the requirements of the SEC applicable to management investment companies
offering redeemable securities. The Funds may charge, either in lieu or in
addition to the fixed creation or redemption Transaction Fee, a variable fee for
creations and redemptions in order to cover certain brokerage, tax, foreign
exchange, execution, market impact and other costs and expenses related to the
execution of trades resulting from such transaction, up to a maximum of 2.00% of
the NAV per Creation Unit, inclusive of any Transaction Fees charged (if
applicable).
Investment
Objective, Policies, Strategies and Associated Risks
The
following discussion supplements the description of the Funds’ investment
objective and principal investment strategies and principal risks set forth in
the Prospectus. Except for the fundamental investment limitations listed below
(see “Fundamental and Non-Fundamental Investment Limitations”), the Funds’
investment objectives, strategies and policies are not
fundamental
and may be changed by sole action of the Board, without shareholder approval.
The Funds will only invest in any of the following instruments or engage in any
of the following investment practices if such investment or activity is
consistent with such Fund’s investment objective and permitted by the Fund’s
stated investment policies. The Funds might not invest in all of these types of
securities or use all of these techniques at any one time. The Funds’
transactions in a particular type of security or use of a particular technique
is subject to limitations imposed by the Funds’ investment objectives, policies
and restrictions described in the Funds’ Prospectus and/or this SAI, as well as
the federal securities laws.
Investment
Objective
The
investment objective of each Fund is set forth under the “Summary Section” in
the Funds’ Prospectus.
Diversification
The
Water Fund and Pipeline Fund are each classified as a non-diversified investment
company under the 1940 Act. A “non-diversified” classification means that the
Fund is not limited by the 1940 Act with regard to the percentage of its assets
that may be invested in the securities of a single issuer. This means that the
Fund may invest a greater portion of its assets in the securities of a single
issuer than a diversified fund. The securities of a particular issuer may
constitute a greater portion of the Fund’s Underlying Index and, therefore, the
securities may constitute a greater portion of the Fund’s portfolio. This may
have an adverse effect on the Fund’s performance or subject the Fund’s shares to
greater price volatility than more diversified investment companies. Moreover,
in pursuing its objective, the Fund may hold the securities of a single issuer
in an amount exceeding 10% of the outstanding voting securities of the issuer,
subject to restrictions imposed by Subchapter M of the Internal Revenue Code of
1986, as amended (the “Code”). In particular, as a Fund’s size grows and its
assets increase, it will be more likely to hold more than 10% of the voting
securities of a single issuer if the issuer has a relatively small public float
as compared to other components in its Underlying Index.
Because
each Fund intends to qualify as a “regulated investment company” ("RIC") under
the Code, each Fund will limit its investment, excluding cash, cash items
(including receivables), U.S. government securities and securities of other
regulated investment companies, so that at the close of each quarter of the
taxable year, (1) not more than 25% of the Fund’s total assets will be invested
in the securities of a single issuer, and (2) with respect to 50% of its total
assets, not more than 5% of the Fund’s total assets will be invested in the
securities of a single issuer nor represent more than 10% of the issuer’s
outstanding voting securities.
Concentration
Each
Fund concentrates its investments in a particular industry or group of
industries, as described in the Prospectus. The securities of issuers in
particular industries may dominate the Underlying Index of a Fund and
consequently the Fund’s investment portfolio. This may adversely affect the
Fund’s performance or subject its shares to greater price volatility than that
experienced by less concentrated investment companies.
Equity
Securities
Equity
securities represent ownership interests in a company. Investments in equity
securities in general are subject to market risks that may cause their prices to
fluctuate over time. Fluctuations in the value of equity securities in which the
Funds invest will cause the NAV of the Funds to fluctuate.
Types
of equity securities in which the Funds may invest:
Common
Stocks.
Common
stock represents an equity ownership interest in the profits and losses of a
corporation, after payment of amounts owed to bondholders, other debt holders,
and holders of preferred stock. Holders of common stock generally have voting
rights, but the Funds do not expect to have voting control in any of the
companies in which they invest. In addition to the general risks set forth
above, investments in common stocks are subject to the risk that in the event a
company in which the Funds invest is liquidated, the holders of preferred stock
and creditors of that company will be paid in full before any payments are made
to the Funds as holders of common stock. It is possible that all assets of that
company will be exhausted before any payments are made to the holders of common
stock.
Master
Limited Partnerships.
A master limited partnership (“MLP”) is an entity that is generally taxed as a
partnership for federal income tax purposes if certain qualifying income
requirements are met.
An
MLP has one or more general partners (who may be individuals, corporations, or
other partnerships) which manage the partnership, and limited partners, which
provide capital to the partnership but have no role in its management.
Typically, the general partner is owned by company management or another
publicly traded sponsoring corporation. When an investor buys units in an MLP,
the investor becomes a limited partner.
MLPs
are formed in several ways. A non-traded partnership may decide to go public.
Several non-traded partnerships may roll up into a single MLP. A corporation may
spin-off a group of assets or part of its business into an MLP of which it is
the general partner, to realize the assets’ full value on the marketplace by
selling the assets and using the cash proceeds received from the MLP to address
debt obligations or to invest in higher growth opportunities, while retaining
control of the MLP. A corporation may fully convert to an MLP, although tax
consequences have made this an unappealing option for most corporations. Unlike
the ways described above, it is also possible for a newly formed entity to
commence operations as an MLP from its inception.
The
sponsor or general partner of an MLP, other energy companies, and utilities may
sell assets to MLPs in order to generate cash to fund expansion projects or
repay debt. The MLP structure essentially transfers cash flows generated from
these acquired assets directly to MLP limited partner unitholders.
In
the case of an MLP buying assets from its sponsor or general partner, the
transaction is intended to be based upon comparable terms in the acquisition
market for similar assets. To help insure that appropriate protections are in
place, the board of the MLP generally creates an independent committee to review
and approve the terms of the transaction. The committee often obtains a fairness
opinion and can retain counsel or other experts to assist its evaluation. Since
both
parties normally have a significant equity stake in the MLP, both parties are
aligned to see that the transaction is accretive and fair to the
MLP.
The
business of certain MLPs is affected by supply and demand for energy commodities
because such MLPs derive revenue and income based upon the volume of the
underlying commodity produced, transported, processed, distributed, and/or
marketed. Pipeline MLPs have indirect commodity exposure to gas and oil price
volatility because although they do not own the underlying energy commodity, the
general level of commodity prices may affect the volume of the commodity that
the MLP delivers to its customers and the cost of providing services such as
distributing natural gas liquids. The costs of natural gas pipeline MLPs to
perform services may exceed the negotiated rates under “negotiated rate”
contracts. Specifically, processing MLPs may be directly affected by energy
commodity prices. Propane MLPs own the underlying energy commodity, and
therefore have direct exposure to energy commodity prices, although the Adviser
intends to target high quality MLPs that seek to mitigate or manage direct
margin exposure to commodity prices. However, the MLP industry in general could
be hurt by market perception that an MLP’s performance and valuation are
directly tied to commodity prices.
The
Pipeline Fund may invest in the securities of MLPs, which include:
MLP
Common Units.
MLP common units represent an equity ownership interest in an MLP, providing
limited voting rights and entitling the holder to a share of the company’s
success through distributions and/or capital appreciation. Unlike stockholders
of a corporation, common unitholders do not elect directors annually and
generally have the right to vote only on certain significant events, such as
mergers, a sale of substantially all of the assets, removal of the general
partner or material amendments to the partnership agreement. MLPs are required
by their partnership agreements to distribute a large percentage of their
current operating earnings. Common unitholders generally have first right to a
minimum quarterly distribution (“MQD”) prior to distributions to the convertible
subordinated unitholders or the general partner (including incentive
distributions). Common unitholders typically have arrearage rights if the MQD is
not met. In the event of liquidation, MLP common unitholders have first rights
to the partnership’s remaining assets after bondholders, other debt holders, and
preferred unitholders have been paid in full. MLP common units trade on a
national securities exchange or over- the-counter. In addition, like common
stock, prices of MLP common units are sensitive to general movements in the
stock market and a drop in the stock market may depress the price of MLP common
units to which the Fund has exposure. MLP common units may represent an
ownership interest, held directly or indirectly, in a limited partnership whose
primary assets are general partner interests in an underlying operating
MLP.
Limited
Liability Company Common Units.
Some Pipeline Companies in which the Pipeline Fund may invest have been
organized as LLCs. Such LLCs are generally treated in the same manner as MLPs
for federal income tax purposes. Consistent with its investment objective and
policies, the Fund may invest in common units or other securities of such LLCs.
LLC common units represent an equity ownership interest in an LLC, entitling the
holders to a share of the LLC’s success through distributions and/or capital
appreciation. Similar to MLPs, LLCs typically do not pay federal income tax at
the entity level and are required by their operating agreements to distribute a
large percentage of their current operating earnings. LLC common unitholders
generally have first right to a MQD prior to distributions to subordinated
unitholders and typically have
arrearage
rights if the MQD is not met. In the event of liquidation, LLC common
unitholders have first right to the LLC’s remaining assets after bondholders,
other debt holders and preferred unitholders, if any, have been paid in full.
LLC common units trade on a national securities exchange or
over-the-counter.
In
contrast to MLPs, LLCs have no general partner and there are generally no
incentives that entitle management or other unitholders to increased percentages
of cash distributions as distributions reach higher target levels. In addition,
LLC common unitholders typically have voting rights with respect to the LLC,
whereas MLP common units have limited voting rights.
MLP
Convertible Subordinated Units.
MLP convertible subordinated units are typically issued by MLPs to founders,
corporate general partners of MLPs, entities that sell assets to the MLP, and
institutional investors. The purpose of the convertible subordinated units is to
increase the likelihood that during the subordination period there will be
available cash to be distributed to common unitholders. Convertible subordinated
units generally are not entitled to distributions until holders of common units
have received specified MQD, plus any arrearages, and may receive less than
common unitholders in distributions upon liquidation. Convertible subordinated
unitholders generally are entitled to MQD prior to the payment of incentive
distributions to the general partner but are not entitled to arrearage rights.
Therefore, convertible subordinated units generally entail greater risk than MLP
common units. They are generally convertible automatically into the senior
common units of the same issuer at a one-to-one ratio upon the passage of time
and/or the satisfaction of certain financial tests. These units generally do not
trade on a national exchange or over-the-counter, and there is no active market
for convertible subordinated units. Although the means by which convertible
subordinated units convert into senior common units depend on a security’s
specific terms, MLP convertible subordinated units typically are exchanged for
common units. The value of a convertible security is a function of its worth if
converted into the underlying common units. Convertible subordinated units
generally have similar voting rights as MLP common units. Distributions may be
paid in cash or in-kind.
Equity
Securities of MLP Affiliates.
In addition to equity securities of MLPs, the MLP & Pipeline Fund may also
invest in equity securities of MLP Affiliates.
General
Partner Interests.
Indirect investments in MLP general partner interests are available through
investment in the equity securities of MLP Affiliates organized as corporations
and limited liability companies that own, directly or indirectly, general
partner interests. While these general partner interests themselves are
generally not publicly traded, the MLP Affiliates investing in such interests
and in which the Fund may invest are publicly traded. General partner interests
often confer direct board participation rights and in many cases, operating
control, over the MLP. General partner interests receive cash distributions,
typically 2% of the MLP’s aggregate cash distributions, which are contractually
defined in the partnership agreement. In addition, holders of general partner
interests may hold incentive distribution rights (“IDRs”), which provide them
with an increasing larger share of the aggregate MLP cash distributions upon the
payment of distributions to limited partner unitholders that exceed prescribed
levels. General partner interests with IDRs may have higher
distribution
growth prospects than their underlying MLPs, but incentive distribution payments
would also decline at a greater rate than the decline rate in distributions to
common unitholders in the event of a reduction in the MLP’s
distribution.
General
partner interests generally cannot be converted into common units. The general
partner interest can be redeemed by the MLP if the MLP unitholders choose to
remove the general partner, typically with a supermajority vote by limited
partner unitholders.
Risks
of Investing in Equity Securities:
General
Risks of Investing in Stocks.
While investing in stocks allows investors to participate in the benefits of
owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a company’s earnings and cash flow,
preferred stockholders, followed by common stockholders in order of priority,
are entitled only to the residual amount after a company meets its other
obligations. For this reason, the value of a company’s stock will usually react
more strongly to actual or perceived changes in the company’s financial
condition or prospects than its debt obligations. Stockholders of a company that
fares poorly can lose money.
Stock
markets tend to move in cycles with short or extended periods of rising and
falling stock prices. The value of a company’s stock may fall because
of:
•Factors
that directly relate to that company, such as decisions made by its management
or lower demand for the company’s products or services;
•Factors
affecting an entire industry, such as increases in production costs;
and
•Changes
in general financial market conditions that are relatively unrelated to the
company or its industry, such as changes in interest rates, currency exchange
rates or inflation rates.
Small-
and Medium-Sized Companies.
Investors in small- and medium-sized companies typically take on greater risk
and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of their
small or medium size, limited markets and financial resources, narrow product
lines and frequent lack of management depth. The securities of small- and
medium-sized companies are often traded in the over-the-counter market and might
not be traded in volumes typical of securities traded on a national securities
exchange. Thus, the securities of small and medium capitalization companies are
likely to be less liquid, and subject to more abrupt or erratic market
movements, than securities of larger, more established companies.
Foreign
Investments and Currencies
The
Funds may invest in securities of non-U.S. issuers. Investments in the
securities of foreign issuers and other non-U.S. investments may involve risks
in addition to those normally associated with investments in the securities of
U.S. issuers or other U.S. investments. All foreign investments are subject to
risks of foreign political and economic instability, adverse movements in
foreign exchange rates, and the imposition or tightening of exchange controls
and limitations on the repatriation of foreign capital. Other risks stem from
potential changes in
governmental
attitude or policy toward private investment, which in turn raises the risk of
nationalization, increased taxation or confiscation of foreign investors’
assets.
The
financial problems in global economies over the past several years may continue
to cause high volatility in global financial markets. In addition, global
economies are increasingly interconnected, which increases the possibilities
that conditions in one country or region might adversely impact a different
country or region. The severity or duration of these conditions may also be
affected if one or more countries leave the euro currency or by other policy
changes made by governments or quasi-governmental organizations.
On
March 29, 2017, the United Kingdom (“UK”) triggered the procedures to withdraw
from the European Union (“EU”) after the two year period settlement negotiation
as prescribed in Article 50 of the Treaty of Lisbon. On January 31, 2020 the UK
officially withdrew from the EU, subject to an 11 month transition period.
Following a transition period during which the EU and the UK government engaged
in a series of negotiations regarding the terms of the UK’s future relationship
with the EU, the EU and the UK government signed an agreement on December 30,
2020 regarding the economic relationship between the UK and the EU. This
agreement became effective on a provisional basis on January 1, 2021 and
formally entered into force on May 1, 2021. It is still uncertain what the
long-term impacts will be as a result of the commercial arrangements reached
between the EU and the UK. The withdrawal could cause an extended period of
uncertainty and market volatility, not just in the UK but throughout the EU, the
European Economic Area and globally.
Additional
non-U.S. taxes and expenses may also adversely affect the Funds’ performance,
including foreign withholding taxes on foreign securities’ dividends. Brokerage
commissions and other transaction costs on foreign securities exchanges are
generally higher than in the United States. Foreign companies may be subject to
different accounting, auditing and financial reporting standards. To the extent
the foreign securities held by the Funds are not registered with the SEC or with
any other U.S. regulator, the issuers thereof will not be subject to the
reporting requirements of the SEC or any other U.S. regulator. Accordingly, less
information may be available about foreign companies and other investments than
is generally available on issuers of comparable securities and other investments
in the United States. Foreign securities and other investments may also trade
less frequently and with lower volume and may exhibit greater price volatility
than U.S. securities and other investments.
Changes
in foreign exchange rates will affect the value in U.S. dollars of all foreign
currency-denominated securities and other investments held by the Funds.
Exchange rates are influenced generally by the forces of supply and demand in
the foreign currency markets and by numerous other political and economic events
occurring outside the United States, many of which may be difficult, if not
impossible, to predict.
Income
from foreign securities and other investments will be received and realized in
foreign currencies, and the Funds are required to compute and distribute income
in U.S. dollars. Accordingly, a decline in the value of a particular foreign
currency against the U.S. dollar occurring after the Funds’ income has been
earned and computed in U.S. dollars may require the Funds to liquidate portfolio
securities and other investments to acquire sufficient U.S. dollars to make a
distribution. Similarly, if the exchange rate declines between the time the
Funds incur expenses in U.S. dollars and the time such expenses are paid, the
Funds may be required to
liquidate
additional portfolio securities and other investments to purchase the U.S.
dollars required to meet such expenses.
American
Depositary Receipts.
American Depositary Receipts (“ADRs”) are negotiable receipts issued by a U.S.
bank or trust company that evidence ownership of securities in a foreign company
which have been deposited with such bank or trust company’s office or agent in a
foreign country. Investing in ADRs presents risks that may not be equal to the
risk inherent in holding the equivalent shares of the same companies that are
traded in the local markets even though the Funds will purchase, sell and be
paid dividends on ADRs in U.S. Dollars. These risks include fluctuations in
currency exchange rates, which are affected by international balances of
payments and other economic and financial conditions; government intervention;
speculation; and other factors. With respect to certain foreign countries, there
is the possibility of expropriation or nationalization of assets, confiscatory
taxation, political and social upheaval, and economic instability. The Funds may
be required to pay foreign withholding or other taxes on certain ADRs that it
owns. The Funds may also invest in Global Depositary Receipts (“GDRs”), European
Depositary Receipts (“EDRs”), and International Depositary Receipts (“IDRs”)
(collectively, with ADRs, “Depositary Receipts”). GDRs, EDRs and IDRs are
similar to ADRs in that they are certificates evidencing ownership of shares of
a foreign issuer, however, GDRs, EDRs, and IDRs may be issued in bearer form and
denominated in other currencies, and are generally designed for use in specific
or multiple securities markets outside the U.S. Depositary receipts will not
necessarily be denominated in the same currency as their underlying
securities.
Depositary
Receipts may be sponsored by foreign issuers or may be unsponsored. There is
generally less publicly available information with respect to unsponsored
Depositary Receipts and there may not be a correlation between such information
and the market value of the Depositary Receipts. Unsponsored ADRs are organized
independently and without the cooperation of the foreign issuer of the
underlying securities. While readily exchangeable with stock in local markets,
unsponsored ADRs may be less liquid than sponsored ADRs. The use of Depositary
Receipts may increase tracking error relative to the Underlying
Index.
Derivatives
The
Funds may utilize futures contracts, options contracts and swap agreements.
Futures contracts generally provide for the future sale by one party and
purchase by another party of a specified commodity or security at a specified
future time and at a specified price. Index futures contracts are settled daily
with a payment by one party to the other of a cash amount based on the
difference between the level of the index specified in the contract from one day
to the next. Futures contracts are standardized as to maturity date and
underlying instrument. They are traded on futures exchanges and must be executed
through a futures commission merchant (“FCM”), which is a brokerage firm that is
a member of the relevant exchanges.
When
a Fund enters into a futures contract, it must deliver to an account controlled
by the FCM an amount referred to as “initial margin” that is typically
calculated as an amount equal to the volatility in market value of a contract
over a fixed period. Initial margin requirements are determined by the
respective exchanges on which the futures contracts are traded and the FCM.
Thereafter, a “variation margin” amount may be required to be paid by the Fund
or received by the Fund in accordance with margin controls set for such
accounts, depending upon changes in the marked-to-market value of the futures
contract.
Closing
out an open futures position is done by taking an opposite position (“buying” a
contract which has previously been “sold,” or “selling” a contract previously
“purchased”) in an identical contract to terminate the position. When the
futures contract is closed out, if a Fund has a loss equal to or greater than
the margin amount, the margin amount is paid to the FCM along with any loss in
excess of the margin amount. If a Fund has a loss of less than the margin
amount, the excess margin is returned to the Fund. If a Fund has a gain, the
full margin amount and the amount of the gain is paid to the Fund. Brokerage
commissions are incurred when a futures contract position is opened or closed.
The
Funds’ use of futures contracts is subject to the risks associated with
derivative instruments generally. In addition, a purchase or sale of a futures
contract may result in losses to the Funds in excess of the amount that the
Funds delivered as initial margin. Because of the relatively low margin deposits
required, futures trading involves a high degree of leverage; as a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, or gain, to the Funds.
There
is a risk of loss by the Funds of its initial and variation margin deposits in
the event of bankruptcy of the FCM with which the Funds have an open position in
a futures contract. The assets of the Funds may not be fully protected in the
event of the bankruptcy of the FCM or central counterparty because the Funds
might be limited to recovering only a pro rata share of all available funds and
margin segregated on behalf of an FCM’s customers. If the FCM does not provide
accurate reporting, the Funds are also subject to the risk that the FCM could
use the Funds’ assets, which are held in an omnibus account with assets
belonging to the FCM’s other customers, to satisfy its own financial obligations
or the payment obligations of another customer.
The
Commodity Futures Trading Commission (the “CFTC”) and the various exchanges have
established limits referred to as “speculative position limits” on the maximum
net long or net short position that any person, such as the Funds, may hold or
control in a particular futures contract. Trading limits are also imposed on the
maximum number of contracts that any person may trade on a particular trading
day. An exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions.
