STATEMENT OF ADDITIONAL
INFORMATION
February 1, 20 20
A
series of the
Starboard Investment Trust
116 South Franklin
Street
Post Office Box 69
Rocky Mount, North Carolina
27802-0069
Telephone 1-800-773-3863
TABLE OF
CONTENTS
Page
|
2 |
|
2 |
|
13 |
|
15 |
|
17 |
|
18 |
|
27 |
|
28 |
|
29 |
|
3 0 |
|
32 |
|
34 |
|
35 |
|
39 |
This Statement of
Additional Information (“SAI”) is meant to be read in conjunction with the
Prospectus for The Sector Rotation Fund, dated February 1, 20 20, as amended or
supplemented from time to time (the “Prospectus”) , and is incorporated by
reference in its entirety into the Prospectus. Because this Statement of
Additional Information is not itself a Prospectus, no investment in shares of
The Sector Rotation Fund should be made solely upon the information contained
herein. The Fund’s financial statements and accompanying notes that appear in
the Fund’s annual and semi-annual reports are incorporated by reference into
this SAI. Copies of Prospectus, annual report, and/or semi-annual report may be
obtained at no charge by writing or calling Fund at the address or phone number
shown above or online at https//www.nottinghamco.com/fundpages/SectorRotation .
Capitalized terms used but not defined herein have the same meanings as in the
Prospectus.
Starboard Investment Trust
(“Trust”) was organized on May 13, 2009, as a Delaware statutory trust and is
authorized to have multiple series or portfolios. The Trust 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”) . The Trust currently consists of 16 separate series. This SAI
relates to the Sector Rotation Fund (the “Fund”) , which is a separate,
diversified series of the Trust. Pursuant to a reorganization that took place on
June 27, 2011, the Fund is the successor by merger to a series of the World
Funds Trust (“Predecessor Fund”), a Delaware statutory trust. The Predecessor
Fund had the same investment objectives and strategies and substantially the
same investment policies as the Fund. The Predecessor Fund commenced
operations in December 30, 2009. The Fund’s investment advisor is Grimaldi
Portfolio Solutions, Inc. (previously Navigator Money Management, Inc.) (the
“Advisor”).
This SAI describes the
financial history, management and operation of the Fund, as well as the Fund’s
investment objective and policies. It should be read in conjunction with the
Prospectus.
Investments in the Fund
are not:
• |
Deposits or obligations of any
bank; |
• |
Guaranteed or endorsed by any bank;
or |
• |
Federally insured or guaranteed by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other federal agency. |
The Prospectus describes
the Fund’s investment objective and principal investment strategy, as well as
the principal investment risks of the Fund. All investments in securities
and other financial instruments involve a risk of financial loss. No assurance
can be given that the Fund’s investment program will be successful. Investors
should carefully review the descriptions of the Fund’s investments and their
risks described in the Prospectus and this SAI.
The following descriptions
and policies supplement the descriptions in the Prospectus, and include
descriptions of certain types of investments that may be made by the Fund but
are not principal investment strategies of the Fund. Unless otherwise noted, the
investments described below may be made by the Fund directly or indirectly
through its investments in other investment companies. Attached to this SAI is
Appendix A, which contains descriptions of the rating symbols used by nationally
recognized statistical rating organizations for securities in which the Fund may
invest. Appendix B contains a copy of the Advisor’s Proxy Voting Policy and
Procedures.
General Investment Risks. All investments
in securities and other financial instruments involve a risk of financial
loss. No assurance can be given that the Fund’s investment program will be
successful. Investors should carefully review the descriptions of the
Fund’s investments and their risks described in the P rospectus and this
Statement of Additional Information.
Investment Companies. The Fund will
invest in securities of other investment companies, including, without
limitation, money market funds and exchange traded funds (“ETFs”). The
Fund expects to rely on Rule 12d1-1 under the Investment Company Act of 1940, as
amended (the “1940 Act”), when purchasing shares of a money market fund.
Under Rule 12d1-1, the Fund may generally invest without limitation in money
market funds as long as the Fund pay no sales charge, as defined in rule
2830(b)(8) of the Conduct Rules of the Financial Industry Regulatory Authority
(“FINRA”), or service fee, as defined in Rule 2830(b)(9) of the Conduct Rules of
FINRA, charged in connection with the purchase, sale, or redemption of
securities issued by the money market fund; or the Advisor waives its management
fee in an amount necessary to offset any sales charge or service fee. The
Fund will also purchase shares of other investment companies that are not money
market funds. The Fund’s investments in such securities involve certain
additional expenses and certain tax results, which would not be present in a
direct investment in the underlying fund. Pursuant to Section 12(d)(1)(A) of the
1940 Act, the Fund will be prevented from: (i) purchasing more than 3% of an
investment company’s outstanding shares; (ii) investing more than 5% of the
Fund’s assets in any single such investment company, and (iii) investing more
than 10% of the Fund’s assets in investment companies overall; unless: (a)
the underlying investment company and/or the applicable Fund has received an
order for exemptive relief from such limitations from the SEC; and (b) the
underlying investment company and the Fund take appropriate steps to comply with
any conditions in such order. In addition, the Fund is subject to Section
12(d)(1)(C), which provides that the Fund may not acquire shares of a closed-end
fund if, immediately after such acquisition, the Fund and other investment
companies having the same adviser as the Fund would hold more than 10% of the
closed-end fund’s total outstanding voting stock. However, Section 12(d)(1)(F)
of the 1940 Act provides that the limitations of paragraph 12(d)(1) shall not
apply to securities purchased or otherwise acquired by the Fund if immediately
after such purchase or acquisition not more than 3% of the total outstanding
shares of such investment company is owned by the Fund and all affiliated
persons of the Fund. Investments by the Fund in other investment companies
entail a number of risks unique to a fund of funds structure. These risks
include the following:
Multiple
Layers of Fees. By investing in other investment companies indirectly
through the Fund, prospective investors will directly bear the fees and expenses
of the Fund’s Advisor and indirectly bear the fees and expenses of other
investment companies and other investment companies’ managers as well. As
such, this multiple or duplicative layer of fees will increase the cost of
investments in the Fund.
Lack
of Transparency. The Advisor will not be able to monitor the
investment activities of the other investment companies on a continuous basis
and the other investment companies may use investment strategies that differ
from its past practices and are not fully disclosed to the Advisor and that
involve risks that are not anticipated by the Advisor. The Fund has no
control over the risks taken by the underlying investment companies in which
they invest.
Valuation
of Investment Companies. Although the Advisor will attempt to review
the valuation procedures used by other investment companies’ managers, the
Advisor will have little or no means of independently verifying valuations of
the Fund’s investments in investment companies and valuations of the underlying
securities held by other investment companies. As such, the Advisor will
rely significantly on valuations of other investment companies and the
securities underlying other investment companies that are reported by other
investment companies’ managers. In the event that such valuations prove to
be inaccurate, the net asset value (“NAV”) of the Fund could be adversely
impacted and an investor could incur a loss of investment in the Fund.
Illiquidity
of Investments by and In Other Investment Companies. Other investment
companies may invest in securities that are not registered, are subject to legal
or other restrictions on transfer, or for which no liquid market exists.
The market prices, if any, for such securities tend to be volatile and
restricted securities may sell at prices that are lower than similar securities
that are not subject to legal restrictions on resale. Further, the Fund
may not be able to redeem their interests in other investment companies’
securities that it has purchased in a timely manner. If adverse market
conditions were to develop during any period in which the Fund is unable to
redeem interests in other investment companies, the Fund may suffer losses as a
result of this illiquidity. As such, the lack of liquidity and volatility
of restricted securities held by other investment companies could adversely
affect the value of the other investment companies. Any such losses could
adversely affect the value of the Fund’s investments and an investor could incur
a loss of investment in the Fund.