The
Funds may purchase and sell put and call options. A call option gives a holder
the right to purchase a specific security or an index at a specified price
(“exercise price”) within a specified period of time. A put option gives a
holder the right to sell a specific security or an index at a specified price
within a specified period of time. The initial purchaser of a call option pays
the “writer,” i.e.,
the party selling the option, a premium which is paid at the time of purchase
and is retained by the writer whether or not such option is exercised. The Funds
may purchase put options to hedge their portfolios against the risk of a decline
in the market value of securities held and may purchase call options to hedge
against an increase in the price of securities it is committed to purchase. The
Funds may write put and call options along with a long position in options to
increase their ability to hedge against a change in the market value of the
securities they hold or are committed to purchase.
Options
may relate to particular securities and may or may not be listed on a national
securities exchange and issued by the Options Clearing Corporation. Options
trading is a highly specialized activity that entails greater than ordinary
investment risk. Options on particular securities may be more volatile than the
underlying securities, and therefore, on a percentage
basis,
an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves. Because options premiums
paid or received by the Funds are small in relation to the market value of the
investments underlying the options, buying and selling put and call options can
be more speculative than investing directly in securities.
A
Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate an
obligation under a call option or put option that it has written by purchasing
an identical call option or put option. This is known as a closing purchase
transaction. Conversely, the Fund may terminate a position in a put or call
option it had purchased by writing an identical put or call option. This is
known as a closing sale transaction. Closing transactions permit the Fund to
realize profits or limit losses on an option position prior to its exercise or
expiration.
The
Funds may enter into swap agreements, including interest rate, index, and total
return swap agreements. Swap agreements are contracts between parties in which
one party agrees to make periodic payments to the other party based on the
change in market value or level of a specified rate, index or asset. In return,
the other party agrees to make payments to the first party based on the return
of a different specified rate, index or asset. A swap agreement may be
negotiated bilaterally and traded OTC between the two parties (for an uncleared
swap) or, in some instances, must be transacted through an FCM and cleared
through a clearinghouse that serves as a central counterparty (for a cleared
swap). The notional amount is the set dollar or other value selected by the
parties to use as the basis on which to calculate the obligations that the
parties to a swap agreement have agreed to exchange. The parties typically do
not actually exchange the notional amount. Instead they agree to exchange the
returns that would be earned or realized if the notional amount were invested in
given investments or at given rates.
Swap
agreements will usually be done on a net basis, i.e.,
where the two parties make net payments with the Funds receiving or paying, as
the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a Fund's obligations over its entitlements with respect to
each swap is accrued on a daily basis and an amount of cash or equivalents
having an aggregate value at least equal to the accrued excess is maintained by
the Fund.
In
a total return swap transaction, one party agrees to pay the other party an
amount equal to the total return on a defined underlying asset or a non-asset
reference during a specified period of time. The underlying asset might be a
security or basket of securities, and the non-asset reference could be a
securities index. In return, the other party would make periodic payments based
on a fixed or variable interest rate or on the total return from a different
underlying asset or non-asset reference. The payments of the two parties could
be made on a net basis.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act”) and related regulatory developments have imposed comprehensive
new regulatory requirements on swaps and swap market participants. The new
regulatory framework includes: (1) registration and regulation of swap dealers
and major swap participants; (2) requiring central clearing and execution of
standardized swaps; (3) imposing margin requirements on swap transactions; (4)
regulating and monitoring swap transactions through position limits and large
trader reporting requirements; and (5) imposing record keeping and centralized
and public reporting requirements, on an anonymous basis, for most swaps. The
CFTC is responsible for the regulation of most swaps, and has completed most of
its rules implementing the Dodd-Frank Act swap regulations. The SEC has
jurisdiction over a small segment of the market referred to
as
“security-based swaps,” which includes swaps on single securities or credits, or
narrow-based indices of securities or credits, but has not yet completed its
rulemaking.
The
use of swaps is subject to the risks associated with derivative instruments
generally. In addition, because uncleared swaps are typically executed
bilaterally with a swap dealer rather than traded on exchanges, uncleared swap
participants may not be as protected as participants on organized exchanges.
Performance of an uncleared swap agreement is the responsibility only of the
swap counterparty and not of any exchange or clearinghouse. As a result, the
Funds are subject to the risk that a counterparty will be unable or will refuse
to perform under such agreement, including because of the counterparty’s
bankruptcy or insolvency.
As
noted above, under recent financial reforms, certain types of swaps are, and
others eventually are expected to be, required to be cleared through a central
counterparty, which may affect counterparty risk and other risks faced by the
Funds. Central clearing is designed to reduce counterparty credit risk and
increase liquidity compared to uncleared swaps because central clearing
interposes the central clearinghouse as the counterparty to each participant’s
swap, but it does not eliminate those risks completely. The Funds are also
subject to the risk that, after entering into a cleared swap with an executing
broker, no FCM or central counterparty is willing or able to clear the
transaction. In such an event, the Funds may be required to break the trade and
make an early termination payment to the executing broker.
With
respect to cleared swaps, there is also a risk of loss by a Fund of its initial
and variation margin deposits in the event of bankruptcy of the FCM with which
the Fund has an open position, or the central counterparty in a swap contract.
The assets of the Funds may not be fully protected in the event of the
bankruptcy of the FCM or central counterparty because the Funds might be limited
to recovering only a pro rata share of all available funds and margin segregated
on behalf of an FCM’s customers. If the FCM does not provide accurate reporting,
the Funds are also subject to the risk that the FCM could use the Funds’ assets,
which are held in an omnibus account with assets belonging to the FCM’s other
customers, to satisfy its own financial obligations or the payment obligations
of another customer to the central counterparty. Credit risk of cleared swap
participants is concentrated in a few clearinghouses, and the consequences of
insolvency of a clearinghouse are not clear.
Exclusion
of Adviser from Commodity Pool Operator Definition.
An
exclusion from the definition of “commodity pool operator” (“CPO”) under the
Commodity Exchange Act (“CEA”) and the rules of the CFTC has been claimed with
respect to the Funds, and, therefore, the Adviser is not subject to CFTC
registration or regulation as a CPO with respect to the Funds. In addition, with
respect to the Funds, the Adviser is relying upon a related exclusion from the
definition of “commodity trading advisor” under the CEA and the rules of the
CFTC.
The
terms of the CPO exclusion require the Funds, among other things, to adhere to
certain limits on its investments in “commodity interests.” Commodity interests
include commodity futures, commodity options and swaps, which in turn include
non-deliverable currency forward contracts. Because the Adviser and the Funds
intend to comply with the terms of the CPO exclusion, the Funds may, in the
future, need to adjust its investment strategies, consistent with its investment
goal, to limit its investments in these types of instruments. The Funds are not
intended as a vehicle for trading in the commodity futures, commodity options or
swaps
markets.
The CFTC has neither reviewed nor approved the Adviser’s reliance on these
exclusions, or the Funds, its investment strategies or this SAI.
Generally,
the exclusion from CPO regulation on which each Fund relies requires the Fund to
meet one of the following tests for its commodity interest positions, other than
positions entered into for bona fide hedging purposes (as defined in the rules
of the CFTC): either (1) the aggregate initial margin and premiums required to
establish the Fund’s positions in commodity interests may not exceed 5% of the
liquidation value of the Fund’s portfolio (after taking into account unrealized
profits and unrealized losses on any such positions); or (2) the aggregate net
notional value of the Fund’s commodity interest positions, determined at the
time the most recent such position was established, may not exceed 100% of the
liquidation value of the Fund’s portfolio (after taking into account unrealized
profits and unrealized losses on any such positions). In addition to meeting one
of these trading limitations, the Fund may not be marketed as a commodity pool
or otherwise as a vehicle for trading in the commodity futures, commodity
options or swaps markets. If, in the future, the Funds can no longer satisfy
these requirements, the Adviser would withdraw its notice claiming an exclusion
from the definition of a CPO, and the Adviser would be subject to registration
and regulation as a CPO with respect to the Funds, in accordance with CFTC rules
that apply to CPOs of registered investment companies. Generally, these rules
allow for substituted compliance with CFTC disclosure and shareholder reporting
requirements, based on the Adviser’s compliance with comparable SEC
requirements. However, in the event the Adviser had to register as a CPO, the
Funds might incur additional compliance and other expenses as a result of CFTC
regulation governing commodity pools and CPOs.
Risks
of Potential Government Regulation of Derivatives.
It
is possible that additional government regulation of various types of derivative
instruments, including futures, options, and swap contracts, may limit or
prevent the Funds from using such instruments as part of their investment
strategy, and could ultimately prevent the Funds from being able to achieve
their investment objective. It is impossible to fully predict the effects of
past, present or future legislation and regulation in this area, but the effects
could be substantial and adverse. It is possible that legislative and regulatory
activity could limit or restrict the ability of the Funds to use certain
instruments as part of their investment strategy. Limits or restrictions
applicable to the counterparties with which the Funds engage in derivative
transactions could also prevent the Funds from using certain
instruments.
There
is a possibility of future regulatory changes altering, perhaps to a material
extent, the nature of an investment in the Funds or the ability of the Funds to
continue to implement their investment strategies. The futures, options, and
swaps markets are subject to comprehensive statutes, regulations, and margin
requirements. In addition, the SEC, the CFTC and the exchanges are authorized to
take extraordinary actions in the event of a market emergency, including, for
example, the implementation or reduction of speculative position limits, the
implementation of higher margin requirements, the establishment of daily price
limits, and the suspension of trading. The regulation of futures, options, and
swaps transactions in the United States is a rapidly changing area of law and is
subject to modification by government action.
New
and developing regulation may negatively impact a Fund's ability to meet its
investment objective either through limits or requirements imposed on it or upon
its counterparties. In particular, any new position limits imposed on the Fund
or its counterparties may impact the Fund's ability to invest in futures,
options, and swaps in a manner that efficiently meets its
investment
objective. New requirements, even if not directly applicable to the Funds,
including capital requirements and mandatory clearing, may increase the cost of
the Funds’ investments and cost of doing business, which could adversely affect
investors.
In
October 2020, the SEC adopted Rule 18f-4 under the 1940 Act, with a compliance
date of August 19, 2022. Funds that are subject to the rule are required to
adopt and implement a written derivatives risk management program and
quantitatively limit their use of derivatives based on the estimated potential
risk of loss that the funds incur from their derivatives transactions. Funds
that limit derivatives exposure to 10% of net assets are exempt from many of the
requirements of Rule 18f-4, but must still adopt and implement policies and
procedures reasonably designed to manage the fund’s derivatives risks. Rule
18f-4 governs the way funds must comply with the asset segregation and coverage
requirements of Section 18 of the 1940 Act with respect to derivatives and
certain other financing transactions.
Other
Investment Strategies, Policies and Risks
Other
Equity Securities
Real
Estate Investment Trusts.
The real estate securities in which the Funds may invest consist of securities
issued by Real Estate Investment Trusts (“REITs”) and/or Real Estate Operating
Companies (“REOCs”) that are listed on a securities exchange or traded
over-the-counter. A REIT is a corporation or trust that invests in fee or
leasehold ownership of real estate, mortgages or shares issued by other REITs
and receives favorable tax treatment provided it meets certain conditions. REITs
may be characterized as equity REITs (i.e., REITs that primarily invest in fee
ownership and leasehold ownership of land), mortgage REITs (i.e., REITs that
primarily invest in mortgages on real estate and other real estate debt) or
hybrid REITs which invest in both fee and leasehold ownership of land and
mortgages. A REIT that meets the applicable requirements of the Code may deduct
dividends paid to shareholders, effectively eliminating any corporate level
federal tax. As a result, REITs are able to distribute a larger portion of their
earnings to investors than other corporate entities subject to the federal
corporate tax. There is the risk that a REIT held by the Funds will fail to
qualify for this tax-free pass-through treatment of its income. By investing in
REITs indirectly through the Funds, in addition to bearing a proportionate share
of the expenses of the Funds, investors will also indirectly bear similar
expenses of the REITs in which the Funds invest. A REOC is typically structured
as a “C” corporation under the Code and is not required to distribute any
portion of its income. A REOC, therefore, does not receive the same favorable
tax treatment that is accorded a REIT. In addition, the value of the Funds’
securities issued by REOCs may be adversely affected by income streams derived
from businesses other than real estate ownership.
Preferred
Stocks.
Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated to the liabilities of the issuer. Unlike common stocks, preferred
stocks are generally not entitled to vote on corporate matters. Types of
preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred stock.
Generally, the market values of preferred stock with a fixed dividend rate and
no conversion element vary inversely with interest rates and perceived credit
risk.
Rights
and Warrants.
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitles the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
When-Issued
Securities.
A when-issued security is one whose terms are available and for which a market
exists, but which has not been issued. When a Fund engages in when-issued
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, the Fund may miss the opportunity to obtain
the security at a favorable price or yield.
When
purchasing a security on a when-issued basis, the Funds assume the rights and
risks of ownership of the security, including the risk of price and yield
changes. At the time of settlement, the market value of the security may be more
or less than the purchase price. The yield available in the market when the
delivery takes place also may be higher than those obtained in the transaction
itself. Because the Funds do not pay for the security until the delivery date,
these risks are in addition to the risks associated with their other
investments.
A
Fund will only make commitments to purchase securities on a when-issued basis
with the intention of actually acquiring the securities within 35 days of the
trade date.
Debt
Securities
The
Funds may invest in a wide range of debt securities, which may include
investment grade debt securities and below investment grade debt securities
(commonly known as “junk bonds” or “high yield bonds”). Investment grade
corporate bonds are those rated BBB- or better by Standard & Poor’s Rating
Service, Inc. (“S&P”) or Baa3 or better by Moody’s Investors Service, Inc.
(“Moody’s”) each of which are considered a nationally recognized statistical
rating organization (“NRSRO”). To the extent that a Fund invests in below
investment grade debt securities, such securities will be rated, at the time of
investment, at least B- by S&P or B3 by Moody’s or a comparable rating by at
least one other rating agency or, if unrated, determined by the Adviser to be of
comparable quality. The Funds may hold a debt security rated below investment
grade if a downgrade occurs after the security has been purchased. Investments
in
junk
bonds are speculative in nature. See Appendix A for a description of corporate
bond ratings.
Sensitivity
to interest rate and economic changes.
Debt securities may be sensitive to economic changes, political and corporate
developments, and interest rate changes. In addition, during an economic
downturn or periods of rising interest rates, issuers that are highly leveraged
may experience increased financial stress that could adversely affect their
ability to meet projected business goals, obtain additional financing, and
service their principal and interest payment obligations. Furthermore, periods
of economic change and uncertainty can be expected to result in increased
volatility of market prices and yields of certain debt securities. For example,
prices of these securities can be affected by financial contracts held by the
issuer or third parties (such as derivatives) related to the security or other
assets or indices.
Liquidity.
Bond markets have consistently grown over the past three decades while the
capacity for traditional dealer counterparties to engage in fixed income trading
has not kept pace and in some cases has decreased. As a result, dealer
inventories of corporate bonds, which provide a core indication of the ability
of financial intermediaries to "make markets," are at or near historic lows in
relation to market size. Because market makers provide stability to a market
through their intermediary services, the significant reduction in dealer
inventories could potentially lead to decreased liquidity and increased
volatility in the fixed income markets. Such issues may be exacerbated during
periods of economic uncertainty.
Liquidity
risk may result from the lack of an active market, reduced number and capacity
of traditional market participants to make a market in fixed income securities,
and may be magnified in a rising interest rate environment or other
circumstances causing increased supply in the market due to selling activity.
Further, fixed income securities with longer durations until maturity face
heightened levels of liquidity risk as compared to fixed income securities with
shorter durations until maturity. Finally, liquidity risk also refers to the
risk of unusually high redemption requests or other unusual market conditions
that may make it difficult for the Funds to fully honor redemption requests
within the allowable time period. Meeting such redemption requests could require
the Funds to sell securities at reduced prices or under unfavorable conditions,
which would reduce the value of the Funds. It may also be the case that other
market participants may be attempting to liquidate holdings at the same time as
the Funds, causing increased supply in the market and contributing to liquidity
risk and downward pricing pressure.
Changing
Fixed Income Market Conditions.
There may be a heightened level of interest rate risk in times of monetary
policy change and/or uncertainty, such as when the Federal Reserve Board adjusts
a quantitative easing program and/or changes rates. As the Federal Reserve
“tapers” or reduces quantitative easing, and when the Federal Reserve raises the
federal funds rate, there is a risk that interest rates across the U.S.
financial system will rise. These policy changes may expose fixed-income and
related markets to heightened volatility and may reduce liquidity for certain
fixed income investments, which could cause the value of such investments to
decline. In addition, decreases in fixed income dealer market-making capacity,
which occurred following the
financial
crisis that began in 2007, may persist in the future, potentially leading to
decreased liquidity and increased volatility in the fixed income
markets.
Below
Investment Grade Debt Securities.
Below investment grade debt securities generally offer a higher current yield
than that available for investment grade issues. However, below investment grade
debt securities involve higher risks, in that they are especially subject to
adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged issuers
may experience financial stress that could adversely affect their ability to
make payments of interest and principal and increase the possibility of default.
At times in recent years, the prices of many below investment grade debt
securities declined substantially, reflecting an expectation that many issuers
of such securities might experience financial difficulties. As a result, the
yields on below investment grade debt securities rose dramatically, reflecting
the risk that holders of such securities could lose a substantial portion of
their value as a result of the issuers’ financial restructuring or default.
There can be no assurance that such price declines will not recur. The market
for below investment grade debt issues generally is thinner and less active than
that for higher quality securities, which may limit the Funds’ ability to sell
such securities at fair value in response to changes in the economy or financial
markets. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of below
investment grade debt securities, especially in a thinly traded market. Changes
by recognized rating services in their rating of a debt security may affect the
value of these investments. The Funds will not necessarily dispose of a security
when its rating is reduced below its rating at the time of purchase. However,
the Adviser will monitor the investment to determine whether continued
investment in the security will assist in meeting the Funds’ investment
objective.
Corporate
Debt Securities.
Corporate debt securities are fixed-income securities issued by businesses to
finance their operations, although corporate debt instruments may also include
bank loans to companies. Notes, bonds, debentures and commercial paper are the
most common types of corporate debt securities, with the primary difference
being their maturities and secured or unsecured status. Commercial paper has the
shortest term and is usually unsecured.
The
broad category of corporate debt securities includes debt issued by domestic or
foreign companies of all kinds, including those with small-, mid- and
large-capitalizations. Corporate debt may be rated investment grade or below
investment grade and may carry variable or floating rates of
interest.
Because
of the wide range of types and maturities of corporate debt securities, as well
as the range of creditworthiness of its issuers, corporate debt securities have
widely varying potentials for return and risk profiles. For example, commercial
paper issued by a large established domestic corporation that is rated
investment grade may have a modest return on principal, but carries relatively
limited risk. On the other hand, a long-term corporate note issued by a small
foreign corporation from an emerging market country that has not been rated may
have the potential for relatively large returns on principal, but carries a
relatively high degree of risk.
Corporate
debt securities carry credit risk, interest rate risk, extension risk and
prepayment risk. Credit risk is the risk that a fund could lose money if the
issuer of a corporate debt security is
unable
to pay interest or repay principal when it is due. Some corporate debt
securities that are rated below investment grade are generally considered
speculative because they present a greater risk of loss, including default, than
higher quality debt securities. The credit risk of a particular issuer’s debt
security may vary based on its priority for repayment. For example, higher
ranking (senior) debt securities have a higher priority than lower ranking
(subordinated) securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior securities.
In addition, in the event of bankruptcy, holders of higher-ranking senior
securities may receive amounts otherwise payable to the holders of more junior
securities.
Interest
rate risk is the risk that the value of certain corporate debt securities will
tend to fall when interest rates rise. In general, corporate debt securities
with longer terms tend to fall more in value when interest rates rise than
corporate debt securities with shorter terms. Prepayment risk occurs when
issuers may prepay fixed rate debt securities when interest rates fall, forcing
the Funds to invest in securities with lower interest rates. Extension risk is
the risk that borrowers may pay off their debt obligations more slowly in times
of rising interest rates, which will lengthen the duration of the portfolio.
Issuers of debt securities are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors that
may restrict the ability of the issuer to pay, when due, the principal of and
interest on its debt securities. The possibility exists therefore, that, as a
result of bankruptcy, litigation or other conditions, the ability of an issuer
to pay, when due, the principal of and interest on its debt securities may
become impaired.
Convertible
Securities.
Convertible securities are securities that may be exchanged for, converted into,
or exercised to acquire a predetermined number of shares of the issuer’s common
stock at the Funds’ option during a specified time period (such as convertible
preferred stocks, convertible debt, convertible debentures and warrants). A
convertible security is generally a fixed income security that is senior to
common stock in an issuer’s capital structure, but is usually subordinated to
similar non-convertible fixed income securities. In exchange for the conversion
feature, many corporations will pay a lower rate of interest on convertible
securities than debt securities of the same corporation. In general, the market
value of a convertible security is at least the higher of its “investment value”
(i.e.,
its value as a fixed income security) or its “conversion value” (i.e.,
its value upon conversion into its underlying common stock).
Convertible
securities are subject to the same risks as similar securities without the
convertible feature. The price of a convertible security is more volatile during
times of steady interest rates than other types of debt securities. The price of
a convertible security tends to increase as the market value of the underlying
stock rises, whereas it tends to decrease as the market value of the underlying
common stock declines.
Zero-Coupon
Securities.
Zero-coupon securities make no periodic interest payments, but are sold at a
deep discount from their face value. The buyer recognizes a rate of return
determined by the gradual appreciation of the security, which is redeemed at
face value on a specified maturity date. The discount varies depending on the
time remaining until maturity, as well as market interest rates, liquidity of
the security, and the issuer’s perceived credit quality. If the issuer defaults,
the holder may not receive any return on its investment. Because zero-coupon
securities bear no interest, their price fluctuates more than other types of
bonds. Since zero-coupon bondholders do not receive interest payments, when
interest rates rise, zero-coupon
securities
fall more dramatically in value than bonds paying interest on a current basis.
When interest rates fall, zero-coupon securities rise more rapidly in value
because the bonds reflect a fixed rate of return. An investment in zero- coupon
may cause a Fund to recognize income and make distributions to shareholders
before it receives any cash payments on its investment.
Unrated
Debt Securities.
The Funds may also invest in unrated debt securities. Unrated debt, while not
necessarily lower in quality than rated securities, may not have as broad a
market. Because of the size and perceived demand for the issue, among other
factors, certain issuers may decide not to pay the cost of getting a rating for
their bonds. The creditworthiness of the issuer, as well as any financial
institution or other party responsible for payments on the security, will be
analyzed to determine whether to purchase unrated bonds.
Yankee
Bonds.
The
Funds may invest in Yankee bonds. Yankee bonds are U.S. dollar denominated bonds
typically issued in the United States by foreign governments and their agencies
and foreign banks and corporations. The Funds may also invest in Yankee
Certificates of Deposit (“Yankee CDs”). Yankee CDs are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States. These investments involve risks that are different from
investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect and create increased risk
relative to payment of principal or interest.
Variable
and Floating Rate Securities.
Variable
and floating rate securities provide for a periodic adjustment in the interest
rate paid on the obligations. The terms of such obligations must provide that
interest rates are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. The adjustment intervals may be
regular, and range from daily up to annually, or may be event based, such as
based on a change in the prime rate. The Funds may invest in floating rate debt
instruments (“floaters”) and engage in credit spread trades. The interest rate
on a floater is a variable rate which is tied to another interest rate, such as
a money-market index or Treasury bill rate. The interest rate on a floater
resets periodically, typically every six months. While, because of the interest
rate reset feature, floaters provide the Funds with a certain degree of
protection against rises in interest rates, the Funds will participate in any
declines in interest rates as well. A credit spread trade is an investment
position relating to a difference in the prices or interest rates of two
securities or currencies, where the value of the investment position is
determined by movements in the difference between the prices or interest rates,
as the case may be, of the respective securities or currencies. The Funds also
may invest in inverse floating rate debt instruments (“inverse floaters”). The
interest rate on an inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is indexed. An inverse
floating rate security may exhibit greater price volatility than a fixed rate
obligation of similar credit quality.
U.S.
Government Obligations
The
Funds may invest in U.S. government obligations. U.S. government obligations
include securities issued or guaranteed as to principal and interest by the U.S.
government, its agencies or instrumentalities. Treasury bills, the most
frequently issued marketable government securities, have a maturity of up to one
year and are issued on a discount basis. U.S.
government
obligations include securities issued or guaranteed by government- sponsored
enterprises.
Payment
of principal and interest on U.S. government obligations may be backed by the
full faith and credit of the United States or may be backed solely by the
issuing or guaranteeing agency or instrumentality itself. In the latter case,
the investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
government would provide financial support to its agencies or instrumentalities,
including government-sponsored enterprises, where it is not obligated to do so
(see “Agency Obligations,” below). In addition, U.S. government obligations are
subject to fluctuations in market value due to fluctuations in market interest
rates. As a general matter, the value of debt instruments, including U.S.
government obligations, declines when market interest rates increase and rises
when market interest rates decrease. Certain types of U.S. government
obligations are subject to fluctuations in yield or value due to their structure
or contract terms.
Investment
Company Securities
The
Funds may invest in the securities of other investment companies, subject to
applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to
Section 12(d)(1), a Fund may invest in the securities of another investment
company (the “acquired company”) provided that the Fund, immediately after such
purchase or acquisition, does not own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of the Fund; or (iii) securities issued by the acquired
company and all other investment companies (other than Treasury stock of the
Fund) having an aggregate value in excess of 10% of the value of the total
assets of the Fund. To the extent allowed by law, regulation or SEC order, the
Funds may invest their assets in securities of investment companies, including
money market funds, in excess of the limits discussed above.
If
a Fund invests in and, thus, is a shareholder of, another investment company,
the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund’s own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund’s own operations.
In
October 2020, the SEC adopted regulatory changes related to the ability of an
investment company to invest in other investment companies in excess of
specified statutory limits. These changes include, among other things,
amendments to Rule 12d1-1, the rescission of Rule 12d1-2, the adoption of new
Rule 12d1-4, and the rescission of certain exemptive relief issued by the SEC
permitting certain fund of funds arrangements. Rule 12d1-4, which became
effective on January 19, 2021, permits each Fund to invest in other investment
companies, including money market funds, beyond the statutory limits, subject to
certain conditions. The rescission of the applicable exemptive orders and the
withdrawal of the applicable no- action letters was effective on January 19,
2022. Following this effectiveness, an investment company is no longer able to
rely on these exemptive orders and no-action letters, and is subject instead to
Rule 12d1-4 and other applicable rules under Section 12(d)(1).
Exchange
Traded Notes (“ETNs”)
An
investment in an ETN involves risks, including possible loss of principal. ETNs
are unsecured debt securities issued by a bank that are linked to the total
return of a market index. Risks of investing in ETNs also include limited
portfolio diversification, uncertain principal payment, and illiquidity.
Additionally, the investor fee will reduce the amount of return on maturity or
at redemption, and as a result the investor may receive less than the principal
amount at maturity or upon redemption, even if the value of the relevant index
has increased. An investment in an ETN may not be suitable for all
investors.
Short-Term
Investments
Bank
Certificates of Deposit, Bankers’ Acceptances and Time Deposits.
The Funds may acquire certificates of deposit, bankers’ acceptances and time
deposits in U.S. dollar or foreign currencies. Certificates of deposit are
negotiable certificates issued against monies deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers’ acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are “accepted” by a bank,
meaning in effect that the bank unconditionally agrees to pay the face value of
the instrument on maturity. These short-term instruments which the Funds may
acquire must, at the time of purchase, have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
government. If a Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred if the Fund invests only in debt
obligations of U.S. domestic issuers. See “Foreign Investments” above. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located, the possible confiscation or nationalization of foreign deposits, the
possible establishment of exchange controls, or the adoption of other foreign
governmental restrictions which may adversely affect the payment of principal
and interest on these securities.
Domestic
banks and foreign banks are subject to different governmental regulations with
respect to the amount and types of loans that may be made and interest rates
that may be charged. In addition, the profitability of the banking industry
depends largely upon the availability and cost of Fund and the interest income
generated from lending operations. General economic conditions and the quality
of loan portfolios affect the banking industry.
As
a result of federal and state laws and regulations, domestic banks are required
to maintain specified levels of reserves, limited in the amount that they can
loan to a single borrower, and are subject to regulations designed to promote
financial soundness. However, such laws and regulations may not necessarily
apply to foreign banks, thereby affecting the risk involved in bank obligations
that the Funds may acquire.
In
addition to purchasing certificates of deposit and bankers’ acceptances, to the
extent permitted under its investment strategies and policies stated above, and
in the Prospectus, the Funds may invest in interest-bearing time deposits or
other interest-bearing deposits in commercial or savings banks. Time deposits
are non- negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
Savings
Association Obligations.
The Funds may invest in certificates of deposit (interest-bearing time deposits)
issued by savings banks or savings and loan associations that have capital,
surplus and undivided profits in excess of $100 million, based on latest
published reports, or less than $100 million if the principal amount of such
obligations is fully insured by the U.S. government.
Commercial
Paper, Short-Term Notes and Other Corporate Obligations.
The Funds may invest a portion of their assets in commercial paper and
short-term notes. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper and short-term notes will normally
have maturities of less than nine months and fixed rates of return, although
such instruments may have maturities of up to one year.
A
Fund’s investment in commercial paper and short-term notes will consist of
issues rated at the time of purchase “A-2” or higher by S&P, “Prime-1” or
“Prime-2” by Moody’s, or similarly rated by another nationally recognized
statistical rating organization or, if unrated, will be determined by the
Adviser or the Sub-Adviser to be of comparable quality. These rating symbols are
described in Appendix A.
Corporate
debt obligations are subject to the risk, among others, of an issuer’s inability
to meet principal and interest payments on the obligations, i.e.,
credit risk.
Money
Market Mutual Funds.
Generally, money market mutual funds seek to earn income consistent with the
preservation of capital and maintenance of liquidity. They primarily invest in
high quality money market obligations, including U.S. government obligations,
bank obligations and high-grade corporate instruments. These investments
generally mature within 397 days from the date of purchase. An investment in a
money market mutual fund is not a bank account and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any government
agency.
To
the extent that a Fund invests in money market funds, a shareholder’s cost of
investing in the Fund will generally be higher since the shareholder will
indirectly bear fees and expenses charged by the underlying money market mutual
funds in addition to the Fund’s direct fees and expenses. Furthermore, investing
in money market funds could affect the timing, amount and character of
distributions to a shareholder and therefore may increase the amount of taxes
payable by the shareholder.
Repurchase
Agreements
The
Funds may enter into repurchase agreements. Under such agreements, a Fund agrees
to purchase U.S. government obligations from a counterparty and the counterparty
agrees to repurchase the securities at a mutually agreed upon time and price.
The repurchase price may be higher than the purchase price, the difference being
income to the Funds, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Funds together with the repurchase price on
repurchase. In either case, the income to the Funds is unrelated to the interest
rate on the security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the SEC or
exempt from such registration. The Funds will generally enter into repurchase
agreements of short durations, from overnight to one week,
although
the underlying securities generally have longer maturities. A Fund may not enter
into a repurchase agreement with more than seven days to maturity if, as a
result, more than 15% of the value of the Fund’s net assets would be invested in
illiquid investments including such repurchase agreements. To the extent
necessary to facilitate compliance with Section 12(d)(3) of the 1940 Act and
Rule 12d3-1 promulgated thereunder, the Funds will ensure that repurchase
agreements will be collateralized fully to the extent required by
Rule 5b-3.
For
purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from a
Fund to the seller of the U.S. government obligations that are subject to the
repurchase agreement. It is not clear whether a court would consider the U.S.
government obligations to be acquired by a Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the U.S. government obligations before
its repurchase under a repurchase agreement, the Funds could encounter delays
and incur costs before being able to sell the underlying U.S. government
obligations. Delays may involve loss of interest or a decline in price of the
U.S. government obligations. If a court characterizes the transaction as a loan
and the Funds have not perfected a security interest in the U.S. government
obligations, the Funds may be required to return the securities to the seller’s
estate and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Funds would be at the risk of losing some or all of the principal
and income involved in the transaction. As with any unsecured debt instrument
purchased for the Funds, the Adviser or the Sub-Adviser seeks to minimize the
risk of loss through repurchase agreements by analyzing the creditworthiness of
the other party, in this case the seller of the U.S. government
security.
Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the U.S. government obligations. However,
the Funds will always receive as collateral for any repurchase agreement to
which it is a party, securities acceptable to the Adviser or the Sub-Adviser,
the market value of which is equal to at least 100% of the repurchase price, and
the Funds will make payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its Custodian. If the
market value of the U.S. government obligations subject to the repurchase
agreement become less than the repurchase price (including interest), the Funds
will direct the seller of the U.S. government obligations to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that the
Funds could be unsuccessful in seeking to enforce on the seller a contractual
obligation to deliver additional securities.
Reverse
Repurchase Agreements
The
Funds may enter into reverse repurchase agreements for temporary purposes with
banks and securities dealers if the creditworthiness of the bank or securities
dealer has been determined by the Adviser, or the applicable Sub-Adviser, to be
satisfactory. A reverse repurchase agreement is a repurchase agreement in which
a Fund is the seller of, rather than the investor in, securities and agrees to
repurchase them at an agreed-upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of securities
because it avoids certain market risks and transaction costs.
Reverse
repurchase agreements are considered a form of borrowing and are therefore
limited to up to one-third of a Fund's total assets (including the amount
borrowed) less liabilities (other
than
borrowings). The use of reverse repurchase reverse repurchase agreements by a
Fund creates leverage which increases its investment risk. If the income and
gains on securities purchased with the proceeds of these transactions exceed the
cost, the Fund’s earnings or NAV will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the cost, earnings
or NAV would decline faster than otherwise would be the case. The Funds intend
to enter into reverse repurchase agreements only if the income from the
investment of the proceeds is expected to be greater than the expense of the
transaction, because the proceeds are invested for a period no longer than the
term of the reverse repurchase agreement.
Borrowing
While
the Funds have no present intention to do so, they may engage in borrowing.
Borrowing creates an opportunity for increased return, but, at the same time,
creates special risks. Furthermore, if the Funds were to engage in borrowing, an
increase in interest rates could reduce the value of the Funds’ shares by
increasing the Funds’ interest expense. Subject to the limitations described
under “Investment Limitations” below, the Funds may be permitted to borrow for
temporary purposes and/or for investment purposes. Such a practice will result
in leveraging of a Fund’s assets and may cause the Fund to liquidate portfolio
positions when it would not be advantageous to do so. This borrowing may be
secured or unsecured. Provisions of the 1940 Act require a Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed, with an
exception for borrowings not in excess of 5% of the Fund’s total assets made for
temporary purposes. Any borrowings for temporary purposes in excess of 5% of a
Fund’s total assets will count against this asset coverage requirement. If the
300% asset coverage should decline as a result of market fluctuations or other
reasons, the Fund may be required to sell some of its portfolio holdings within
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint if the Fund sells
securities at that time. Borrowing will tend to exaggerate the effect on NAV of
any increase or decrease in the market value of the Fund’s portfolio. Money
borrowed will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased, if any. The Funds also may be required
to maintain minimum average balances in connection with such borrowings or to
pay a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate.
Illiquid
Investments
The
Funds may purchase illiquid investments, which may include securities that are
not readily marketable and securities that are not registered under the
Securities Act. A Fund may not acquire any illiquid investments if, immediately
after the acquisition, the Fund would have invested more than 15% of its net
assets in illiquid investments that are assets. The term “illiquid investments”
for this purpose means any investment that a 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, as determined pursuant to the provisions of Rule 22e-4 under the
1940 Act. The Funds may not be able to sell illiquid investments when the
Adviser or the Sub-Adviser considers it desirable to do so or may have to sell
such investments at a price that is lower than the price that could be obtained
if the investments were more liquid. In addition, the sale of illiquid
investments also may require more time and may result in higher dealer discounts
and other selling expenses than does the sale of
investments
that are more liquid. Illiquid investments also may be more difficult to value
due to the unavailability of reliable market quotations for such investments,
and investments in illiquid investments may have an adverse impact on NAV.
Institutional
markets for restricted securities have developed as a result of the promulgation
of Rule 144A under the Securities Act, which provides a safe harbor from
Securities Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment
opportunity and otherwise meet selection criteria, a Fund may make such
investments. Whether or not such investments are illiquid depends on the market
that exists for the particular investment. It is not possible to predict with
assurance exactly how the market for Rule 144A restricted securities or any
other security will develop. An investment which when purchased enjoyed a fair
degree of marketability may subsequently become illiquid. In such event,
appropriate remedies are considered to minimize the effect on a Fund’s
liquidity.
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, the Adviser or the Sub-Adviser, the
Funds’ custodian or transfer agent, or intermediaries or 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 their 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. While the Funds and their service providers
have established business continuity plans and risk management systems designed
to prevent or reduce the impact of cybersecurity attacks, such plans and systems
have inherent limitations due in part to the ever-changing nature of technology
and cybersecurity attack tactics, and there is a possibility that certain risks
have not been adequately identified or prepared for. Furthermore, the Funds
cannot control any cybersecurity plans or systems implemented by its service
providers.
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.
Fundamental
and Non-Fundamental Investment Limitations
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Funds. These restrictions cannot be changed with respect to
a Fund without the approval of the holders of a majority of the Fund’s
outstanding voting securities. For these purposes, a “majority of the
outstanding voting securities” of a Funds means the vote of the lesser of: (1)
67% or more of the voting securities of the Fund present at the meeting if the
holders of more
than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of the Fund.
Except
with the approval of a majority of its outstanding voting securities, the
Pipeline Fund may not:
1.Concentrate
its investments in an industry or group of industries (i.e.,
hold 25% or more of its total assets in the securities of companies in a
particular industry or group of industries), except that the Fund will
concentrate in the energy pipeline industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities), repurchase agreements collateralized by U.S. government
securities and tax-exempt securities of state or municipal governments and their
political subdivisions are not considered to be issued by members of any
industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.
3.Make
loans, except to the extent permitted under the 1940 Act, the rules and
regulations thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
4.Purchase
or sell commodities or real estate, except to the extent permitted under the
1940 Act, the rules and regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time to
time.
5.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act, the rules and regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time to
time.
Except
with the approval of a majority of its outstanding voting securities, the Water
Fund may not:
1.Concentrate
its investments in an industry or group of industries (i.e.,
hold 25% or more of its total assets in the securities of companies in a
particular industry or group of industries), except to the extent that the
Fund’s Underlying Index concentrates in a particular industry or group of
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities and tax-exempt securities of state
or municipal governments and their political subdivisions are not considered to
be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.
3.Make
loans, except to the extent permitted under the 1940 Act, the rules and
regulations thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
4.Purchase
or sell physical commodities except to the extent permitted by the 1940 Act or
other governing statute, by the rules thereunder, or by the SEC or other
regulatory agency with authority over the Fund.
5.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act, the rules and regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time to
time.
6.Purchase
or sell real estate, except that the Fund may purchase marketable securities
issued by companies which own or invest in real estate (including
REITs).
In
addition to the investment restrictions adopted as fundamental policies as set
forth above, each Fund observes the following non-fundamental restriction, which
may be changed without a shareholder vote.
1.The
Fund will not invest less than 80% of its total assets (excluding securities
lending collateral) in securities that comprise its Underlying
Index.
Percentage
Limitations
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money and
illiquid investments will be observed continuously. If the percentage of a
Fund’s net assets invested in illiquid investments exceeds 15% due to market
activity or changes in the Fund’s portfolio, the Fund will take appropriate
measures to reduce its holdings of illiquid investments in accordance with the
1940 Act and the Funds' policies and procedures.
The
following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
Concentration.
The
SEC has defined concentration as investing 25% or more of a Fund’s total assets
in an industry or group of industries, with certain exceptions.
Borrowing.
The 1940 Act presently allows the Funds to borrow from any bank (including
pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its
total assets (not including temporary borrowings up to 5% of its total
assets).
Senior
Securities.
Senior securities may include any obligation or instrument issued by the Funds
evidencing indebtedness. The 1940 Act generally prohibits a Fund from issuing
senior securities, although Rule 18f-4 under the 1940 Act provides an exemption
from the applicable prohibitions and restrictions on issuing senior securities,
such as certain borrowings, short sales, reverse repurchase agreements, firm
commitment agreements and standby commitments.
Lending.
Under the 1940 Act, the Funds may only make loans if expressly permitted by
their investment policies. Each Fund's current investment policy on lending is
that the Fund may not make loans if, as a result, more than 33 1/3% of its total
assets would be lent to other parties, except that the Funds may:
(i) purchase or hold debt instruments in accordance with its investment
objective and policies; (ii) enter into repurchase agreements; and (iii) engage
in securities lending as described in this SAI.
Underwriting.
Under the 1940 Act, underwriting securities involves the Funds purchasing
securities directly from an issuer for the purpose of selling (distributing)
them or participating in any such activity either directly or indirectly.
Real
Estate.
The 1940 Act does not directly restrict the Funds’ ability to invest in real
estate, but does require every investment company to have the fundamental
investment policy governing such investments. The Funds will not purchase or
sell real estate, except that the Funds may purchase marketable securities
issued by companies which own or invest in real estate (including REITs).
Commodities.
The Funds will not purchase or sell physical commodities or commodities
contracts, except that the Funds may purchase: (i) marketable securities issued
by companies which own or invest in commodities or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
Exchange
Listing and Trading
A
discussion of exchange listing and trading matters associated with an investment
in the Funds are contained in the Prospectus Fund Summary, “Purchasing and Sale
of Fund Shares,” and “Buying and Selling Fund Shares.” The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The
shares of the Funds are approved for listing and trading on the Exchange. The
shares trade on the Exchange at prices that may differ to some degree from their
NAV. There can be no assurance that the requirements of the Exchange necessary
to maintain the listing of shares of either Fund will continue to be met.
The
Exchange may, but is not required to, remove the shares of a Fund from listing
if: (1) following the initial twelve-month period beginning upon the
commencement of trading of the Fund, there are fewer than 50 beneficial holders
of the shares (2) the Fund is no longer eligible to operate in reliance on Rule
6c-11 under the 1940 Act; (3) the Fund fails to meet certain continuing listing
standards of the Exchange; or (4) such other event occurs or condition exists
that, in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable. In addition, the Exchange will remove the shares of the Funds from
listing and trading upon termination of the Trust or the Funds. The Trust
reserves the right to adjust the share price of the Funds in the future to
maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the Funds.
As
in the case of other publicly traded securities, brokers’ commissions on
transactions will be based on negotiated commission rates at customary levels.