Lack
of Control. Although the Fund and the Advisor will evaluate regularly
other investment companies to determine whether their investment programs are
consistent with the Fund’s investment objective, the Advisor will not have any
control over the investments made by other investment companies. Even
though other investment companies are subject to certain constraints, the
investment advisor to each such investment company may change aspects of their
investment strategies at any time. The Advisor will not have the ability
to control or influence the composition of the investment portfolio of other
investment companies.
Lack
of Diversification. There is no requirement that the underlying
investments held by other investment companies be diversified. As such, other
investment companies’ managers may target or concentrate other investment
companies’ investments in specific markets, sectors, or types of securities. As
a result, investments made by other investment companies are subject to greater
volatility as a result of this concentration than if the other investment
companies had non-concentrated and diversified portfolios of investments. Thus,
the Fund’s portfolio (and by extension the value of an investment in the Fund)
may therefore be subject to greater risk than the portfolio of a similar fund
with investments in diversified investment companies.
Use
of Leverage. The other investment companies may utilize leverage
(i.e., borrowing) to acquire their underlying portfolio investments. When
other investment companies borrow money or otherwise leverage their portfolio of
investments, doing so may exaggerate changes in the NAV of the shares of the
other investment companies and in the return on the other investment companies’
investments. Borrowing will also cost other investment companies interest
expense and other fees. As such, the value of the Fund’s investments in
other investment companies may be more volatile and all other risks (including
the risk of loss of an investment in other investment companies) tend to be
compounded or magnified. As a result, any losses suffered by other
investment companies as a result of their use of leverage could adversely affect
the value of the Fund’s investments and an investor could incur a loss of
investment in the Fund.
Exchange Traded Funds. ETFs are traded on
a securities exchange based on their market value. An investment in an ETF
generally presents the same primary risks as an investment in a conventional
registered investment company (i.e., one that is not exchange traded). In
addition, all ETFs will have costs and expenses that will be passed on to the
Fund, which will in turn increase the Fund’s expenses. ETFs are also
subject to the following risks that often do not apply to conventional
investment companies: (i) the market price of the ETF’s shares may trade at a
discount to the ETF’s NAV, and as a result, ETFs may experience more price
volatility than other types of portfolio investments and which could negatively
impact the Fund’s NAV; (ii) an active trading market for an ETF’s shares may not
develop or be maintained at a sufficient volume; (iii) trading of an ETF’s
shares may be halted if the listing exchange deems such action appropriate; and
(iv) ETF shares may be delisted from the exchange on which they trade, or
“circuit breakers” (which are tied to large decreases in stock prices used by
the exchange) may temporarily halt trading in the ETF’s stock. ETFs are
also subject to the risks of the underlying securities the ETF holds.
Finally, there may be legal limitations and other conditions imposed by SEC
rules on the amount of the ETF shares that the Fund may acquire.
Equity Securities. The equity portion of
the Fund’s portfolio may be comprised of common stocks traded on domestic
securities exchanges or on the over-the-counter (“OTC”) market. In
addition to common stocks, the equity portion of each Fund’s portfolio may also
include preferred stocks, convertible preferred stocks, and convertible bonds.
Prices of equity securities in which the Fund invests (either directly or
indirectly through the Fund’s investment in shares of other investment
companies) may fluctuate in response to many factors, including, but not limited
to, the activities of the individual companies whose securities the Fund owns,
general market and economic conditions, interest rates, and specific industry
changes. Such price fluctuations subject the Fund to potential
losses. In addition, regardless of any one company’s prospects, a
declining stock market may produce a decline in prices for all equity
securities, which could also result in losses for the Fund. Market declines may
continue for an indefinite period, and investors should understand that during
temporary or extended bear markets, the value of equity securities will
decline.