The
base and trading currency of the Funds is the U.S. dollar. The base currency is
the currency in which the Funds’ NAV is calculated and the trading currency is
the currency in which shares of the Funds are listed and traded on the Exchange.
Management
of the Fund
Board
of Trustees
The
management and affairs of the Funds are supervised by the Board of Trustees. The
Board of Trustees consists of four individuals. The Trustees are fiduciaries and
are governed by the laws of the State of Delaware in this regard. The Board of
Trustees establishes policies for the operation of the Funds and appoints the
officers who conduct the daily business of the Funds.
The
Role of the Board of Trustees
The
Board provides oversight of the management and operations of the Trust. Like all
mutual funds, the day-to-day responsibility for the management and operation of
the Trust is the responsibility of various service providers to the Trust and
its individual series, such as the Adviser; Quasar Distributors, LLC, the Funds’
principal underwriter (the “Distributor”); U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, the Funds’ administrator (the
“Administrator”) and transfer agent (the “Transfer Agent”); and U.S. Bank, N.A.,
the Funds’ Custodian, each of whom are discussed in greater detail in this SAI.
The Board approves all significant agreements between the Trust and its service
providers, including the agreements with the Adviser, Distributor,
Administrator, Custodian and Transfer Agent. The Board has appointed various
individuals of certain of these service providers as officers of the Trust, with
responsibility to monitor and report to the Board on the Trust’s day-to-day
operations. In conducting this oversight, the Board receives regular reports
from these officers and service providers regarding the Trust’s operations. The
Board has appointed a Chief Compliance Officer (“CCO”) who reports directly to
the Board and who administers the Trust’s compliance program and regularly
reports to the Board as to compliance matters, including an annual compliance
review. Some of these reports are provided as part of formal Board Meetings,
which are held four times per year, in person, and such other times as the Board
determines is necessary, and involve the Board’s review of recent Trust
operations. From time to time one or more members of the Board may also meet
with Trust officers in less formal settings, between formal Board Meetings to
discuss various topics. In all cases, however, the role of the Board and of any
individual Trustee is one of oversight and not of management of the day-to-day
affairs of the Trust and its oversight role does not make the Board a guarantor
of the Trust’s investments, operations or activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to
effectively perform its oversight function. The Board is comprised of four
Trustees that are not considered to be “interested persons” of the Funds, as
defined by the 1940 Act (“Independent Trustees”) – Messrs. David A. Massart,
Leonard M. Rush, David M. Swanson and Robert J. Kern. Accordingly, 100% of the
members of the Board are Independent Trustees, who are Trustees that are not
affiliated with the investment adviser or sub-adviser to the Funds or affiliates
of the investment adviser, sub-adviser or other service providers to the Funds.
Prior to July 6, 2020, Mr. Kern was considered an “interested person” of the
Trust as defined in the 1940 Act (“Interested Trustee”). He was considered an
Interested Trustee by virtue of the fact that he had served as a board member of
Quasar Distributors, LLC, which acts as principal underwriter to many of the
Trust’s series and had been an Executive Vice President of the Administrator.
The Board has established two standing committees, an Audit Committee and a
Nominating &
Governance
Committee, which are discussed in greater detail under “Board Committees” below.
Each of the Audit Committee and the Nominating & Governance Committee are
comprised entirely of Independent Trustees. The Independent Trustees have
engaged independent counsel to advise them on matters relating to their
responsibilities in connection with the Trust, as well as the
Funds.
The
Independent Trustees have appointed Leonard M. Rush as Chairman. Prior to July
6, 2020, Mr. Kern served as Chairman of the Trust and Mr. Rush served as lead
Independent Trustee with responsibilities to coordinate activities of the
Independent Trustees, act as a liaison with the Trust’s service providers,
officers, legal counsel, and other Trustees between meetings, help to set Board
meeting agendas, and serve as chair during executive sessions of the Independent
Trustees.
In
accordance with the fund governance standards prescribed by the SEC under the
1940 Act, the Independent Trustees on the Nominating & Governance Committee
select and nominate all candidates for Independent Trustee positions. Each
Trustee was appointed to serve on the Board because of his experience,
qualifications, attributes and skills as set forth in the subsection “Trustee
Qualifications” below.
The
Board reviews its structure regularly in light of the characteristics and
circumstances of the Trust, including: the affiliated or unaffiliated nature of
each investment adviser; the number of funds that comprise the Trust; the
variety of asset classes that those funds reflect; the net assets of the Trust;
the committee structure of the Trust; and the independent distribution
arrangements of each of the Trust’s series.
The
Board has determined that the inclusion of all Independent Trustees as members
of the Audit Committee and the Nominating & Governance Committee allows all
such Trustees to participate in the full range of the Board’s oversight duties,
including oversight of risk management processes discussed below. Given the
composition of the Board and the function and composition of its various
committees as described above, the Trust has determined that the Board’s
leadership structure is appropriate.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept comprised of many elements
(such as, for example, investment risk, issuer and counter-party risk,
compliance risk, operational risk, business continuity risk, etc.) the oversight
of different types of risks is handled in different ways. For example, the CCO
regularly reports to the Board during Board Meetings and meets in executive
session with the Independent Trustees and their legal counsel to discuss
compliance and operational risks. In addition, Mr. Rush, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert” meets
with the President, Treasurer and the Funds’ independent registered public
accounting firm to discuss, among other things, the internal control structure
of the Funds’ financial reporting function. The full Board receives reports from
the investment advisers to the underlying series as to investment
risks.
Trustees
and Officers
The
Trustees and officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years.
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Name,
Address and Year of Birth |
Position(s) Held
with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other Directorships Held
by Trustee During the Past Five Years |
Independent
Trustees |
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Leonard
M. Rush, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1946 |
Chairman, Trustee
and Audit Committee Chairman |
Indefinite Term;
Since April 2011 |
29 |
Retired
(2011 - present); Chief Financial Officer, Robert W. Baird & Co.
Incorporated, (2000-2011). |
Independent Trustee,
ETF Series Solutions (60 Portfolios) (2012-Present) |
David
A. Massart 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1967 |
Trustee
|
Indefinite Term;
Since April 2011 |
29 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder and Chief Investment Strategist, Next Generation Wealth
Management, Inc. (2005-2021). |
Independent Trustee,
ETF Series Solutions (60
Portfolios) (2012-Present) |
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David
M. Swanson 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1957 |
Trustee
and Nominating & Governance Committee Chairman |
Indefinite Term;
Since April 2011 |
29 |
Founder
and Managing Principal, SwanDog Strategic Marketing, LLC
(2006-present). |
Independent
Trustee, ALPS Variable Investment Trust (7 Portfolios) (2006 to Present);
Independent Trustee, RiverNorth Funds (3 Portfolios) (2018 to Present);
RiverNorth Managed Duration Municipal Income Fund, Inc. (1 Portfolio)
(2019 to Present); RiverNorth Opportunistic Municipal Income Fund, Inc. (1
Portfolio) (2018 to Present); RiverNorth Capital and Income Fund (1
Portfolio) (2018 to Present); RiverNorth Opportunities Fund, Inc. (1
portfolio) (2015 to Present); RiverNorth/DoubleLine Strategic Opportunity
Fund, Inc. (1 Portfolio) (2019 to Present); RiverNorth Flexible Municipal
Income Fund, Inc. (1 Portfolio) (2020 to Present); RiverNorth Flexible
Municipal Income Fund II, Inc. (1 Portfolio) (2021 to Present); RiverNorth
Managed Duration Municipal Income Fund II, Inc. (1 Portfolio) (2022 to
Present). |
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Robert
J. Kern 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1958 |
Trustee |
Indefinite Term;
Since January 2011 |
29 |
Retired
(2018-present); Executive Vice President, U.S. Bancorp Fund Services, LLC
(1994-2018). |
None |
Officers |
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Brian
R. Wiedmeyer 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1973 |
President
and Principal Executive Officer |
Indefinite
Term; Since November 2018 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2005-present). |
N/A |
Deborah
Ward 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1966 |
Vice
President, Chief Compliance Officer and Anti-Money Laundering
Officer |
Indefinite
Term; Since April 2013 |
N/A |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (2004-present). |
N/A |
Benjamin
Eirich 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1981 |
Treasurer,
Principal Financial Officer and Vice President |
Indefinite Term;
Since August 2019 (Treasurer); Indefinite Term;
Since November 2018 (Vice President) |
N/A |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (2008-present). |
N/A |
John
Hadermayer 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1977 |
Secretary |
Indefinite
Term; Since May 2022 |
N/A |
Vice
President, U.S. Bancorp Fund Services, LLC (2022-present); Executive
Director, AQR Capital Management, LLC (2013-2022). |
N/A |
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Peter
A. Walker, CPA 615 E. Michigan St. Milwaukee, WI 53202 Year of
Birth: 1993 |
Assistant
Treasurer and Vice President |
Indefinite
Term: Since November 2021 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2016-present). |
N/A |
Silinapha
Saycocie 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1998 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since November 2023 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2020-Present) |
N/A |
Daniel
Umland 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1993 |
Assistant
Treasurer and Vice President |
Indefinite
Term: Since March 2024 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2021-present); Securities Specialist,
U.S. Bank, N.A. (2016-2021) |
N/A |
Eli
Bilderback 615 E. Michigan St. Milwaukee, WI 53202 Year of Birth:
1991 |
Assistant
Treasurer and Vice President |
Indefinite
Term; Since March 2024 |
N/A |
Officer,
U.S. Bancorp Fund Services, LLC (2022 -Present); Operations Analyst, U.S.
Bank, NA (2018 -2022) |
N/A |
Trustee
Qualifications
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to their continued service as Trustees of the
Trust in light of the Trust’s business and structure. The Trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the Trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual Trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
Trustees’ qualifications to serve on the Board 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.
Mr.
Kern’s trustee attributes include substantial industry experience, including
over 35 years of service with U.S. Bancorp Fund Services, LLC (the fund
accountant (“Fund Accountant”), Administrator and Transfer Agent to the Trust)
where he managed business development and the mutual fund transfer agent
operation including investor services, account services, legal compliance,
document processing and systems support. He also served as a board member of
U.S. Bancorp Fund Services, LLC and previously served as a board member of
Quasar Distributors, LLC (the principal underwriter of many of the Trust's
series). The Board believes Mr. Kern’s experience, qualifications, attributes
and skills on an individual basis and in combination with those of the other
Trustees lead to the conclusion that he possesses the requisite skills and
attributes as a Trustee to carry out oversight responsibilities with respect to
the Trust.
Mr.
Massart’s trustee attributes include substantial industry experience, including
over two decades working with high net worth individuals, families, trusts and
retirement accounts to make strategic and tactical asset allocation decisions,
evaluate and select investment managers and manage client relationships. He is
currently Partner and Managing Director of Beacon Pointe Advisors, LLC.
Previously, he served as Chief Investment Strategist and lead member of the
investment management committee of the SEC registered investment advisory firm
he co-founded. He also previously served as Managing Director of Strong Private
Client and as a Manager of Wells Fargo Investments, LLC. The Board believes Mr.
Massart’s experience, qualifications, attributes and skills on an individual
basis and in combination with those of the other Trustees lead to the conclusion
that he possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Mr.
Rush’s trustee attributes include substantial industry experience, including
serving in several different senior executive roles at various global financial
services firms. He most recently served as Managing Director and Chief Financial
Officer of Robert W. Baird & Co. Incorporated and several other affiliated
entities and served as the Treasurer for Baird Funds. He also served as the
Chief Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial Expert
for the Trust. The Board believes Mr. Rush’s experience, qualifications,
attributes and skills on an individual basis and in combination with those of
the other Trustees lead to the conclusion that he possesses the requisite skills
and attributes as a Trustee and as the Chairman to carry out oversight
responsibilities with respect to the Trust.
Mr.
Swanson’s trustee attributes include substantial industry experience, including
over 35 years of senior management and marketing experience with over 30 years
dedicated to the financial services industry. He is currently the Founder and
Managing Principal of a marketing strategy boutique serving asset and wealth
management businesses. He has also served as Chief Operating Officer and Chief
Marketing Officer of Van Kampen Investments, President and Chief Executive
Officer of Scudder, Stevens & Clark, Canada, Ltd., Managing Director and
Head of Global Investment Products at Morgan Stanley, Director of Marketing for
Morgan Stanley Mutual
Funds,
Director of Marketing for Kemper Funds, and Executive Vice President and Head of
Distribution for Calamos Investments. The Board believes Mr. Swanson’s
experience, qualifications, attributes and skills on an individual basis and in
combination with those of the other Trustees lead to the conclusion that he
possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
The
discussion of the Trustees’ experience and qualifications is pursuant to SEC
requirements, does not constitute holding out the Board or any Trustee as having
special expertise, and shall not impose any greater responsibility or liability
on any such Trustee or the Board by reason thereof.
Trustee
and Management Ownership of Fund Shares
The
following table shows the dollar range of Fund shares and shares in other
portfolios of the Trust beneficially owned by the Trustees as of the calendar
year ended December 31, 2023.
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| Dollar
Range of Fund Shares Beneficially Owned (None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000, Over $100,000) |
Name |
Water
Fund |
Pipeline
Fund |
Aggregate
Dollar Range of Shares
in
all Funds in the Trust(1) |
Independent
Trustees |
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| |
Leonard
M. Rush |
None |
None |
None |
David
A. Massart |
None |
None |
None |
David
M. Swanson |
$1-$10,000 |
$1-$10,000 |
$50,001-$100,000 |
Robert
J. Kern |
None |
None |
None |
(1)The
Trust include other series in addition to the Funds.
As
of March 1, 2024 the Trustees and Officers of the Trust as a group owned less
than 1% of the outstanding shares of each Fund.
Board
Committees
Audit
Committee.
The Trust has an Audit Committee, which is comprised of the Independent
Trustees. The Audit Committee reviews financial statements and other
audit-related matters for the Funds. The Audit Committee also holds discussions
with management and with the Funds’ independent registered public accounting
firm concerning the scope of the audit and the auditor’s independence.
The
Audit Committee met twice with respect to the Funds during the fiscal year ended
November 30, 2023.
Nominating
& Governance Committee.
The Trust has a Nominating & Governance Committee, which is comprised of the
Independent Trustees. The Nominating & Governance Committee is responsible
for seeking and reviewing candidates for consideration as nominees for the
position of trustee and meets only as necessary.
The
Nominating & Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board of Trustees. Recommendations for
consideration by the Nominating & Governance Committee should be sent to the
President of the Trust in writing together with the appropriate biographical
information concerning each such proposed nominee, and such recommendation must
comply with the notice provisions set forth in the Trust’s Bylaws. In general,
to comply with such procedures, such nominations, together with all required
information, must be delivered to and received by the President of the Trust at
the principal executive office of the Trust not less than 120 days, and no more
than 150 days, prior to the shareholder meeting at which any such nominee would
be voted on. Shareholder recommendations for nominations to the Board of
Trustees will be accepted on an ongoing basis. The Nominating & Governance
Committee’s procedures with respect to reviewing shareholder nominations will be
disclosed as required by applicable securities laws.
The Nominating & Governance Committee met once during the Funds' fiscal year
ended November 30, 2023.
Trustee
Compensation
The
Trustees each receive an annual retainer of $110,000. The Chairman of the Audit
Committee receives additional compensation of $14,000, the Chairman of the
Nominating & Governance Committee receives additional compensation of $8,000
and the Chairman of the Board of Trustees receives $12,500, each annually. The
Trustees each receive $8,000 for regularly scheduled meetings and $2,500 for
additional meetings.
The
following table sets forth the compensation received by the Trustees for the
Funds’ fiscal year ended November 30, 2023, with such amounts paid by the
Adviser.
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Name
of Person/Position |
Aggregate
Compensation from the Water Fund1 |
Aggregate
Compensation from the Pipeline Fund1 |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Annual
Benefits Upon Retirement |
Total
Compensation from the Funds and the Trust2 |
Leonard
M. Rush, Chairman, Independent Trustee and Audit Committee
Chairman |
$5,730 |
$5,730 |
None |
None |
$176,500 |
David
A. Massart, Independent Trustee |
$4,874 |
$4,874 |
None |
None |
$150,000 |
David
M. Swanson, Independent Trustee and Nominating & Governance Committee
Chairman |
$5,132 |
$5,132 |
None |
None |
$158,000 |
Robert
J. Kern, Independent Trustee |
$4,874 |
$4,874 |
None |
None |
$150,000 |
1Trustee
fees and expenses are allocated among the Funds and any other series comprising
the Trust.
2The
Trust include other series in addition to the Funds.
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 the Funds. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of the Funds or acknowledges the existence of control. A controlling
person possesses the ability to control the outcome of matters submitted for
shareholder vote by the Funds. As of March 1, 2024, the following shareholders
were considered to be either a control person or a principal shareholder of the
Funds:
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Ecofin
Global Water ESG Fund |
Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, California
94105-1905 |
36.50% |
Record |
National
Financial Services LLC For the Benefit of its Customers PO Box
5000 Cincinnati, Ohio 45201-5000 |
18.40% |
Record |
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Tortoise
North American Pipeline Fund |
Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc.
211
Main Street
San
Francisco, California 94105-1905 |
28.41% |
Record |
National
Financial Services LLC
For
the Benefit of its Customers
PO
Box 5000
Cincinnati,
Ohio 45201-5000 |
21.90% |
Record |
Reliance
Trust Company
PO
Box 48529
Atlanta,
Georgia 30362-1529 |
12.13% |
Record |
Morgan
Stanley Smith Barney LLC
1
New York Plaza, 12th
Floor
New
York, New York 10004-1901 |
7.70% |
Record |
Investment
Adviser
TIS
Advisors, or the Adviser, is a Delaware limited liability company with its
principal offices at 6363 College Boulevard, Suite 100A, Overland Park, Kansas
66211. The Trust, on behalf of each Fund, has entered into an investment
advisory agreement (the “Investment Advisory Agreement”) with the Adviser. The
Adviser is indirectly controlled by Lovell Minnick Partners LLC (“Lovell
Minnick”), a private equity firm and SEC registered investment adviser. The
Adviser is an indirect wholly-owned subsidiary of TortoiseEcofin Investments,
LLC (“TortoiseEcofin Investments”), a company that owns essential asset and
income-oriented investment advisers. A
vehicle
formed by Lovell Minnick and owned by certain private funds sponsored by Lovell
Minnick and a group of institutional co-investors owns a controlling interest in
TortoiseEcofin Investments. Certain employees in the TortoiseEcofin Investments
complex own a minority interest in TortoiseEcofin Investments. The Adviser is
under common control with Tortoise Capital Advisors, L.L.C. (“TCA”) and Ecofin
Advisors Limited ("Ecofin UK"), each a registered investment adviser that
manages other series of the Trust. TCA serves as investment adviser to three
other series of the Trust. Ecofin UK serves as investment sub-adviser to one
other series of the Trust.
Subject
to such policies as the Board of Trustees may determine, the Adviser is
ultimately responsible for investment decisions for the Funds. Pursuant to the
terms of the Investment Advisory Agreement, the Adviser provides the Funds with
such investment advice as it deems necessary for the proper supervision of the
Funds’ investments. The Adviser also monitors and maintains the Funds’
investment criteria and determines from time to time what securities may be
purchased by the Funds.
The
Investment Advisory Agreement will continue in effect from year to year only if
such continuance is specifically approved at least annually by the Board or by
vote of a majority of a Fund’s outstanding voting securities and by a majority
of the Trustees who are not parties to the Investment Advisory Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Investment Advisory Agreement. The Investment Advisory Agreement
is terminable without penalty by the Trust on behalf of a Fund, upon giving the
Adviser 60 days’ notice when authorized either by a majority vote of the Fund’s
shareholders or by a vote of a majority of the Board, or by the Adviser on 60
days’ written notice, and will automatically terminate in the event of its
“assignment” (as defined in the 1940 Act). The Investment Advisory Agreement
provides that the Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
Investment Advisory Agreement, except for a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services, or for
a loss resulting from willful misfeasance, bad faith or gross negligence in the
performance of its duties, or from reckless disregard by the Adviser of its
duties under the Investment Advisory Agreement.
In
consideration of the services to be provided by the Adviser pursuant to the
Investment Advisory Agreement, the Adviser is entitled to receive from each Fund
an investment advisory fee computed daily and paid monthly, at the annual rate
of 0.40% of the average daily net assets of the Fund. Under the investment
advisory agreement, the Adviser has agreed to pay all expenses incurred by the
Funds except for the advisory fee, interest, taxes, brokerage expenses and other
fees, charges, taxes, levies or expenses (such as stamp taxes) incurred in
connection with the execution of portfolio transactions or in connection with
creation and redemption transactions (including without limitation any fees,
charges, taxes, levies or expenses related to the purchase or sale of an amount
of any currency, or the patriation or repatriation of any security or other
asset, related to the execution of portfolio transactions or any creation or
redemption transactions), legal fees or expenses in connection with any
arbitration, litigation or pending or threatened arbitration or litigation,
acquired fund fees and expenses, any fees and expenses related to the provision
of securities lending services, extraordinary expenses, and distribution fees
and expenses paid by the Trust under any distribution plan adopted pursuant to
Rule 12b-1 under the 1940 Act. The Funds paid the following in advisory fees to
the Adviser during the fiscal periods ended November 30:
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| 2023 |
2022 |
2021 |
Water
Fund |
$199,435 |
$234,385 |
$171,669 |
Pipeline
Fund |
$2,044,440 |
$2,100,483 |
$1,742,630 |
Investment
Sub-Adviser
The
Trust, on behalf of the Funds, and the Adviser have retained ETC, 10900 Hefner
Pointe Drive, Suite 400, Oklahoma City, Oklahoma 73120, to serve as sub-adviser
for the Funds. ETC is majority owned by Cottonwood ETF Holdings LLC, which is
controlled by Richard R. Hogan. ETC has provided investment advisory services to
individual and institutional accounts since 2009.
Pursuant
to a Sub-Advisory Agreement between the Trust, the Adviser, and ETC (the
“Sub-Advisory Agreement”), ETC is responsible for trading portfolio securities
on behalf of the Funds, including selecting broker-dealers to execute purchase
and sale transactions as instructed by the Adviser or in connection with any
rebalancing or reconstitution of a Fund’s respective Underlying Index, subject
to the supervision of the Adviser and the Board. For the services it provides to
the Funds, ETC is compensated by the Adviser from the management fees paid by
the Funds to the Adviser.
The
Sub-Advisory Agreement will continue in force for an initial period of two
years. Thereafter, the Sub-Advisory Agreement is renewable from year to year
with respect to a Fund, so long as its continuance is approved at least annually
(1) by the vote, cast in person at a meeting called for that purpose, of a
majority of those Trustees who are not “interested persons” of the Trust; and
(2) by the majority vote of either the full Board or the vote of a majority of
the outstanding Shares of the applicable Fund. The Sub-Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at any
time without penalty by the Board or, with respect to a Fund, by a majority of
the outstanding Shares, or by the Adviser, in each case upon 60 days’ written
notice to ETC, or by ETC on 60 days’ written notice to the Adviser and the
Trust. The Sub-Advisory Agreement provides that the Sub-Adviser shall not be
protected against any liability to the Trust or its shareholders by reason of
willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard of its obligations or
duties thereunder.
ETC
began serving as sub-adviser on June 1, 2023. The Adviser paid the following in
sub-advisory fees to ETC for period of June 1, 2023 through November 30,
2023:
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Water
Fund |
$6,932 |
Pipeline
Fund |
$71,703 |
Prior
to ETC's appointment, Vident Investment Advisory, LLC ("Vident") served as
sub-adviser to the Funds. The Adviser paid the following in sub-advisory fees to
Vident during the fiscal periods ended November 30:
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| |
| 2023* |
2022 |
2021 |
Water
Fund |
$12,568 |
$25,000 |
$20,000 |
Pipeline
Fund |
$105,903 |
$179,054 |
$155,667 |
*For
the period of December 1, 2022 through May 31, 2023.
Portfolio
Managers
The
Funds are managed by the sub-adviser’s portfolio management team. The individual
members of the team jointly and primarily responsible for the day-to-day
management of each Fund’s portfolio are described below.
Andrew
Serowik, has served as a portfolio manager for the Fund since June of
2023.
Gabriel
Tan, CFA, CFP® has served as a portfolio manager for the Fund since June of
2023.
Todd
Alberico has served as a portfolio manager for the Fund since June of
2023.
Brian
Cooper has served as a portfolio manager for the Fund since June of
2023.
The
following table provides information regarding other accounts managed by each
Portfolio Manager, excluding the Funds, including information regarding the
number of managed accounts that pay a performance fee, as of November 30,
2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Manager |
Account
Category |
#
of Accounts |
Total
Assets of Accounts (in millions) |
#
of Accounts Paying a Performance Fee |
Total
Assets of Accounts Paying a Performance Fee |
Andrew
Serowik |
|
|
|
| |
| Registered
investment companies |
56 |
$4,608 |
None |
None |
| Other
pooled investment vehicles |
0 |
$0 |
None |
None |
| Other
accounts |
0 |
$0 |
None |
None |
|
|
|
|
| |
Gabriel
Tan |
|
|
| |
| Registered
investment companies |
56 |
$4,608 |
None |
None |
| Other
pooled investment vehicles |
0 |
$0 |
None |
None |
| Other
accounts |
0 |
$0 |
None |
None |
Todd
Alberico |
|
|
|
| |
| Registered
investment companies |
56 |
$4,608 |
None |
None |
| Other
pooled investment vehicles |
0 |
$0 |
None |
None |
| Other
accounts |
0 |
$0 |
None |
None |
Brian
Cooper |
|
|
|
| |
| Registered
investment companies |
56 |
$4,608 |
None |
None |
| Other
pooled investment vehicles |
0 |
$0 |
None |
None |
| Other
accounts |
0 |
$0 |
None |
None |
Securities
Ownership of Portfolio Managers
As
of the date of this SAI, the Funds’ portfolio managers did not own any shares of
the Funds.
Potential
Conflicts of Interest Involving the Adviser and Portfolio Manager and Portfolio
Manager Compensation
Conflicts
of interest may arise because the Adviser or Sub-Adviser and their affiliates
generally may provide investment advisory services for other clients and may
engage in other business ventures in which the Funds will have no interest. As a
result of these separate business activities, the Adviser or Sub-Adviser and
affiliates may have conflicts of interest in allocating management time,
services, and functions among the Funds and other business ventures and advisory
clients.
The
Portfolio Managers' management of "other accounts" may give rise to potential
conflicts of interest in connection with their management of the Fund's
investments, on one hand, and the investments of the other accounts, on the
other. The other accounts may have similar investment objectives as the Fund.
Therefore, a potential conflict of interest may arise as a result of the
identical investment objectives, whereby a portfolio manager could favor one
account over another. Another potential conflict could include a portfolio
manager's knowledge about the size, timing and possible market impact of Fund
trades, whereby such portfolio manager could use this information to the
advantage of other accounts and to the disadvantage of the Fund. However, the
Sub-Adviser has established policies and procedures to ensure that the purchase
and sale of securities among all accounts the Sub-Adviser manages are fairly and
equitably allocated.
The
Adviser and Sub-Adviser have implemented policies and procedures designed to
ensure that each entity conducts its trading activities separately and without
knowledge or consultation with the other entity. As a result, investment
professionals at the Adviser or the Sub-Adviser may place trades that are
directly or indirectly contrary to investment decisions made on behalf of the
Funds, or may make investment decisions that are similar to those made for the
Funds, both of which have potential to adversely impact the Funds depending on
market conditions.
Additionally,
the Adviser may in the future provide advice to other clients, including
separately managed accounts, commingled funds and additional investment funds,
using the same strategy as the Funds or to other funds or accounts which seek to
replicate the performance of similar or different indices. Advisory accounts of
the Adviser following the same or similar strategies may experience differences
in return or tracking error due to various factors including the size of the
account, timing of investments, liquidity needs, and differences in cash inflows
and outflows. The Adviser and its principals, officers, employees, and
affiliates may buy and sell securities or other investments for their own
accounts and may have actual or potential conflicts of interest with respect to
investments made on the Funds’ behalf. As a result of differing trading and
investment strategies or constraints, positions may be taken by principals,
officers, employees, and affiliates of the Adviser that are the same as,
different from, or made at a different time than positions taken for the
Funds.
The
Adviser serves as the Index Provider to the Funds. The Adviser has adopted
policies and procedures designed to address potential conflicts that may arise
from the advisory activities of the Adviser and TCA, and the provision of the
Index by the Adviser. For example, such policies and procedures limit the
ability of the Adviser’s portfolio management personnel from influencing
personnel who are responsible for maintaining the Underlying Index’s
methodology. In addition, information about changes to the Underlying Index’s
methodology and change in constituent components are treated as confidential
information and the Adviser has adopted policies and procedures that it believes
are reasonably designed to prevent the misuse of such information. Further, the
Adviser has adopted a code of ethics governing the personal trading activity of
its personnel. Finally, each of the Funds will disclose on a daily basis its
entire portfolio holdings.
The
Portfolio Managers do not receive any direct compensation from the Funds.
Each
Portfolio Manager’s compensation includes a fixed base salary and discretionary
bonus which is not tied to the performance of the Funds or asset growth in the
Funds. The discretionary bonus is tied to the profitability of the overall
firm.
Service
Providers
U.S.
Bancorp Fund Services, LLC doing business as U.S. Bank Global Fund Services
(“Fund Services”), located at 615 East Michigan Street, Milwaukee, Wisconsin,
53202 serves as the Administrator, Transfer Agent and index receipt agent (as
that term is defined in the rules of the National Securities Clearing
Corporation (“NSCC”)) for the Funds.
Pursuant
to a Fund Administration Servicing Agreement and Fund Accounting Servicing
Agreement between the Trust and Fund Services, Fund Services provides certain
administrative services to the Funds, including, among other responsibilities,
portfolio accounting services, tax accounting services and furnishing financial
reports, 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; 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, the Fund Services does not have any
responsibility or authority for the investment management of the Funds, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares. As compensation for the administration and
accounting services, the Adviser pays Fund Services a fee based on each Fund’s
average daily net assets, subject to an annual minimum fee. Fund Services also
is entitled to certain out-of-pocket expenses. Fund Services also is entitled to
certain out-of-pocket expenses. The following table shows fees earned by
Fund Services for fund administration and fund accounting services provided to
the Funds during the fiscal periods ended November 30:
|
|
|
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
2021 |
Water
Fund |
$61,760 |
$70,600 |
$44,464 |
Pipeline
Fund |
$292,656 |
$293,726 |
$237,778 |
Fund
Services also acts as Transfer Agent and Dividend Disbursing Agent under a
separate agreement with the Trust.
Pursuant
to a custody agreement between the Trust and the Funds, U.S. Bank N.A., an
affiliate of Fund Services, serves as the custodian of the Funds’ assets (the
“Custodian”). Pursuant to the custody agreement, the Custodian receives an
annual fee from the Adviser based on the Funds’ total average daily net assets,
subject to a minimum annual fee, and certain settlement charges. The Custodian
also is entitled to certain out-of-pocket expenses. The Custodian’s address is
1555 North RiverCenter Drive, Milwaukee, Wisconsin, 53212. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
the Funds. U.S. Bank and its affiliates may participate in revenue sharing
arrangements with service providers of mutual funds in which the Funds may
invest.
Legal
Counsel
Stradley
Ronon Stevens & Young, LLP, 2005 Market Street, Suite 2600, Philadelphia,
Pennsylvania 19103, serves as legal counsel to the Trust and as independent
legal counsel to the Board.
Independent
Registered Public Accounting Firm
Ernst
& Young, LLP, 700 Nicollet Mall, Suite 500, Minneapolis, Minnesota 55402,
serves as the independent registered public accounting firm for the Funds. Its
services include auditing the Funds’ financial statements and the performance of
related compliance tax services.
Distribution
of Fund Shares
The
Trust has entered into a distribution agreement (the “Distribution Agreement”)
with Quasar Distributors, LLC (the “Distributor”), Three Canal Plaza, Suite 100,
Portland, Maine 04101, pursuant to which the Distributor acts as the Funds’
principal underwriter and distributes shares. Shares are continuously offered
for sale by the Distributor only in Creation Units. The Distributor will not
distribute Shares in amounts less than a Creation Unit. The Distributor is not
affiliated with the Adviser, Administrator, Fund Accountant or the
Custodian.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will
receive orders for the purchase and redemption of Creation Units, provided that
any subscriptions and orders will not be binding on the Trust until accepted by
the Trust. The Distributor will deliver prospectuses and, upon request,
Statements of Additional Information to persons purchasing Creation Units and
will maintain records of orders placed with it. The Distributor is a
broker-dealer registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and a member of the Financial Industry Regulatory Authority
(“FINRA”).
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers may also be Authorized Participants (as discussed in
“Procedures for Creation of Creation Units” below) or DTC participants (as
defined below).
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 of Trustees or by vote of a majority of the Funds’ outstanding voting
securities and, in either case, by a majority of the Independent Trustees. The
Distribution Agreement is terminable without penalty by the Trust, on behalf of
the Funds, on 60 days’ written notice when authorized either by a majority
vote of the Funds’ shareholders or by vote of a majority of the Board of
Trustees, including a majority of the Trustees who are not “interested persons”
(as defined under 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.
Distribution
(Rule 12b-1) Plan
The
Trust has adopted a Distribution Plan (the “Plan”) with respect to the Funds in
accordance with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the
distribution
of its shares. The Funds do not presently intend to make any payments pursuant
to the Plan. Continuance of the Plan with respect to the Funds must be approved
annually by a majority of the Trustees of the Trust and by a majority of the
Trustees who are not interested persons (as defined in the 1940 Act) of the
Trust and have no direct or indirect financial interest in the Plan or in any
agreements related to the Plan (“Qualified Trustees”). The Plan requires that
quarterly written reports of amounts spent under the Plan and the purposes of
such expenditures be furnished to and reviewed by the Trustees. The Plan may not
be amended to increase materially the amount that may be spent thereunder with
respect to the Funds without approval by a majority of the outstanding shares of
any class of the Funds that is affected by such increase. All material
amendments of the Plan will require approval by a majority of the Trustees of
the Trust and of the Qualified Trustees.
The
Plan provides that each Fund pays the Distributor an annual fee of up to a
maximum of 0.25% per annum of the average daily net assets of the Fund’s shares.
Under the Plan, the Distributor may make payments pursuant to written agreements
to financial institutions and intermediaries such as banks, savings and loan
associations and insurance companies including, without limit, investment
counselors, broker-dealers and the Distributor’s affiliates and subsidiaries
(collectively, “Agents”) as compensation for services and reimbursement of
expenses incurred in connection with distribution assistance. The Plan is
characterized as a compensation plan since the distribution fee will be paid to
the Distributor without regard to the distribution expenses incurred by the
Distributor or the amount of payments made to other financial institutions and
intermediaries. The Trust intends to operate the Plan in accordance with its
terms and with FINRA rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, the
Funds are authorized to compensate the Distributor up to the maximum amount to
finance any activity primarily intended to result in the sale of Creation Units
of the Funds or for providing or arranging for others to provide shareholder
services and for the maintenance of shareholder accounts. Such activities may
include, but are not limited to: (i) delivering copies of the Funds’ then
current reports, prospectuses, notices, and similar materials, to prospective
purchasers of Creation Units; (ii) marketing and promotional services, including
advertising; (iii) paying the costs of and compensating others, including
Authorized Participants with whom the Distributor has entered into written
Authorized Participant Agreements, for performing shareholder servicing on
behalf of the Funds; (iv) compensating certain Authorized Participants for
providing assistance in distributing the Creation Units of the Funds, including
the travel and communication expenses and salaries and/or commissions of sales
personnel in connection with the distribution of the Creation Units of the
Funds; (v) payments to financial institutions and intermediaries such as banks,
savings and loan associations, insurance companies and investment counselors,
broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of
the Trust’s service providers as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance; (vi) facilitating
communications with beneficial owners of shares, including the cost of providing
(or paying others to provide) services to beneficial owners of shares,
including, but not limited to, assistance in answering inquiries related to
shareholder accounts, and (vi) such other services and obligations as are set
forth in the Distribution Agreement.
Marketing
Support Payments
The
Adviser, out of its own profits and resources and without additional cost to the
Funds or its shareholders, may provide cash payments or other compensation
(“Support Payments”) to certain financial intermediaries who sell and/or promote
the sale of shares of the Funds. Subject to and in accordance with the terms of
the Funds’ prospectus and the Plan (as applicable) adopted by resolution of the
Trust’s Board of Trustees, and specifically the “Payments to Financial
Intermediaries” section of the Funds’ prospectus, the Adviser may make Support
Payments to such financial intermediaries related to marketing/distribution
support, education training or support, shareholder servicing, sales meetings,
inclusion on sales lists (including a preferred or select sales list),
participation in sales programs, and for making shares of the Funds available to
the intermediaries’ customers generally and in investment programs.
Support
Payments made by the Adviser to intermediaries may be calculated in different
ways, including: (1) as a percentage of net sales; (2) as a percentage of net
assets; and (3) as a flat fee.
The
possibility of receiving, or the receipt of, such Support Payments as described
above may provide such intermediaries and/or their salespersons with an
incentive to favor sales of shares of the Funds, and other funds whose
affiliates make similar compensation available, over other investments that do
not make such payments. Investors may wish to take such payment arrangements
into account when considering and evaluating any recommendations relating to the
Funds and other ETFs.
Portfolio
Transactions and Brokerage
Subject
to the supervision of the Adviser, the Sub-Adviser is responsible for decisions
to buy and sell securities for the Funds, broker-dealer selection, and
negotiation of brokerage commission rates. The Sub-Adviser’s primary
consideration in effecting a security transaction will be to obtain the best
execution. In selecting a broker-dealer to execute each particular transaction,
the Sub-Adviser will initially consider their ability to execute transactions at
the most favorable prices and lowest overall execution costs, while also taking
into consideration other relevant factors, such as, the reliability, integrity
and financial condition of the broker-dealer, the size of and difficulty in
executing the order, the quality of execution and custodial services, and the
provision of valuable research services that can be reasonably expected to
enhance the investment return of clients managed by the Sub-Adviser. Research
services may include reports on particular companies, the market, the economy
and other general widely distributed research, and may be used by the
Sub-Adviser in servicing any funds and accounts managed by the Sub-Adviser,
including the Funds. Receipt of research is one of a number of factors
considered in assigning an overall internal ranking to brokers. The price to the
Funds in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
execution services offered.
The
Funds may, from time to time, enter into arrangements with placement agents in
connection with direct placement transactions. In evaluating placement agent
proposals, the Sub-Adviser will consider each broker’s access to issuers of
Water and Pipeline securities and experience transacting in Water and Pipeline
markets, particularly the direct placement market. In addition to these factors,
the Sub-Adviser will consider whether the proposed services are customary,
whether the proposed fee schedules are within the range of customary rates,
whether any
proposal
would obligate us to enter into transactions involving a minimum fee, dollar
amount or volume of securities, or into any transaction whatsoever, and other
terms such as indemnification provisions.
The
Sub-Adviser shall not be deemed to have acted unlawfully or to have breached any
duty solely by reason of its having caused the Funds to pay a broker or dealer
that provides brokerage and research services to the Sub-Adviser an amount of
commission for effecting an investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Sub-Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Sub-Adviser’s overall responsibilities with
respect to the Funds and to other clients of the Sub-Adviser as to which the
Sub-Adviser exercises investment discretion. The overall reasonableness of
brokerage commissions is evaluated by the Sub-Adviser based upon its knowledge
of available information as to the general level of commissions paid by other
institutional investors for comparable services. The Sub-Adviser is further
authorized to allocate the orders placed by it on behalf of the Funds to such
brokers and dealers who also provide research or statistical material or other
services to the Sub-Adviser. Such allocation shall be in such amounts and
proportions as the Sub-Adviser shall determine and the Sub-Adviser will report
on said allocations regularly to the Adviser and Board of Trustees indicating
the brokers to whom such allocations have been made and the basis therefor.
Portfolio
transactions may be placed with broker-dealers who sell shares of the Funds
subject to rules adopted by FINRA and the SEC. Portfolio transactions may also
be placed with broker-dealers in which the Adviser has invested on behalf of the
Funds and/or client accounts.
The
Funds paid the following amounts in brokerage commissions for the fiscal years
ended November 30:
|
|
|
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
2021 |
Water
Fund |
$4,629 |
$7,712(1) |
$4,708 |
Pipeline
Fund |
$59,936 |
$39,386(2) |
$59,682 |
(1)The
Water Fund's brokerage commissions increased for the fiscal year ended November
30, 2022 due to increased turnover and therefore increased trading activity in
the Fund.
(2)The
Pipeline Fund's brokerage commissions decreased for the fiscal year ended
November 30, 2022 due to decreased turnover and therefore decreased trading
activity in the Fund.
Brokerage
with Fund Affiliates
The
Funds may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Funds, the Adviser or the Distributor for a
commission in conformity with the 1940 Act, the Exchange Act and rules
promulgated by the SEC. These rules require that commissions paid to the
affiliate by the Funds for exchange transactions not exceed “usual
and customary” brokerage commissions. The rules define “usual and customary”
commissions to include amounts which are “reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time.” The Trustees, including those who are not “interested persons” of the
Funds, have adopted procedures for evaluating the reasonableness of commissions
paid to affiliates and review these procedures periodically.
Securities
of “Regular Broker-Dealers
The
Funds are required to identify any securities of its “regular brokers and
dealers” (as such term is defined in the 1940 Act) which it may hold at the
close of its most recent fiscal year. “Regular brokers or dealers” of the Funds
are the ten brokers or dealers that, during the most recent fiscal year: (i)
received the greatest dollar amounts of brokerage commissions from the Funds’
portfolio transactions; (ii) engaged as principal in the largest dollar amounts
of portfolio transactions of the Fund; or (iii) sold the largest dollar amounts
of the Funds’ shares.
Portfolio
Turnover
Portfolio
turnover may vary from year to year, as well as within a year. Portfolio
turnover rate is calculated by dividing (1) the lesser of purchases or
sales of portfolio securities for the fiscal year by (2) the monthly
average of the value of portfolio securities owned during the fiscal year. A
100% turnover rate would occur if all the securities in the Funds’ portfolio,
with the exception of securities whose maturities at the time of acquisition
were one year or less, were sold and either repurchased or replaced within one
year. A high rate of portfolio turnover (100% or more) generally leads to
above-average transaction costs and could generate capital gains that must be
distributed to shareholders as short-term capital gains taxed at ordinary income
rates (currently as high as 35%). To the extent that the Funds experience an
increase in brokerage commissions due to a higher portfolio turnover rate, the
performance of the Funds could be negatively impacted by the increased expenses
incurred and may result in a greater number of taxable transactions. The Funds’
portfolio turnover rates for the fiscal periods ended November 30 were as
follows:
|
|
|
|
|
|
|
| |
| 2023 |
2022 |
Water
Fund |
19% |
26% |
Pipeline
Fund |
19% |
12% |
Code
of Ethics
The
Trust, the Adviser, and the Sub-Adviser each have adopted a code of ethics in
accordance with Rule 17j-1 under the 1940 Act. These codes of ethics permit the
personnel of these entities to invest in securities, including securities that
the Funds may purchase or hold. The codes of ethics are on public file with, and
are available from, the SEC.