Foreign Investment Risk. Foreign
securities and foreign currency contracts involve investment risks different
from those associated with domestic securities. Changes in foreign economies and
political climates are more likely to affect the Fund than a mutual fund that
invests exclusively in domestic securities. The value of foreign currency
denominated securities or foreign currency contracts is affected by the value of
the local currency relative to the U.S. dollar. There may be less government
supervision of foreign markets, resulting in non-uniform accounting practices
and less publicly available information about issuers of foreign currency
denominated securities. The value of foreign investments may be affected by
changes in exchange control regulations, application of foreign tax laws
(including withholding tax), changes in governmental administration or economic
or monetary policy (in this country or abroad), or changed circumstances in
dealings between nations. In addition, foreign brokerage commissions, custody
fees, and other costs of investing in foreign securities are generally higher
than in the United States. Investments in foreign issues could be affected by
other factors not present in the United States, including expropriation, armed
conflict, confiscatory taxation, and potential difficulties in enforcing
contractual obligations.
Uncertainties
surrounding the sovereign debt of a number of European Union (EU) countries and
the viability of the EU have disrupted and may in the future disrupt markets in
the United States and around the world. If one or more countries leave the EU or
the EU dissolves, the world’s securities markets likely will be significantly
disrupted. In June 2016, the United Kingdom approved a referendum to leave the
EU, commonly referred to as “Brexit.” There is significant market uncertainty
regarding Brexit’s ramifications, and the range and potential implications of
possible political, regulatory, economic, and market outcomes are difficult to
predict. Political and military events, including the military crises in Ukraine
and the Middle East, and nationalist unrest in Europe, also may cause market
disruptions.
Fixed-Income Securities. Fixed-income
securities include government and corporate bonds, money market instruments,
high yield securities or "junk bonds" and zero-coupon bonds. Zero-coupon
bonds are purchased at a discount from their face values and accrue interest at
the applicable coupon rate over a period of time. Fixed-income securities
purchased by the Fund may consist of obligations of any rating.
Fixed-income securities in the lowest investment grade categories have
speculative characteristics, with changes in the economy or other circumstances
more likely to lead to a weakened capacity of the bonds to make principal and
interest payments than would occur with bonds rated in higher categories.
High yield bonds are typically rated below "Baa" by Moody's Investors Service,
Inc. ("Moody's") or below "BBB" by S&P Global Ratings ("S&P") or
below investment grade by other recognized rating agencies. The Fund may
also invest in other mutual funds that invest in unrated securities of
comparable quality under certain circumstances. Such bonds are subject to
greater market fluctuations and risk of loss of income and principal than higher
rated bonds for a variety of reasons, including:
Sensitivity
to Interest Rate and Economic Change. The economy and interest rates
affect high yield securities differently than other securities. For example, the
prices of high yield bonds have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
changes or individual corporate developments. Also, during an economic downturn
or substantial period of rising interest rates, highly leveraged issuers may
experience financial stress which would adversely affect their ability to
service their principal and interest obligations, to meet projected business
goals, and to obtain additional financing. If the issuer of a bond defaults, an
underlying mutual fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility or market prices of high yield bonds and the Underlying
Fund's asset values.
Payment
Expectations. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises
these provisions in a declining interest rate market,
the Fund or an investment company in which the Fund invests would have to
replace the security with a lower yielding
security, resulting in a decreased return for
investors. Conversely, a high yield bond's value will decrease in a rising
interest rate market, as will the value of the Fund's or other investment
company’s assets. If the Fund or an investment company in which the Fund
invests experiences unexpected net redemptions, it may be
forced to sell its high yield bonds without regard to their
investment merits, thereby decreasing the asset base
upon which the Fund's or other investment company in which expenses can be
spread and possibly reducing the Fund's or
other investment company’s rate of return.
Liquidity
and Valuation. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact a fund's ability to accurately value high yield bonds and may hinder a
fund's ability to dispose of the bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly traded
market.
Credit
Ratings. Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also,
because credit rating agencies may fail to timely
change the credit ratings to reflect subsequent
events, the Fund or an investment company in which the Fund invests must
monitor the issuers of high yield
bonds in their portfolios to determine if the issuers
will have sufficient cash flow and profits to meet
required principal and interest payments, and
to assure the bonds' liquidity so the Fund or an investment company
in which the Fund invests can meet redemption requests.