Proxy
Voting Procedures
The
Board of Trustees has adopted proxy voting policies and procedures (“Proxy
Policies”) wherein the Trust has delegated to the Adviser the responsibility for
voting proxies relating to portfolio securities held by the Funds as part of the
Adviser’s investment advisory services, subject to the supervision and oversight
of the Board of Trustees. Notwithstanding this delegation of responsibilities,
however, the Funds retains the right to vote proxies relating to its portfolio
securities. The fundamental purpose of the Proxy Policies is to ensure that each
vote will be in a manner that reflects the best interest of the Funds and its
shareholders, taking into account the value of the Funds’
investments.
The
actual voting records relating to portfolio securities during the most recent
12-month period ended June 30 are available without charge, upon request, by
calling toll-free, (800) SEC-0330 or by accessing the SEC’s website at
www.sec.gov.
The
Adviser’s Proxy Voting Policies and Procedures
The
Adviser will vote proxies on behalf of the Funds in a manner that it believes is
consistent with the best interests of the Funds and its shareholders. Absent
special circumstances, all proxies will be voted consistent with guidelines
established and described in the Adviser’s Proxy Voting Policies and Procedures.
A summary of the Adviser’s Proxy Voting Policies and Procedures is as
follows:
•Because
the Adviser manages index-based products only, it is the policy of the Adviser
to vote proxies in accordance with the recommendation of a proxy voting service.
•The
Adviser retains the power to vote contrary to the recommendation of a proxy
voting service at its discretion, so long as the reasons for doing so are well
documented.
•The
Adviser may determine not to vote a particular proxy, if the costs and burdens
exceed the benefits of voting.
•In
certain situations there may be a conflict of interest in the voting of proxies
between the interests of the Funds and its shareholders and those of the Adviser
as a result of the Adviser’s passive index- based business. Conflicts identified
by TIS Advisors will be addressed in accordance with the proxy policies by TIS
Advisors. The Board of Directors of the Adviser will address any such conflicts
on a case-by-case basis.
•All
proxies will be voted in accordance with any applicable investment restrictions
of the Funds and, to the extent applicable, any resolutions or other
instructions approved by the Board of Trustees.
Anti-Money
Laundering Compliance Program
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA
PATRIOT Act”). To ensure compliance with this law, the Trust’s Program provides
for the development of internal practices, procedures and controls, designation
of anti-money laundering compliance officers, an ongoing training program and an
independent audit function to determine the effectiveness of the Program. Ms.
Deborah Ward has been designated as the Trust’s Anti-Money Laundering Compliance
Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity; checking
shareholder names against designated government lists, including Office of
Foreign Asset Control (“OFAC”), and a complete and thorough review of all new
opening account applications. The Funds will not transact business with any
person or legal entity whose identity and beneficial owners, if applicable,
cannot be adequately verified under the provisions of the USA PATRIOT
Act.
As
a result of the Program, the Funds may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Funds may be required to transfer
the account or proceeds of the account to a governmental agency.
Portfolio
Holdings Information
The
Trust, on behalf of the Funds, has adopted portfolio holdings disclosure
policies (“Portfolio Holdings Policies”) that govern the timing and
circumstances of disclosure of portfolio holdings of the Funds. The Portfolio
Holdings Policies are applicable to service providers of the Funds, including
the Adviser. Information about the Funds’ portfolio holdings will not be
distributed to any third party except in accordance with these Portfolio
Holdings Policies. The Board of Trustees considered the circumstances under
which the Funds’ portfolio holdings may be disclosed under the Portfolio
Holdings Policies. The Board of Trustees also considered actual and potential
material conflicts that could arise in such circumstances between the interests
of the Funds’ shareholders and the interests of the Adviser, Distributor or any
other affiliated person of the Funds. After due consideration, the Board of
Trustees determined that the Funds have a legitimate business purpose for
disclosing portfolio holdings to persons described in the Portfolio Holdings
Policies. The Board of Trustees also authorized its CCO to consider and
authorize dissemination of portfolio holdings information to additional parties,
after considering the best interests of the Funds’ shareholders and potential
conflicts of interest in making such disclosures.
The
Board of Trustees exercises continuing oversight of the disclosure of the Funds’
portfolio holdings by (1) overseeing the implementation and enforcement of the
Portfolio Holdings Policies, codes of ethics and other relevant policies of the
Funds and its service providers by the CCO, (2) by considering reports and
recommendations by the CCO concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act), and (3) by considering whether to
approve any amendment to these Portfolio Holdings Policies. The Board of
Trustees reserves the right to amend the Portfolio Holdings Policies at any time
without prior notice in its sole discretion.
Disclosure
of the Funds’ complete holdings is required to be made quarterly within 60 days
of the end of each fiscal quarter, in the annual and semi-annual reports to Fund
shareholders, and in the quarterly holdings report on Form N-PORT. These
reports will be made available, free of charge, on the EDGAR database on the
SEC’s website at www.sec.gov. In addition, the Funds’ entire portfolio holdings,
that will form the basis for the Fund's next calculation of NAV per share, are
publicly disseminated each day the Funds are open for business, before the
opening of regular trading on the Exchange, through the Funds’ website and may
be made available through financial reporting and news services or any other
medium, including publicly available internet web sites. In addition, the
composition of the Deposit Securities and the Redemption Securities is
disseminated daily prior to the opening of the Exchange via the
NSCC.
In
the event of a conflict between the interests of the Funds and its shareholders
and the interests of the Adviser or an affiliated person of the Adviser under
the Portfolio Holdings Policy, the CCO of the Adviser, in consultation with the
Trust’s CCO, shall make a determination in the best interests of the Funds and
its shareholders, and shall report such determination to the Board of Trustees
at the end of the quarter in which such determination was made. Any
employee
of the Adviser who suspects a breach of this obligation must report the matter
immediately to the Adviser’s CCO or to his or her supervisor.
In
addition, material non-public holdings information may be provided without lag
as part of the normal investment activities of the Funds to each of the
following entities which, by explicit agreement or by virtue of their respective
duties to the Funds, are required to maintain the confidentiality of the
information disclosed: the Administrator; the Adviser; the Funds’ Accountant;
the Custodian; the Transfer Agent; the Funds’ independent registered public
accounting firm; counsel to the Funds or the Board of Trustees (current parties
are identified in this SAI); broker-dealers (in connection with the purchase or
sale of securities or requests for price quotations or bids on one or more
securities); lending agents; and regulatory authorities. Portfolio holdings
information not publicly available with the SEC may only be provided to
additional third parties in accordance with the Portfolio Holdings Policies,
when the Funds have a legitimate business purpose, and the third party recipient
is subject to a confidentiality agreement. Portfolio holdings information may be
separately provided to any person, including rating and ranking organizations
such as Lipper and Morningstar, at the same time that it is filed with the SEC
or one day after it is first published on the Funds’ website. Such portfolio
holdings disclosure must be approved under the Portfolio Holdings Policies by
the Trust’s CCO.
In
no event shall the Adviser, its affiliates or employees, or the Funds receive
any direct or indirect compensation in connection with the disclosure of
information about the Funds’ portfolio holdings.
There
can be no assurance that the Portfolio Holdings Policies and these procedures
will protect the Funds from potential misuse of that information by individuals
or entities to which it is disclosed.
Book
Entry Only System. Depositary
Trust Company (“DTC”) acts as securities depositary for the shares. Shares of
the Funds are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the NYSE and FINRA. Access to the DTC
system is also available to others such as banks, brokers, dealers, and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly (the “Indirect Participants”).
Beneficial
ownership of shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in shares (owners of such beneficial interests
are referred to herein as “Beneficial Owners”) is shown on, and the transfer of
ownership is effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial
Owners will receive from or through the DTC Participant a written confirmation
relating to their purchase of shares. The Trust recognizes DTC or its nominee as
the record owner of all Shares for all purposes. Beneficial Owners of shares are
not entitled to have Shares registered in their names, and will not receive or
be entitled to physical delivery of share certificates. Each Beneficial Owner
must rely on the procedures of DTC and any DTC Participant and/or Indirect
Participant through which such Beneficial Owner holds its interests, to exercise
any rights of a holder of shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as follows. DTC will make available to the Trust upon request and for a
fee a listing of shares held by each DTC Participant. The Trust will obtain from
each such DTC Participant the number of Beneficial Owners holding shares,
directly or indirectly, through such DTC Participant. The Trust will provide
each such DTC Participant with copies of such notice, statement, or other
communication, in such form, number and at such place as such DTC Participant
may reasonably request, in order that such notice, statement or communication
may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust will pay to each such DTC Participant
a fair and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory
requirements.
Share
distributions will be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares. DTC or its nominee, upon receipt of any such
distributions, will credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in the Funds
as shown on the records of DTC or its nominee. Payments by DTC Participants to
Indirect Participants and Beneficial Owners of shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in the Funds’ shares, or for maintaining, supervising, or
reviewing any records relating to such beneficial ownership interests, or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to the Funds at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Funds will take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such replacement is
unavailable, to issue and deliver printed certificates representing ownership of
shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
Purchase
and Issuance of Shares in Creation Units
The
Trust issues and redeems shares of the Funds only in large blocks, known as
“Creation Units,” which amount may change from time to time. The Trust issues
and sells shares of each Fund: (i) in Creation Units on a continuous basis
through the Fund’s distributor, without a sales load (but subject to transaction
fees), at their NAV per share next determined after receipt of an
order,
on any day the Fund’s primary listing exchange is open for business (“Business
Day”), in proper form pursuant to the terms of the Authorized Participant
Agreement (“Participant Agreement”); or (ii) pursuant to the dividend
reinvestment service of The Depository Trust Company (“DTC”). The NAV of the
Fund’s shares is calculated each Business Day as of the close of regular trading
on the Fund’s primary listing exchange, generally 4:00 p.m., Eastern time. The
Funds will not issue or redeem fractional Creation Units.
FUND
DEPOSIT.
The consideration for purchase of a Creation Unit of a Fund generally consists
of the in- kind deposit of a designated portfolio of securities (the “Deposit
Securities”) per each Creation Unit, constituting a substantial replication, or
a portfolio sampling representation, of the securities included in the Fund’s
Underlying Index and the Cash Component (defined below), computed as described
below. Notwithstanding the foregoing, the Trust reserves the right to permit or
require the substitution of a “cash in lieu” amount (“Deposit Cash”) to be added
to the Cash Component to replace any Deposit Security. When accepting purchases
of Creation Units for all or a portion of Deposit Cash, the Funds may incur
additional costs associated with the acquisition of Deposit Securities that
would otherwise be provided by an in-kind purchaser. These additional costs
associated with the acquisition of Deposit Securities (“Non-Standard Charges”)
may be recoverable from the purchaser of creation units.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the Funds. The “Cash
Component” is an amount equal to the difference between the NAV of the Shares
(per Creation Unit) and the market value of the Deposit Securities or Deposit
Cash, as applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the market value of the Deposit Securities or
Deposit Cash, as applicable), the Cash Component will be such positive amount.
If the Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the market value of the Deposit
Securities or Deposit Cash, as applicable), the Cash Component shall be such
negative amount and the creator will be entitled to receive cash in an amount
equal to the Cash Component. The Cash Component serves the function of
compensating for any differences between the NAV per Creation Unit and the
market value of the Deposit Securities or Deposit Cash, as applicable.
Computation of the Cash Component excludes any stamp duty or other similar fees
and expenses payable upon transfer of beneficial ownership of the Deposit
Securities, if applicable, which will be the sole responsibility of the
Authorized Participant (as defined below).
Each
Fund through NSCC, makes available on each Business Day, immediately prior to
the opening of business on the Exchange (currently 9:30 a.m., Eastern time), the
list of the names and the required number of shares of each Deposit Security or
the required amount of Deposit Cash, as applicable, to be included in the
current Fund Deposit (based on information at the end of the previous Business
Day) for the Fund. Such Fund Deposit is subject to any applicable adjustments as
described below, in order to effect purchases of Creation Units of the Fund
until such time as the next-announced composition of the Deposit Securities or
the required amount of Deposit Cash, as applicable, is made available.
The
identity and number of shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for the Fund Deposit for each Fund changes as
rebalancing adjustments and corporate action events are reflected from time to
time by the Adviser with a view to the investment objective of the Fund. The
composition of the Deposit Securities may also change in
response
to adjustments to the weighting or composition of the component securities of
the Fund’s Underlying Index.
The
Trust reserves the right to permit or require the substitution of an amount of
cash (i.e.,
a
“cash in lieu” amount) to replace any Deposit Security, which will be added to
the Deposit Cash, if applicable, and the Cash Component, including, without
limitation, in situations where the Deposit Security: (i) may not be available
in sufficient quantity for delivery; (ii) may not be eligible for transfer
through the systems of DTC for corporate securities and municipal securities;
(iii) may not be eligible for trading by an Authorized Participant (as defined
below) or the investor for which it is acting; (iv) would be restricted under
the securities laws or where the delivery of the Deposit Security to the
Authorized Participant would result in the disposition of the Deposit Security
by the Authorized Participant becoming restricted under the securities laws; or
(v) in certain other situations (collectively, “custom orders”). The Trust also
reserves the right to include or remove Deposit Securities from the basket in
anticipation of Underlying Index rebalancing changes. The adjustments described
above will reflect changes, known to the Adviser on the date of announcement to
be in effect by the time of delivery of the Fund Deposit, in the composition of
the Fund’s Underlying Index or resulting from certain corporate actions.
PROCEDURES
FOR PURCHASE OF CREATION UNITS.
To be eligible to place orders with the Distributor to purchase a Creation Unit
of a Fund, an entity must be (i) a “Participating Party”, i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the “Clearing Process”), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
“BOOK ENTRY ONLY SYSTEM”). In addition, each Participating Party or DTC
Participant (each, an “Authorized Participant”) must execute a Participant
Agreement that has been agreed to by the Distributor, and that has been accepted
by the Transfer Agent and the Trust, with respect to purchases and redemptions
of Creation Units. Each Authorized Participant will agree, pursuant to the terms
of a Participant Agreement, on behalf of itself or any investor on whose behalf
it will act, to certain conditions, including that it will pay to the Trust an
amount of cash sufficient to pay the Cash Component together with the Creation
Transaction Fee (defined below) and any other applicable fees and taxes. The
Adviser may retain all or a portion of the Transaction Fee to the extent the
Adviser bears the expenses that otherwise would be borne by the Trust in
connection with the purchase of a Creation Unit, which the Transaction Fee is
designed to cover.
All
orders to purchase shares directly from the Funds must be placed for one or more
Creation Units in the manner set forth in the Participant Agreement (the
“Cut-Off Time”). The Cut-Off Time for Fund orders is expected to be 4:00 p.m.
EST, which may be modified by a Fund from time-to-time by amendment to the
Participation Agreement and/or applicable order form. In the case of custom
orders, the order must be received by the Distributor no later than 3 p.m. EST
or such earlier time as may be designated by the Funds and disclosed to
Authorized Participants. The date on which an order to purchase Creation Units
(or an order to redeem Creation Units, as set forth below) is received and
accepted is referred to as the “Order Placement Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g.,
to provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase shares directly from the Funds in Creation Units
have to be placed by the investor’s broker through an Authorized Participant
that has executed a Participant Agreement. In such cases there may be additional
charges to such
investor.
At any given time, there may be only a limited number of broker-dealers that
have executed a Participant Agreement and only a small number of such Authorized
Participants may have international capabilities.
On
days when the Exchange closes earlier than normal, the Funds may require orders
to create Creation Units to be placed earlier in the day. In addition, if a
market or markets on which the Funds’ investments are primarily traded is closed
on any day, the Funds will also generally not accept orders on such day. Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement and in accordance with the AP Handbook. With
respect to the Funds, the Distributor will notify the Custodian of such order.
The Custodian will then provide such information to the appropriate local
sub-custodian(s). Those placing orders through an Authorized Participant should
allow sufficient time to permit proper submission of the purchase order to the
Distributor by the Cut-Off Time on the Business Day on which the order is
placed. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an
Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities) and/or through such other arrangements
allowed by the Trust or its agents. With respect to foreign Deposit Securities,
the Custodian will cause the sub-custodian of such Fund to maintain an account
into which the Authorized Participant will deliver, on behalf of itself or the
party on whose behalf it is acting, such Deposit Securities (or Deposit Cash for
all or a part of such securities, as permitted or required), with any
appropriate adjustments as advised by the Trust. Foreign Deposit Securities must
be delivered to an account maintained at the applicable local sub-custodian. The
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion so as to ensure the delivery of the requisite number of Deposit
Securities or Deposit Cash, as applicable, to the account of a Fund or its
agents by no later than 12:00 p.m. Eastern time (or such other time as specified
by the Trust) on the Settlement Date. If the Funds or its agents do not receive
all of the Deposit Securities, or the required Deposit Cash in lieu thereof, by
such time, then the order may be deemed rejected and the Authorized Participant
shall be liable to a Fund for losses, if any, resulting therefrom. The
“Settlement Date” for the Funds are generally the second Business Day after the
Order Placement Date. All questions as to the number of Deposit Securities or
Deposit Cash to be delivered, as applicable, and the validity, form and
eligibility (including time of receipt) for the deposit of any tendered
securities or cash, as applicable, will be determined by the Trust, whose
determination will be final and binding. The amount of cash represented by the
Cash Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by the
Custodian no later than the Settlement Date. If the Cash Component and the
Deposit Securities or Deposit Cash, as applicable, are not received in a timely
manner by the Settlement Date, the creation order may be cancelled. Upon written
notice to the Distributor, such canceled order may be resubmitted the following
Business Day using the Fund Deposit as newly constituted to reflect the then
current NAV of a Fund.
The
order will be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the Cut-Off
Time and the federal funds in the appropriate amount are deposited by 2:00 p.m.,
Eastern time, with the Custodian on the Settlement Date. If the order is not
placed in proper form as required, or federal funds in the appropriate amount
are not received by 2:00 p.m., Eastern time on the Settlement Date, then
the
order may be deemed to be rejected and the Authorized Participant will be liable
to a Fund for losses, if any, resulting therefrom. A creation request is
considered to be in “proper form” if all procedures set forth in the Participant
Agreement, AP Handbook and this SAI are properly followed.
ISSUANCE
OF A CREATION UNIT.
Except as provided herein, Creation Units will not be issued until the transfer
of good title to the Trust of the Deposit Securities or payment of Deposit Cash,
as applicable, and the payment of the Cash Component have been completed. When
the subcustodian has confirmed to the Custodian that the required Deposit
Securities (or the cash value thereof) have been delivered to the account of the
relevant subcustodian or subcustodians, the Distributor and the Adviser will be
notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units. The delivery of Creation Units so created generally will
occur no later than the second Business Day following the day on which the
purchase order is deemed received by the Distributor. However, the Funds reserve
the right to settle Creation Unit transactions on a basis other than the second
Business Day following the day on which the purchase order is deemed received by
the Distributor in order to accommodate foreign market holiday schedules, to
account for different treatment among foreign and U.S. markets of dividend
record dates and ex-dividend dates (that is the last day the holder of a
security can sell the security and still receive dividends payable on the
security), and in certain other circumstances. The Authorized Participant will
be liable to the Funds for losses, if any, resulting from unsettled
orders.
Creation
Units may be purchased in advance of receipt by the Trust of all or a portion of
the applicable Deposit Securities as described below. In these circumstances,
the initial deposit will have a value greater than the NAV of the Shares on the
date the order is placed in proper form since in addition to available Deposit
Securities, cash must be deposited in an amount equal to the sum of (i) the Cash
Component, plus (ii) an additional amount of cash equal to a percentage of the
market value as set forth in the Participant Agreement, of the undelivered
Deposit Securities (the “Additional Cash Deposit”), which will be maintained in
a separate non-interest bearing collateral account. The Authorized Participant
must deposit with the Custodian the Additional Cash Deposit, as applicable, by
12:00 p.m. Eastern time (or such other time as specified by the Trust) on the
Settlement Date. If a Fund or its agents do not receive the Additional Cash
Deposit in the appropriate amount, by such time, then the order may be deemed
rejected and the Authorized Participant shall be liable to the Fund for losses,
if any, resulting therefrom. An additional amount of cash will be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to
the extent necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to the applicable percentage, as set forth in the
Participant Agreement, of the daily marked to market value of the missing
Deposit Securities. The Participant Agreement will permit the Trust to buy the
missing Deposit Securities at any time. Authorized Participants will be liable
to the Trust for the costs incurred by the Trust in connection with any such
purchases. These costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a Transaction Fee as set forth below under “Creation Transaction Fee”
will be charged in all cases, unless otherwise advised by the Funds, and Non-
Standard
Charges may also apply. The delivery of Creation Units so created generally will
occur no later than the Settlement Date.
ACCEPTANCE
OF ORDERS OF CREATION UNITS.