High-yield securities are
deemed speculative with respect to the issuer's capacity to pay interest and
repay principal over a long period of time. Special tax considerations are
associated with investing in high-yield securities structured as zero coupon or
"pay-in-kind" securities. The Fund or an investment company in which the
Fund invests, will report the interest on these securities as income even though
it receives no cash interest until the security's maturity or payment
date. The payment of principal and interest on most fixed-income
securities purchased by a fund will depend upon the ability of the issuers to
meet their obligations. An issuer's obligations under its fixed-income
securities are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, which may be enacted by federal or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of such obligations. The
power or ability of an issuer to meet its obligations for the payment of
interest on, and principal of, its fixed-income securities may be materially
adversely affected by litigation or other conditions.
The ratings of S&P,
Moody's and other nationally recognized rating agencies represent their opinions
as to the quality of fixed-income securities. It should be emphasized,
however, that ratings are general and are not absolute standards of quality, and
fixed-income securities with the same maturity, interest rate, and rating may
have different yields while fixed-income securities of the same maturity and
interest rate with different ratings may have the same yield. For a more
detailed description of ratings, please see Appendix A.
Money Market Instruments. Money market
instruments include U.S. Government obligations or corporate debt obligations
(including those subject to repurchase agreements). Money market
instruments also may include banker’s acceptances and certificates of deposit of
domestic branches of U.S. banks, commercial paper, and variable amount demand
master notes (“Master Notes”). Banker’s acceptances are time drafts drawn on and
“accepted” by a bank. When a bank “accepts” such a time draft, it assumes
liability for its payment. When the Fund acquires a banker’s acceptance, the
bank that “accepted” the time draft is liable for payment of interest and
principal when due. The banker’s acceptance carries the full faith and credit of
such bank. A certificate of deposit (“CD”) is an unsecured, interest bearing
debt obligation of a bank. Commercial paper is an unsecured, short-term
debt obligation of a bank, corporation, or other borrower. Commercial
paper maturity generally ranges from two to 270 days and is usually sold on a
discounted basis rather than as an interest-bearing instrument. The Fund
will invest in commercial paper only if it is rated in one of the top two rating
categories by Moody’s, S&P, or Fitch Investors Service, Inc. (“Fitch’s), or
if not rated, of equivalent quality in the Advisor’s opinion. Commercial
Paper may include Master Notes of the same quality. Master Notes are unsecured
obligations that are redeemable upon demand of the holder and that permit the
investment of fluctuating amounts at varying rates of interest. Master
Notes will be acquired by the Fund only through the Master Note program of the
Fund’s custodian bank, acting as administrator thereof. The Advisor will
monitor, on a continuous basis, the earnings power, cash flow, and other
liquidity ratios of the issuer of a Master Note held by the Fund.
U.S. Government Securities. U.S.
Government securities include U.S. Government obligations such as U.S. Treasury
notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations guaranteed by
the U.S. Government such as Government National Mortgage Association (GNMA), as
well as obligations of U.S. Government authorities, agencies, and
instrumentalities such as Federal National Mortgage Association (FNMA), Federal
Home Loan Mortgage Corporation (FHLMC), Federal Housing Administration (FHA),
Federal Farm Credit Bank (FFCB), Federal Home Loan Bank (FHLB), Student Loan
Marketing Association (SLMA), and The Tennessee Valley Authority (TVA).
U.S. Government securities may also be acquired subject to repurchase
agreements. While obligations of some U.S. Government sponsored entities
are supported by the full faith and credit of the U.S. Government (e.g. GNMA),
others are not. No assurance can be given that the U.S. Government will
provide financial support to U.S. Government agencies or instrumentalities in
the future since it is not obligated to do so by law. The guarantee of the
U.S. Government does not extend to the yield or value of the Fund’s
shares.
Debentures. A debenture is long-term,
unsecured, debt instrument backed only by the integrity of the borrower, not by
collateral, and documented by an indenture. Governments often issue debentures,
in part because they generally cannot guarantee debt with assets (government
assets are public property). The primary risk with this type of investment is
that the issuer will default or go into bankruptcy. As an unsecured
creditor, in the event of default or bankruptcy, the holder of a debenture does
not have a claim against any specific assets of the issuing firm, so the
investor will only be paid from the issuer’s assets after the secured creditors
have been paid. The Fund may invest in all types of debentures, including
corporate and government debentures.
Derivative Instruments Risk. While the
Fund does not intend to invest in derivatives directly, it may indirectly hold
derivatives through the holdings of the funds in which it invests. When a fund
enters into options, futures, and other forms of financial derivatives, such as
foreign exchange contracts, the investments involve risks different from direct
investments in the underlying securities. While transactions in derivatives may
reduce certain risks, these transactions themselves entail certain other risks.
For example, unanticipated changes in interest rates, securities prices, or
currency exchange rates may result in a poorer overall performance of a fund
than if they had not entered into any derivatives transactions.
Derivatives may magnify a fund’s gains or losses, causing it to make or lose
substantially more than it invested. If a fund uses derivative
instruments, such fund must comply with the applicable requirements of the 1940
Act and the guidance of no-action letters issued by the SEC, including SEC
Release 10666 that requires a fund to segregate assets or otherwise “cover” its
positions in a manner that limits a fund’s risk of loss. The Fund has no
specific limit on the amount it invests in derivatives, directly or indirectly,
although practical limits are created by the requirement to segregate assets and
hold offsetting positions in connection with such investments.
When used for hedging
purposes, increases in the value of the securities a fund holds or intends to
acquire should offset any losses incurred with a derivative. Purchasing
derivatives for purposes other than hedging could expose a fund to greater
risks.
A fund’s ability to hedge
securities through derivatives depends on the degree to which price movements in
the underlying index or instrument correlate with price movements in the
relevant securities. In the case of poor correlation, the price of the
securities a fund is hedging may not move in the same amount, or even in the
same direction as the hedging instrument. A fund will try to minimize this
risk by investing only in those contracts whose behavior it expects to resemble
with the portfolio securities it is trying to hedge. However, if a fund’s
prediction of interest and currency rates, market value, volatility, or other
economic factors is incorrect, a fund may lose money, or may not make as much
money as it expected.
Derivative prices can
diverge from the prices of their underlying instruments, even if the
characteristics of the underlying instruments are very similar to the
derivative. Listed below are some of the factors that may cause such a
divergence:
• |
current and anticipated short-term
interest rates, changes in volatility of the underlying instrument, and
the time remaining until expiration of the
contract; |
• |
a difference between the derivatives and
securities markets, including different levels of demand, how the
instruments are traded, the imposition of daily price fluctuation limits
or trading of an instrument stops; and |
• |
differences between the derivatives, such
as different margin requirements, different liquidity of such markets, and
the participation of speculators in such
markets. |
Derivatives based upon a
narrow index of securities may present greater risk than derivatives based on a
broad index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and
options values are expected to correlate with exchange rates, they may not
reflect other factors that affect the value of the investments of a fund. A
currency hedge, for example, should protect a yen-denominated security from a
decline in the yen, but will not protect a fund against a price decline
resulting from deterioration in the issuer’s creditworthiness. Because the value
of a fund’s foreign-denominated investments changes in response to many factors
other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of a fund’s investments precisely over
time.