The Trust reserves the absolute right to reject an order for Creation Units
transmitted to it by the Distributor in respect of a Fund including, without
limitation, if (a) the order is not in proper form; (b) the Deposit Securities
or Deposit Cash, as applicable, delivered by the Participant are not as
disseminated through the facilities of the NSCC for that date by the Custodian;
(c) the investor(s), upon obtaining the shares ordered, would own 80% or more of
the currently outstanding Shares of the Fund; (d) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (e) the
acceptance of the Funds Deposit would, in the opinion of counsel, be unlawful;
(f) the acceptance of the Fund Deposit would otherwise, in the discretion
of the Trust or the Adviser, have an adverse effect on the Trust or the rights
of beneficial owners; (g) the acceptance or receipt of the order for a Creation
Unit would, in the opinion of counsel to the Trust, be unlawful; or (h)
circumstances outside the control of the Trust, the Custodian, the Transfer
Agent and/or the Adviser make it for all practical purposes not feasible to
process orders for Creation Units.
Examples
of such circumstances include acts of God or public service or utility problems
such as fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Distributor, the Custodian, a sub-custodian,
the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant
in the creation process, and other extraordinary events. The Distributor shall
notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor will either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor
will not be liable for the rejection of any purchase order for Creation
Units.
All
questions as to the number of shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any securities
to be delivered will be determined by the Trust, and the Trust’s determination
will be final and binding.
CREATION
TRANSACTION FEE.
A purchase (i.e.,
creation) transaction fee is imposed for the transfer and other transaction
costs associated with the purchase of Creation Units, and investors will be
required to pay a Creation Transaction Fee regardless of the number of Creation
Units created in the transaction. The Funds may adjust the creation transaction
fee from time to time based upon actual experience. The fixed creation fee may
be waived on certain orders if the Funds’ custodian has determined to waive some
or all of the creation order costs associated with the order or another party,
such as the Funds’ investment adviser, has agreed to pay such fee. In addition,
the Funds may impose a Non-Standard Charge of up to 2% of the value of the
creation transactions for cash creations, non- standard orders, or partial cash
purchases for the Funds. The Funds may adjust the Non-Standard Charge from time
to time based upon actual experience. Investors who use the services of an
Authorized Participant, broker or other such intermediary may be charged a fee
for such services, which may include an amount for the Creation Transaction Fee
and Non-Standard Charges. Investors are responsible
for
the costs of transferring the securities constituting the Deposit Securities to
the account of the Trust. The Funds may determine to not charge a Non-Standard
Charge on certain orders when a Fund’s investment adviser has determined that
doing so is in the best interests of Fund shareholders, e.g., for creation of
orders that facilitate the rebalance of the Funds’ portfolio in a more tax
efficient manner than could be achieved without such order. The Adviser may
retain all or a portion of the Transaction Fee to the extent the Adviser bears
the expenses that otherwise would be borne by the Trust in connection with the
purchase of a Creation Unit, which the Transaction Fee is designed to cover. The
standard Creation Transaction Fee for the Funds is $500.
RISKS
OF PURCHASING CREATION UNITS.
There are certain legal risks unique to investors purchasing Creation Units
directly from the Funds. Because the Funds’ shares may be issued on an ongoing
basis, a “distribution” of shares could be occurring at any time. Certain
activities that a shareholder performs as a dealer could, depending on the
circumstances, result in the shareholder being deemed a participant in the
distribution in a manner that could render the shareholder a statutory
underwriter and subject to the prospectus delivery and liability provisions of
the Securities Act. For example, a shareholder could be deemed a statutory
underwriter if it purchases Creation Units from the Funds, breaks them down into
the constituent shares, and sells those shares directly to customers, or if a
shareholder chooses to couple the creation of a supply of new shares with an
active selling effort involving solicitation of secondary-market demand for
shares. Whether a person is an underwriter depends upon all of the facts and
circumstances pertaining to that person’s activities, and the examples mentioned
here should not be considered a complete description of all the activities that
could cause a shareholder to be deemed an underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
the Funds’ shares as part of an “unsold allotment” within the meaning of Section
4(a)(3)(C) of the Securities Act, will be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3)(C) of the Securities
Act.
REDEMPTION.
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by the Funds through the Transfer
Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE FUNDS, THE
TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
in order to have such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public trading market at
any time to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Funds, the Custodian, through the NSCC, makes available
immediately prior to the opening of business on the Exchange (currently 9:30
a.m., Eastern time) on each Business Day, the list of the names and share
quantities of the Funds’ portfolio securities that will be applicable (subject
to possible amendment or correction) to redemption requests received in proper
form (as defined below) on that day (“Fund Securities”). Fund Securities
received on redemption may not be identical to Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or combination
thereof, as determined by the Trust. With respect to in-kind redemptions of the
Funds, redemption proceeds for a Creation Unit will consist of Fund Securities
-- as announced by the Custodian on the Business Day of the request for
redemption received in proper form -- plus cash in an amount equal to the
difference between the NAV of the Shares being redeemed, as next determined
after a receipt of a request in proper form, and the value of the Funds
Securities (the “Cash Redemption Amount”), less any fixed redemption transaction
fee as set forth below and any Non-Standard Charges. If the Fund Securities have
a value greater than the NAV of the Shares, a compensating cash payment equal to
the differential is required to be made by or through an Authorized Participant
by the redeeming shareholder. Notwithstanding the foregoing, at the Trust’s
discretion, an Authorized Participant may receive the corresponding cash value
of the securities in lieu of the in-kind securities value representing one or
more Fund Securities.
CASH
REDEMPTION METHOD.
Although the Trust does not ordinarily permit full or partial cash redemptions
of Creation Units of the Funds, when full or partial cash redemptions of
Creation Units are available or specified for the Funds, they will be effected
in essentially the same manner as in-kind redemptions thereof. In the case of
full or partial cash redemptions, the Authorized Participant will receive the
cash equivalent of the Fund Securities it would otherwise receive through an
in-kind redemption, plus the same Cash Amount to be paid to an in-kind
redeemer.
REDEMPTION
TRANSACTION FEES.
A redemption transaction fee may be imposed for the transfer and other
transaction costs associated with the redemption of Creation Units, and
Authorized Participants will be required to pay a Redemption Transaction Fee
regardless of the number of Creation Units created in the transaction. The
redemption transaction fee is the same no matter how many Creation Units are
being redeemed pursuant to any one redemption request. The Funds may adjust the
redemption transaction fee from time to time based upon actual experience. The
fixed redemption fee may be waived on certain orders if a Fund’s custodian has
determined to waive some or all of the redemption order costs associated with
the order of another party, such as the Fund’s investment adviser, has agreed to
pay such fee. In addition, the Funds may impose a Non-Standard Charge of up to
2% of the value of a redemption transaction for cash redemptions, non-standard
orders, or partial cash redemptions for the Funds. Investors who use the
services of an Authorized Participant, broker or other such intermediary may be
charged a fee for such services which may include an amount for the Redemption
Transaction Fees and Non- Standard Charges. Investors are responsible for the
costs of transferring the securities constituting the Fund Securities to the
account of the Trust. The Non-Standard Charges are payable to a Funds as it
incurs costs in connection with the redemption of Creation Units, the receipt of
Fund Securities and the Cash Redemption Amount and other transactions costs. The
standard Redemption Transaction Fee for the Funds is $500.
PROCEDURES
FOR REDEMPTION OF CREATION UNITS.
Orders to redeem Creation Units must be submitted in proper form to the Transfer
Agent prior to the time as set forth in the Participant Agreement. A redemption
request is considered to be in “proper form” if (i) an Authorized Participant
has transferred or caused to be transferred to the Trust’s Transfer Agent the
Creation Unit(s) being redeemed through the book- entry system of DTC so as to
be effective by the time as set forth in the Participant Agreement and (ii) a
request in form satisfactory to the Trust is received by the Transfer Agent from
the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant
Agreement.
If the Transfer Agent does not receive the investor’s Shares through DTC’s
facilities by the times and pursuant to the other terms and conditions set forth
in the Participant Agreement, the redemption request will be rejected.
The
Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement, and that, therefore, requests to redeem Creation Units may have to be
placed by the investor’s broker through an Authorized Participant which has
executed an Authorized Participant Agreement. Investors making a redemption
request should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Trust’s Transfer Agent;
such investors should allow for the additional time that may be required to
effect redemptions through their banks, brokers or other financial
intermediaries if such intermediaries are not Authorized
Participants.
In
connection with taking delivery of shares of Fund Securities upon redemption of
Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such Shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank or other custody providers in each jurisdiction in
which any of the Fund Securities are customarily traded, to which account such
Fund Securities will be delivered. Deliveries of redemption proceeds generally
will be made within two Business Days of the trade date.
ADDITIONAL
REDEMPTION PROCEDURES.
In connection with taking delivery of shares of Fund Securities upon redemption
of Creation Units, the Authorized Participant must maintain appropriate custody
arrangements with a qualified broker-dealer, bank or other custody providers in
each jurisdiction in which any of the Fund Securities are customarily traded, to
which account such Fund Securities will be delivered. Deliveries of redemption
proceeds generally will be made within two Business Days of the trade date.
However, due to the schedule of holidays in certain countries, the different
treatment among foreign and U.S. markets of dividend record dates and dividend
ex-dates (that is the last date the holder of a security can sell the security
and still receive dividends payable on the security sold), and in certain other
circumstances, the delivery of in-kind redemption proceeds may take longer than
two Business Days after the day on which the redemption request is received in
proper form; in such circumstances, the Fund may delay delivery more than seven
days if the Fund makes such delivery as soon as practicable, but in no event
later than 15 days. If neither the redeeming Shareholder nor the Authorized
Participant acting on behalf of such redeeming Shareholder has appropriate
arrangements to take delivery of the Fund Securities in the applicable foreign
jurisdiction and it is not possible to make other such arrangements, or if it is
not possible to effect deliveries of the Fund Securities in such jurisdiction,
the Trust may, in its discretion, exercise its option to redeem such Shares in
cash, and the redeeming shareholder will be required to receive its redemption
proceeds in cash.
If
it is not possible to make other such arrangements, or it is not possible to
effect deliveries of the Fund Securities, the Trust may in its discretion
exercise its option to redeem such Shares in cash, and the redeeming investor
will be required to receive its redemption proceeds in cash. In addition, an
investor may request a redemption in cash that a Fund may, in its sole
discretion, permit. In either case, the investor will receive a cash payment
equal to the NAV of its shares
based
on the NAV of Shares of the relevant Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the
Trust’s brokerage and other transaction costs associated with the disposition of
Fund Securities). A Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities but does not differ in
NAV.
Redemptions
of shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Funds (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Units for cash
to the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Funds Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
“qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status in order to receive Fund Securities.
Because
the portfolio securities of a Fund may trade on the relevant exchange(s) on days
that the Exchange is closed or are otherwise not Business Days for such Fund,
shareholders may not be able to redeem their Shares of the Fund, or to purchase
or sell Shares of such Fund on the Exchange, on days when the NAV of such Fund
could be significantly affecting by events in the relevant foreign
markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to a Fund (1) for any period during which the Exchange is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the Exchange is suspended or restricted; (3) for any period during
which an emergency exists as a result of which disposal of the Shares of the
Fund or determination of the NAV of the Shares is not reasonably practicable; or
(4) in such other circumstance as is permitted by the SEC.
Determination
of Net Asset Value
NAV
for a Fund is computed by dividing the value of the net assets of the Fund
(i.e.,
the value of its total assets less total liabilities) by the total number of
shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of the Funds are calculated by the Custodian and
determined at the close of the regular trading session on the New York Stock
Exchange (ordinarily 4:00 p.m., Eastern time) on each day that such Exchange is
open, provided that fixed-income assets may be valued as of the announced
closing time for trading in fixed- income instruments on any day that the
Securities Industry and Financial Markets Association (“SIFMA”) announces an
early closing time.
A
Fund’s assets are generally valued at their market price on the valuation date
and are based on valuations provided by independent pricing services consistent
with the Trust’s valuation
policies.
Pursuant to Rule 2a-5 under the 1940 Act, the Adviser has been designated by the
Board as the valuation designee for the Funds and has been delegated the
responsibility for making good faith, fair value determinations with respect to
the Funds' portfolio securities. When market prices are not readily available,
or believed by the Adviser to be unreliable, a security or other asset is valued
at its fair value by the Adviser as determined under fair value pricing
procedures approved by the Board. The Board reviews, no less frequently than
annually, the adequacy of the Funds' policies and procedures and the
effectiveness of their implementation. These fair value pricing procedures will
also be used to price a security when corporate events, events in the securities
market and/or world events cause the Adviser to believe that a security’s last
sale price may not reflect its actual market value. The intended effect of using
fair value pricing procedures is to ensure that each Fund is accurately priced.
The Board will regularly evaluate whether the Trust’s fair value pricing
procedures continue to be appropriate in light of the specific circumstances of
the Funds and the quality of prices obtained through the application of such
procedures.
The
Funds’ securities 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 ask
prices.
Securities
traded on a securities exchange for which a last-quoted sales price is readily
available will be valued at the last sales price as reported by the primary
exchange on which the securities are listed. Securities listed on the Nasdaq
National Market System (“Nasdaq”) will be valued at the Nasdaq Official Closing
Price, which may differ from the last sales price reported. Securities traded on
a securities exchange for which a last-quoted sales price is not readily
available will be valued at the last bid, ask or mean between the bid and the
ask price, as determined by the Advisor and disclosed in the notes of the annual
report. Equity securities traded in the over- the-counter market (“OTC”) market
in which no last sales price is available will be valued at the average of the
last bid prices obtained from two or more dealers unless there is only one
dealer, in which case that dealer’s last bid price is used.
Stocks
that are “thinly traded” or events occurring when a foreign market is closed but
the Exchange is open may create a situation where a market quote would not be
readily available. When a market quote is not readily available, the security’s
value is based on “fair value” as determined by procedures adopted by the Board.
The Board will periodically review the reliability of the Funds’ fair value
methodology. The Funds may hold portfolio securities, such as those traded on
foreign exchanges that trade on weekends or other days when the Funds’ shares
are not priced. Therefore, the value of the Funds’ shares may change on days
when shareholders will not be able to purchase or redeem shares.
Dividends
and Distributions
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions and
Taxes.”
General
Policies.
The Water Fund expects to pay out dividends from its net investment income
semi-annually. The Pipeline Fund expects to pay out dividends from its net
investment income quarterly. Distributions of net realized capital gains, if
any, generally are declared and paid once a year, but the Funds may make
distributions on a more frequent basis for the Funds to improve
index
tracking or to comply with the distribution requirements of the Code, in all
events in a manner consistent with the provisions of the 1940 Act.
Dividends
and other distributions on shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Funds.
The
Funds make additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the Funds, plus any net capital gains and
(ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code.
Management of the Trust reserves the right to declare special dividends if, in
its reasonable discretion, such action is necessary or advisable to preserve the
Funds’ eligibility for treatment as a RIC or to avoid imposition of income or
excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker- dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of the Funds through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables in order to
participate in the dividend reinvestment service and investors should ascertain
from their brokers such necessary details. If this service is available and
used, dividend distributions of both income and realized gains will be
automatically reinvested in additional whole shares issued by the Trust of the
same Fund at NAV. Distributions reinvested in additional shares of the Funds
will nevertheless be taxable to Beneficial Owners acquiring such additional
shares to the same extent as if such distributions had been received in cash.
Federal
Income Taxes
The
following is a summary of certain additional federal income tax considerations
generally affecting the Funds and their shareholders that supplements the
summary in the Prospectus. No attempt is made to present a comprehensive
explanation of the federal, state, local or foreign tax treatment of the Funds
or its shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The
following general discussion of certain federal income tax consequences is based
on provisions of 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.
Shareholders
are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, or local taxes.
Regulated
Investment Company (RIC) Status.
The Funds will seek to qualify for treatment as a RIC under the Code. Provided
that for each tax year a Fund: (i) meets the requirements to be
treated
as a RIC (as discussed below); and (ii) distributes at least an amount equal to
the sum of 90% of the Fund’s investment company taxable income for such year
(including, for this purpose, the excess of net short-term capital gains over
net long-term capital losses), computed without regard to the dividends-paid
deduction, and 90% of its net tax-exempt interest income for such year (the
“Distribution Requirement”), the Fund itself generally will not be subject to
federal income taxes to the extent the Fund’s income, including the Fund’s net
capital gain (the excess of the Fund’s net long-term capital gains over its net
short-term capital losses), is distributed to the Fund’s shareholders. One of
several requirements for RIC qualification is that a Fund must receive at least
90% of the Fund’s gross income each year from dividends, interest, payments with
respect to certain securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, or other income derived with respect to
the Fund’s business of investing in stock, securities, foreign currencies and
net income from interests in qualified publicly traded partnerships, generally
including MLPs and certain LLCs (the “90% Test”). A second requirement for
qualification as a RIC is that a Funds must diversify its holdings so that, at
the end of each quarter of the Fund’s taxable year: (a) at least 50% of the
market value of the Fund’s total assets is represented by cash and cash items,
U.S. government securities, securities of other RICs, and other securities, with
these other securities limited, in respect to any one issuer, to an amount not
greater than 5% of the value of the Fund’s total assets or 10% of the
outstanding voting securities of such issuer; and (b) not more than 25% of the
value of its total assets is invested in the securities (other than U.S.
government securities or securities of other RICs) of any one issuer, the
securities (other than securities of other RICs) of two or more issuers which
the Fund controls and which are engaged in the same, similar, or related trades
or businesses, or the securities of one or more qualified publicly traded
partnerships, generally including MLPs and certain LLCs (the “Asset Test”).
For
purposes of the 90% Test, the character of income earned by certain entities in
which the Funds invest that are not treated as corporations for U.S. federal
income tax purposes (e.g., partnerships and LLCs that are not publicly traded
partnerships and that have not elected to be classified as corporations under
applicable regulations) will generally pass through to the Funds. Consequently,
in order to qualify as a RIC, the Funds may be required to limit its equity
investments in such entities if they earn income that is nonqualifying income
for purposes of the 90% Test.
If
a Fund fails to satisfy the 90% Test or the Asset Test, the Fund may be eligible
for relief provisions if the failures are due to reasonable cause and not
willful neglect and if a penalty tax is paid with respect to each failure to
satisfy the applicable requirements. Additionally, relief is provided for
certain de
minimis failures
of the Asset Test where a Fund corrects the failure within a specified period of
time. In order to be eligible for the relief provisions with respect to a
failure to meet the Asset Test, a Fund may be required to dispose of certain
assets. If these relief provisions are not available to a Fund and it fails to
qualify for treatment as a RIC for a taxable year, all of its taxable income
would be subject to tax at regular corporate income tax rates without any
deduction for distributions to shareholders, and its distributions (including
capital gains distributions) generally would be taxable as ordinary income
dividends to its shareholders, subject if certain requirements are met to the
dividends-received deduction for corporate shareholders and the lower tax rates
on qualified dividend income received by noncorporate shareholders. To requalify
for treatment as a RIC in a subsequent taxable year, a Fund would be required to
satisfy the RIC qualification requirements for that year and to distribute any
earnings and profits from any year in which the Fund failed to qualify for tax
treatment as a RIC. If a Fund fails to qualify as a RIC for a period longer than
two taxable years, it would generally be required
to
pay a Fund-level tax on certain net built-in gains recognized with respect to
certain of its assets upon a disposition of such assets within ten years of
qualifying as a RIC in a subsequent year. The Board reserves the right not to
maintain the qualification of the Funds for treatment as a RIC if it determines
such course of action to be beneficial to shareholders. If a Fund determines
that it will not qualify for treatment as a RIC, the Fund will establish
procedures to reflect the anticipated tax liability in the Funds’ NAV.
For
each year, each Fund intends to distribute substantially all of its investment
company taxable income (computed without regard to the dividends-paid deduction)
and any realized net capital gain (after taking into account any capital loss
carryovers). If either Fund failed to satisfy the distribution requirement for
any taxable year, it would be taxed as a regular corporation, with consequences
generally similar to those described above.
If
either Fund meets the Distribution Requirement but retains some or all of its
income or gains, it will be subject to federal income tax to the extent any such
income or gains are not distributed. The Funds may designate certain amounts
retained as undistributed net capital gain in a notice to its shareholders, who
(i) will be required to include in income for U.S. federal income tax purposes,
as long-term capital gain, their proportionate shares of the undistributed
amount so designated, (ii) will be entitled to credit their proportionate shares
of the income tax paid by the Funds on that undistributed amount against their
federal income tax liabilities and to claim refunds to the extent such credits
exceed their liabilities and (iii) will be entitled to increase their tax basis,
for federal income tax purposes, in their shares in the Funds by an amount equal
to the excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
The
Funds will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute (and is not deemed to distribute)
to its shareholders in each calendar year an amount at least equal to 98% of its
ordinary income for the calendar year plus 98.2% of its capital gain net income
for the twelve months ended October 31 of that year, subject to an increase for
any shortfall in the prior year’s distribution. For this purpose, any ordinary
income or capital gain net income retained by the Funds and subject to corporate
income tax will be considered to have been distributed. The Funds intend to
declare and distribute dividends and distributions in the amounts and at the
times necessary to avoid the application of this 4% excise tax, but can make no
assurances that all such tax liability will be eliminated.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, a RIC may carry net
capital losses from any taxable year forward to offset capital gains in future
years. The Funds are permitted to carry net capital losses forward indefinitely.
To the extent subsequent capital gains are offset by such losses, they will not
result in U.S. federal income tax liability to the Funds and may not be
distributed as capital gains to shareholders. Generally, the Funds may not carry
forward any losses other than net capital losses. Under certain circumstances,
the Funds may elect to treat certain losses as though they were incurred on the
first day of the taxable year immediately following the taxable year in which
they were actually incurred.
Taxation
of Shareholders.
Distributions of net capital gains that the Funds report to a shareholder as
capital gain dividends are taxable as long-term capital gains, regardless of how
long
the shareholder has owned the shares. Long-term capital gains are generally
taxed to noncorporate shareholders at rates of up to 20%. All other dividends of
the Funds (including dividends from short-term capital gains) from their current
and accumulated earnings and profits are generally subject to tax as ordinary
income, subject to the discussion of qualified dividend income below.
Subject
to certain limitations and requirements, including holding period requirements,
dividends reported by the Funds as qualified dividend income will be taxable to
noncorporate shareholders at rates of up to 20%. In general, dividends may be
reported by the Funds as qualified dividend income if they are paid from
dividends received by the Funds on common and preferred stock of U.S. companies
or on stock of certain eligible foreign corporations, provided that certain
holding period and other requirements are met by the Funds with respect to the
dividend-paying stocks in its portfolio. Subject to certain limitations,
eligible foreign corporations include those incorporated in possessions of the
United States or in certain countries with comprehensive tax treaties with the
United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market
in the United States. “Passive foreign investment companies” (described below)
are not qualified foreign corporations for this purpose. 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. Noncorporate shareholders will only be eligible
for the rates of up to 20% on the Fund’s qualified dividend income distributions
if the shareholders also meet certain holding period requirements with respect
to their shares in the Fund.
Certain
dividends received by the Funds on stock of U.S. corporations (generally,
dividends received by the Funds in respect of any share of stock (1) as to which
the Funds have met certain holding period requirements and (2) that is held in
an unleveraged position) may be eligible for the dividends-received deduction
generally available to corporate shareholders under the Code, provided such
dividends are also appropriately reported as eligible for the dividends-received
deduction by the Funds. In order to qualify for the dividends-received
deduction, corporate shareholders must also meet minimum holding period
requirements with respect to their Fund shares, taking into account any holding
period reductions from certain hedging or other transactions or positions that
diminish their risk of loss with respect to their Fund shares. The entire
dividend, including the otherwise deductible amount, will be included in
determining the excess, if any, of a corporation’s adjusted current earnings
over its alternative minimum taxable income, which may increase a corporation’s
alternative minimum tax liability. Any corporate shareholder should consult its
tax adviser regarding the possibility that its tax basis in its shares may be
reduced, for federal income tax purposes, by reason of “extraordinary dividends”
received with respect to the shares and, to the extent such basis would be
reduced below zero, current recognition of income may be required. The Funds’
investment strategies may significantly limit its ability to distribute
dividends eligible for the dividends-received deduction for corporations.
The
Funds’ participation in loans of securities may affect the amount, timing, and
character of distributions to Fund shareholders. If the Funds participate in a
securities lending transaction and receive a payment in lieu of dividends (a
“substitute payment”) with respect to securities on loan in a securities lending
transaction, such income generally will not constitute qualified dividend income
and thus dividends attributable to such income will not be eligible for taxation
at
the
rates applicable to qualified dividend income. In addition, dividends
attributable to such income will not be eligible for the dividends-received
deduction for corporate shareholders.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by the Funds in October, November or December and payable to
shareholders of record in such a month that is paid during the following January
will be treated for U.S. federal income tax purposes as received by shareholders
on December 31 of the calendar year in which it was declared. In addition,
certain distributions made after the close of a taxable year of the Funds may be
“spilled back” and treated for certain purposes as paid by the Funds 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 4% excise tax described above, such “spilled
back” dividends are treated as paid by the RIC when they are actually paid.
Fund
distributions, if any, that exceed the Funds’ current and accumulated earnings
and profits may be treated as a return of capital to shareholders. A return of
capital distribution generally will not be taxable but will reduce the
shareholder’s cost basis and result in a higher capital gain or lower capital
loss when the shares on which the distribution was received are sold. After a
shareholder’s 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.
The
Funds’ shareholders will be notified annually by the Funds as to the federal tax
characterization of all distributions made by the Funds. Distributions may be
subject to state and local taxes.
U.S.
individuals with income exceeding certain threshold amounts ($250,000 if married
and 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) are
subject to a 3.8% Medicare contribution tax on all or a portion of their “net
investment income,” which generally includes interest, dividends, and capital
gains (including capital gains realized on the sale or exchange of shares of the
Funds or the redemption of Creation Units). 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.
A
taxable shareholder may wish to avoid investing in the Funds shortly before a
dividend or other distribution, because the distribution will generally be
taxable even though it may economically represent a return of a portion of the
shareholder’s investment.
Shareholders
who have not held Fund shares for a full year should be aware that the Funds may
report and distribute to a shareholder, as ordinary dividends or capital gain
dividends, a percentage of income that is not equal to the percentage of the
Fund’s ordinary income or net capital gain, respectively, actually earned during
the shareholder’s period of investment in the Funds.
A
sale of shares by a shareholder may give rise to a gain or loss. The difference
between the selling price and the shareholder’s tax basis for the shares sold
generally determines the amount of the gain or loss realized on the sale or
exchange of shares. The tax basis of shares acquired by purchase will generally
be based on the amount paid for shares and then may be subsequently adjusted for
other applicable transactions as required by the Code. Contact the
broker
through whom you purchased your shares to obtain information with respect to the
available basis reporting methods and elections for your account.
In
general, any gain or loss realized upon a taxable disposition of shares will be
treated as capital gain or loss if the shares are capital assets in the
shareholder’s hands, and will be long-term capital gain or loss if the shares
have been held for more than one year, and short-term capital gain or loss if
the shares are held for one year or less. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term,
rather than short-term, to the extent of any amounts treated as distributions to
the shareholder of long-term capital gain with respect to the shares (including
any amounts credited to the shareholder as undistributed capital gains). All or
a portion of any loss realized upon a taxable disposition of shares will be
disallowed if substantially identical shares of the Funds are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize gain or loss from the exchange. The gain or loss will be equal to
the difference between the market value of the Creation Units at the time of the
exchange and the sum of the Authorized Participant’s aggregate basis in the
securities surrendered plus the amount of cash paid for such Creation Units. The
Internal Revenue Service (“IRS”), however, may assert that a loss realized upon
an exchange of securities for Creation Units cannot be deducted currently under
the rules governing “wash sales,” or on the basis that there has been no
significant change in economic position. Any gain or loss realized by an
Authorized Participant upon a creation of Creation Units will be treated as
capital gain or loss if the Authorized Participant holds the securities
exchanged therefor as capital assets, and otherwise will be ordinary income or
loss. Any capital gain or loss realized upon the creation of Creation Units will
generally be treated as long-term capital gain or loss if the securities
exchanged for such Creation Units have been held by the Authorized Participant
for more than one year, and otherwise will be short-term capital gain or loss.
The
Trust on behalf of the Funds has the right to reject an order for a purchase of
Creation Units if the Authorized Participant (or a group of Authorized
Participants) would, upon obtaining the Creation Units so ordered, own 80% or
more of the outstanding shares of a Fund and if, pursuant to Section 351 of the
Code, the Fund would have a basis in the securities different from the market
value of such securities on the date of deposit. The Trust also has the right to
require information necessary to determine beneficial share ownership for
purposes of the 80% determination. If the Funds do issue Creation Units to an
Authorized Participant (or group of Authorized Participants) that would, upon
obtaining the Creation Units so ordered, own 80% or more of the outstanding
shares of a Fund, the Authorized Participant (or group of Authorized
Participants) may not recognize gain or loss upon the exchange of securities for
Creation Units.
An
Authorized Participant who redeems Creation Units will generally recognize a
gain or loss equal to the difference between the sum of the aggregate market
value of any securities received plus the amount of any cash received for such
Creation Units and the Authorized Participant’s basis in the Creation Units. Any
gain or loss realized by an Authorized Participant upon a redemption of Creation
Units will be treated as capital gain or loss if the Authorized Participant
holds the shares comprising the Creation Units as capital assets, and otherwise
will be ordinary income or loss. Any capital gain or loss realized upon the
redemption of Creation Units will generally be treated as long-term capital gain
or loss if the shares comprising the
Creation
Units have been held by the Authorized Participant for more than one year, and
otherwise will generally be short-term capital gain or loss. Any capital loss
realized upon a redemption of Creation Units held for six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions to the applicable Authorized Participant of long-term capital
gains with respect to the Creation Units (including any amounts credited to the
Authorized Participant as undistributed capital gains).
Persons
purchasing or redeeming Creation Units should consult their own tax advisers
with respect to the tax treatment of any creation or redemption transaction.
Due
to the ability of the Authorized Participants to receive a full or partial cash
redemption of Creation Units of the Funds, the Funds may be required to execute
additional sale or exchange transactions which may increase the taxable income
of the Funds and limit the tax efficiency of the Funds.
Taxation
of Fund Investments.
Certain of the Funds’ investments may be subject to complex provisions of the
Code (including provisions relating to hedging transactions, straddles,
integrated transactions, foreign currency contracts, forward foreign currency
contracts, and notional principal contracts) that, among other things, may
affect the character of gains and losses realized by the Funds (e.g.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Funds and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require the Funds 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 Funds to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the RIC distribution requirements for avoiding income and
excise taxes. Each Fund intends to monitor its transactions, intends to make
appropriate tax elections, and intends to make appropriate entries in its books
and records in order to mitigate the effect of these rules and preserve its
qualification for treatment as a RIC.
The
Funds’ investments in options may be subject to numerous special and complex tax
rules. These rules could affect whether gains and losses recognized by the Funds
are treated as ordinary income and loss or capital gain and loss or whether
capital gains and losses are long-term or short-term in nature, accelerate the
recognition of income to the Funds and/or defer the Funds’ ability to recognize
losses. In turn, those rules may affect the amount, timing or character of the
income distributed by the Funds. It is anticipated that any net gain realized
from the lapse or closing out of options contracts will be considered qualifying
income for purposes of the 90% requirement.
The
Funds may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains with respect
to any investments in those countries. Any such taxes would, if imposed, reduce
the yield on or return from those investments. Tax conventions between certain
countries and the U.S. may reduce or eliminate such taxes in some cases. The
Funds do not expect to satisfy the requirements for passing through to its
shareholders any share of foreign taxes paid by the Funds, with the result that
shareholders will not be required to include such taxes in their gross incomes
and will not be entitled to a tax deduction or credit for any such taxes on
their own tax returns.
Backup
Withholding.
The Funds will be required in certain cases to withhold (as “backup
withholding”) at the applicable withholding rate and remit to the U.S. Treasury
the withheld amount of taxable dividends paid to any shareholder who (1) fails
to provide a correct taxpayer identification number certified under penalty of
perjury; (2) is subject to withholding by the IRS for failure to properly report
all payments of interest or dividends; (3) fails to provide a certified
statement that he or she is not subject to “backup withholding;” or (4) fails to
provide a certified statement that he or she is a U.S. person (including a U.S.
resident alien). The backup withholding rate is 28%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability.
Foreign
Shareholders.
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.
Gains realized by foreign shareholders from the sale or other disposition of
shares of the Funds 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.
The
30% withholding tax also will not apply to dividends that the Funds reports as
(a) interest-related dividends, to the extent such dividends are derived from
the Funds’ “qualified net interest income,” or (b) short-term capital gain
dividends, to the extent such dividends are derived from the Funds’ “qualified
short-term gain.” “Qualified net interest income” is the Funds’ net income
derived from U.S.-source interest and original issue discount, subject to
certain exceptions and limitations. “Qualified short-term gain” generally means
the excess of the net short-term capital gain of the Funds for the taxable year
over its net long-term capital loss, if any. In the case of shares held through
a broker, the broker may withhold even if the Funds report a payment as an
interest-related dividend or a short-term capital gain dividend. Non-U.S.
shareholders should contact their brokers with respect to the application of
these rules to their accounts.
Unless
certain non-U.S. entities that hold Fund shares comply with IRS requirements
that generally require them to report information regarding U.S. persons
investing in, or holding accounts with, such entities, a 30% withholding tax may
apply to Fund distributions payable to such entities, and, after December 31,
2018, redemptions and certain capital gain dividends payable to such entities. A
non-U.S. shareholder may be exempt from the withholding described in this
paragraph under an applicable intergovernmental agreement between the U.S. and a
foreign government, provided that the shareholder and the applicable foreign
government comply with the terms of the agreement.
A
beneficial holder of shares who is a foreign person may be subject to foreign,
state and local tax and to the U.S. federal estate tax in addition to the
federal income tax consequences referred to above. If a shareholder is eligible
for the benefits of a tax treaty, any effectively connected income or gain will
generally be subject to U.S. federal income tax on a net basis only if it is
also attributable to a permanent establishment or fixed base maintained by the
shareholder in the United States.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss of $2
million or more for an individual shareholder or $10 million or more for a
corporate shareholder (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 adverse tax consequences, including 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 advisers to determine the applicability of
these regulations in light of their individual circumstances.
Other
Issues.
The Funds may be subject to tax or taxes in certain states where the Funds do
business. Furthermore, in those states which have income tax laws, the tax
treatment of the Funds and of Fund shareholders with respect to distributions by
the Funds may differ from federal tax treatment.
The
foregoing discussion is based on federal tax laws and regulations which are in
effect on the date of this Statement of Additional Information. Such laws and
regulations may be changed by legislative or administrative action. Shareholders
are advised to consult their tax advisers concerning their specific situations
and the application of federal, state, local and foreign taxes.
Financial
Statements
The
Funds’ annual
report
to shareholders for the fiscal year ended November 30, 2023 is a separate
document and the financial statements, accompanying notes and report of the
independent registered public accounting firm appearing therein are incorporated
by reference into this SAI.
Appendix
A
Standard
& Poor’s Corporation
DESCRIPTION
OF CREDIT RATINGS
A
brief description of the applicable Standard & Poor’s Corporation
(“S&P”) rating symbols and their meanings (as published by S&P) follows:
Long-Term
Debt
An
S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees. The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances. The ratings are based, in varying
degrees, on the following considerations:
1.Likelihood
of default-capacity and willingness of the obligor as to the timely payment of
interest and repayment of principal 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.
Investment
Grade
AAADebt
rated “AAA” has the highest rating assigned by S&P. Capacity to pay interest
and repay principal is extremely strong.
AADebt
rated “AA” has a very strong capacity to pay interest and repay principal and
differs from the highest rated issues only in small degree.
ADebt
rated “A” has a strong capacity to pay interest and repay principal although it
is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories.
BBBDebt
rated “BBB” is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
Speculative
Grade Rating
Debt
rated “BB”, “B”, “CCC”, “CC” and “C” is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. “BB” indicates the least degree of speculation and “C” the highest.
While such debt will likely have some quality and protective characteristics
these are outweighed by major uncertainties or major exposures to adverse
conditions.
BBDebt
rated “BB” has less near-term vulnerability to default than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to inadequate
capacity to meet timely interest and principal payments. The “BB” rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied “BBB” rating.
BDebt
rated “B” has a greater vulnerability to default but currently has the capacity
to meet interest payments and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or willingness to pay
interest and repay principal. The “B” rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied “BB” or “BB”
rating.
CCCDebt
rated “CCC” has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The “CCC” rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
“B” or “B” rating.
CCThe
rating “CC” typically is applied to debt subordinated to senior debt that is
assigned an actual or implied “CCC” debt rating.
CThe
rating “C” typically is applied to debt subordinated to senior debt which is
assigned an actual or implied “CCC” debt rating. The “C” rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CIThe
rating “CI” is reserved for income bonds on which no interest is being paid.
DDebt
rated “D” is in payment default. The “D” rating category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P 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 if debt service payments 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.
Provisional
Ratings: The letter “p” indicates 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 and 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 judgment with
respect to such likelihood and risk.
rThe
letter “r” is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an “r” symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
LThe
letter “L” indicates that the rating pertains to the principal amount of those
bonds to the extent that the underlying deposit collateral is Federally insured
by the Federal Savings & Loan Insurance Corporation or the Federal Deposit
Insurance Corporation* In the case of certificates of deposit the letter “L”
indicates that the deposit, combined with other deposits being held in the same
right and capacity will be honored for principal and accrued pre-default
interest up to the Federal insurance limits within 30 days after closing of the
insured institution or, in the event that the deposit is assumed by a successor
insured institution, upon maturity.
NRIndicates
no rating has been requested, that there is insufficient information on which to
base a rating, or that S&P does not rate a particular type of obligation as
a matter of policy.
Commercial
Paper
An
S&P 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-1” for the highest
quality obligations to “D” for the lowest. These categories are as follows:
A-1This
highest category 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-2Capacity
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.”
*Continuance
of the rating is contingent upon S&P’s receipt of an executed copy of the
escrow agreement or closing documentation confirming investments and cash flow.
A-3Issues
carrying this designation have adequate capacity for timely payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
BIssues
rated “B” are regarded as having only speculative capacity for timely payment.
CThis
rating is assigned to short-term debt obligations with a doubtful capacity for
payment.
DDebt
rated “D” is in payment default. The “D” rating category is used when interest
payments or principal Payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A
commercial rating is not a recommendation to purchase, sell or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers
reliable.
S&P
does not perform an audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in or unavailability of such information or
based on other circumstances.
Preferred
Securities
AAAThis
is the highest rating that may be assigned to a preferred stock issue and
indicates an extremely strong capacity to pay the preferred stock obligations.
AAA
preferred stock issue rated AA also qualifies as a high quality fixed income
security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated AAA.
AAn
issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBBAn
issue rated BBB is regarded as backed by an adequate capacity to pay preferred
stock obligations. Although it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make payments for preferred stock in this category for
issues in the A category.
BBAs
issue rated BB is regarded, on balance, as predominantly speculative with
respect to the issuer’s capacity to pay the preferred stock obligation. While
such issues will likely have some quality and protective characteristics, they
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
Moody’s
Investors Service, Inc.
A
brief description of the applicable Moody’s Investors Service, Inc. (“Moody’s”)
rating symbols and their meanings (as published by Moody’s) follows:
Long-Term
Debt
The
following summarizes the ratings used by Moody’s for corporate and municipal
long-term debt:
AaaBonds
are judged to be of the best quality. They carry the smallest degree of
investment risk and are generally referred to as “gilt edged.” Interest payments
are protected by a
large
or by an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the Fundamentally strong position of such issuer.
AaBonds
are judged to be of high quality by all standards. Together with the “Aaa” group
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in
“Aaa” securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risks
appear somewhat larger than in “Aaa” securities.
ABonds
possess many favorable investment attributes and are to be considered as upper
medium-grade obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
BaBonds
considered medium-grade obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba,
B, Caa, Ca, and C Bonds that possess one of these ratings provide questionable
protection of interest and principal (“Ba” indicates some speculative elements;
“B” indicates a general lack of characteristics of desirable investment; “Caa”
represents a poor standing; “Ca” represents obligations which are speculative in
a high degree; and “C” represents the lowest rated class of bonds). “Caa,” “Ca”
and “C” bonds may be in default.
Con.
(---) Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
(P)When
applied to forward delivery bonds, indicates that the rating is provisional
pending delivery of the bonds. The rating may be revised prior to delivery if
changes occur in the legal documents or the underlying credit quality of the
bonds.
Note:
Those bonds in the Aa, A, Baa, Ba and B groups which Moody’s believes possess
the strongest investment attributes are designated by the symbols, Aa1, A1, Ba1
and B1.
Short-Term
Loans
MIG
1/VMIG 1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad based access to the market for refinancing.
MIG
2/VMIG 2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
MIG
3/VMIG 3 This designation denotes favorable quality. All security elements are
accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well-established.
MIG
4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded
as required of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
S.G.
This designation denotes speculative quality. Debt instruments in this category
lack margins of protection.
Commercial
Paper
Issuers
rated Prime-1 (or related supporting institutions) have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics:
•Leading
market positions in well-established industries.
•High
rates of return on Fund employed.
•Conservative
capitalization structures with moderate reliance on debt and ample asset
protection.
•Broad
margins in earnings coverage of fixed financial charges and high internal cash
generation.
•Well-established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers
rated Prime-2 (or related supporting institutions) have a strong capacity for
repayment of short-term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained. Issuers rated
Prime-3 (or related supporting institutions) have an acceptable capacity for
repayment of short-term promissory obligations. The effect of industry
characteristics and market composition may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers
rated Not Prime do not fall within any of the Prime rating categories.
Preferred
Securities Ratings
aaaPreferred
stocks which are rated “aaa” are considered to be top quality. This rating
indicates good asset protection and the least risk of dividend impairment within
the universe of preferred stocks.
aaPreferred
stocks which are rated “aa” are considered to be high grade. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future.
aPreferred
stocks which are rated “a” are considered to be upper-medium grade. While risks
are judged to be somewhat greater than in the “aaa” and “aa” classifications,
earnings and asset protection are, nevertheless, expected to be maintained at
adequate levels.
baaPreferred
stocks which are rated “baa” are judged lover-medium grade, neither highly
protected nor poorly secured. Earnings and asset protection appear adequate at
present but may be questionable over any great length of time.
baPreferred
stocks which are rated “ba” are considered to have speculative elements and
their future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.