Before a futures contract
or option is exercised or expires, a fund can terminate it only by entering into
a closing purchase or sale transaction. Moreover, a fund may close out a futures
contract only on the exchange the contract was initially traded. Even when there
appears to be an active market for options an futures, there is no guarantee
that such a liquid market will exist. If there is no secondary market for
the contract, or the market is illiquid, a fund may not be able to close out a
position. In an illiquid market, a fund may:
• |
have to sell securities to meet its daily
margin requirements at a time when it is disadvantageous to do
so; |
• |
have to purchase or sell the instrument
underlying the contract; |
• |
not be able to hedge its investments;
and |
• |
not be able to realize profits or limit
its losses. |
Derivatives may become
illiquid (i.e., difficult to sell at a desired time and price) under a variety
of market conditions. For example:
• |
an exchange may suspend or limit trading
in a particular derivative instrument, an entire category of derivatives,
or all derivatives, which sometimes occurs because of increased market
volatility; |
• |
unusual or unforeseen circumstances may
interrupt normal operations of an
exchange; |
• |
the facilities of the exchange may not be
adequate to handle current trading volume; |
• |
equipment failures, government
intervention, insolvency of a brokerage firm or clearing house, or other
occurrences may disrupt normal trading activity;
or |
• |
investors may lose interest in a
particular derivative or category of
derivatives. |
If a fund incorrectly
predicts securities market and interest rate trends, such fund may lose money by
investing in derivatives. For example, if a fund were to write a call
option based on the expectation that the price of the underlying security would
fall, but the price were to rise instead, a fund could be required to sell the
security upon exercise at a price below the current market price.
Similarly, if a fund were to write a put option based on the Advisor’s
expectation that the price of the underlying security would rise, but the price
were to fall instead, a fund could be required to purchase the security upon
exercise at a price higher than the current market price.
Because of the low margin
deposits required upon the opening of a derivative position, such transactions
involve an extremely high degree of leverage. Consequently, a relatively small
price movement in a derivative may result in an immediate and substantial loss
(as well as gain) to the Fund and they may lose more than it originally invested
in the derivative.
If the price of a futures
contract changes adversely, a fund may have to sell securities at a time when it
is disadvantageous to do so to meet its minimum daily margin requirement. A fund
may lose margin deposits if a broker with whom they have an open futures
contract or related option becomes insolvent or declares bankruptcy.
The prices of derivatives
are volatile (i.e., they may change rapidly, substantially, and unpredictably)
and are influenced by a variety of factors, including:
• |
actual and anticipated changes in
interest rates; |
• |
fiscal and monetary policies;
and |
• |
national and international political
events. |
Most exchanges limit the
amount by which the price of a derivative can change during a single trading
day. Daily trading limits establish the maximum amount that the price of a
derivative may vary from the settlement price of that derivative at the end of
trading on the previous day. Once the price of a derivative reaches this
value, a fund may not trade that derivative at a price beyond that limit. The
daily limit governs only price movements during a given day and does not limit
potential gains or losses. Derivative prices have occasionally moved to the
daily limit for several consecutive trading days, preventing prompt liquidation
of the derivative.
Government
Regulation of Derivatives. It is possible that government regulation of
various types of derivative instruments, including futures and swap agreements,
may limit or prevent a fund from using such instruments as a part of its
investment strategy, and could ultimately prevent a fund from being able to
achieve its investment objective. It is impossible to predict fully the effects
of legislation and regulation in this area, but the effects could be substantial
and adverse.
The futures markets are
subject to comprehensive statutes, regulations, and margin requirements. The
SEC, the Commodities Futures Trading Commission (“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 swaps
and futures transactions in the U.S., the European Union and other jurisdictions
is a rapidly changing area of law and is subject to modification by government
and judicial action. There is a possibility of future regulatory changes
altering, perhaps to a material extent, the nature of an investment in a fund or
the ability of a fund to continue to implement its investment strategies.
Under recently adopted
rules and regulations, transactions in some types of swaps (including interest
rate swaps and credit default swaps on North American and European indices) are
required to be centrally cleared, and additional types of swaps may be required
to be centrally cleared in the future. In a transaction involving those swaps
(“cleared derivatives”), a fund’s counterparty is a clearing house, rather than
a bank or broker. Since a fund is not a member of a clearing house and only
clearing members can participate directly in the clearing house, a fund will
hold cleared derivatives through accounts at clearing members. In cleared
derivatives transactions, a fund will make payments (including margin payments)
to and receive payments from a clearing house through its accounts at clearing
members. Clearing members guarantee performance of their clients’ obligations to
the clearing house.
In addition, U.S.
regulators, the European Union and certain other jurisdictions have adopted
minimum margin and capital requirements for uncleared OTC derivatives
transactions. It is expected that these regulations will have a material impact
on a fund’s use of uncleared derivatives. These rules will impose minimum margin
requirements on derivatives transactions between a fund and its swap
counterparties and may increase the amount of margin a fund is required to
provide. They will impose regulatory requirements on the timing of transferring
margin, which may accelerate a fund’s current margin process. They will also
effectively require changes to typical derivatives margin documentation. Such
requirements could increase the amount of margin a fund needs to provide in
connection with uncleared derivatives transactions and, therefore, make such
transactions more expensive.
The SEC has also issued a
proposed rule under the 1940 Act providing for the regulation of registered
investment companies’ use of derivatives and certain related instruments. The
ultimate impact, if any, of possible regulation remains unclear, but the
proposed rule, if adopted, could, among other things, restrict a fund’s ability
to engage in derivatives transactions and/or increase the costs of such
derivatives transactions such that a fund may be unable to implement its
investment strategy. These and other new rules and regulations could, among
other things, further restrict a fund’s ability to engage in, or increase the
cost to a fund of, derivatives transactions, for example, by making some types
of derivatives no longer available to a fund, increasing margin or capital
requirements, or otherwise limiting liquidity or increasing transaction costs.
The implementation of the clearing requirement has increased the costs of
derivatives transactions for a fund, since a fund has to pay fees to its
clearing members and is typically required to post more margin for cleared
derivatives than it has historically posted for bilateral derivatives. The costs
of derivatives transactions are expected to increase further as clearing members
raise their fees to cover the costs of additional capital requirements and other
regulatory changes applicable to the clearing members. These regulations are new
and evolving, so their potential impact on a fund and the financial system are
not yet known. While the new regulations and central clearing of some
derivatives transactions are designed to reduce systemic risk (i.e., the risk
that the interdependence of large derivatives dealers could cause them to suffer
liquidity, solvency or other challenges simultaneously), there is no assurance
that the new mechanisms will achieve that result.
Options. While the Fund does not intend
to purchase and write put and call options on securities directly, it may
indirectly hold such securities through the holdings of the funds Fund’s
investment in which it invests. The purchase and writing of options involves
certain risks. During the option period, a call writer that holds the
underlying security has, in return for the premium on the option, given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price, but, as long as its obligation as a writer continues, has
retained the risk of loss should the price of the underlying security
decline. The writer of an option has no control over the time when it may
be required to fulfill its obligation as a writer of the option. Once an option
writer has received an exercise notice, it cannot effect a closing purchase
transaction in order to terminate its obligation under the option and must
deliver the underlying securities at the exercise price. If a put or call option
purchased by a fund is not sold when it has remaining value, and if the market
price of the underlying security, in the case of a put, remains equal to or
greater than the exercise price or, in the case of a call, remains less than or
equal to the exercise price, a fund will lose its entire investment in the
option. Also, where a put or call option on a particular security is
purchased to hedge against price movements in a related security, the price of
the put or call option may move more or less than the price of the related
security. There can be no assurance that a liquid market will exist when a
fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options market, a fund may be
unable to close out a position.
A fund may write a call or
put option only if the option is “covered” by holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of a fund’s obligation as writer of the option. A written call
option creates a potential obligation to sell the underlying security. In order
to make sure that this obligation can be met, a fund could (i) hold the security
underlying the written option; (ii) hold an offsetting call option (one with a
strike price that is the same or lower than the strike price of the written
option); or (iii) segregate cash and liquid securities (which can be cash, U.S.
Government securities, and other liquid debt or equity securities) that when
added to collateral on deposit equals the market value of the underlying
security. A written put option creates a potential obligation to buy the
underlying security. In order to make sure that this obligation can be
met, a fund could (i) sell short the underlying security at the same or higher
price than the strike price of the written put option; (ii) hold an offsetting
put option (one with a strike price that is the same or higher than the strike
price of the written option); or (iii) segregate cash and liquid securities that
when added to collateral on deposit equals the strike price of the option.
Options offer large
amounts of leverage, which will result in a fund’s NAV being more sensitive to
changes in the value of the related instrument. A fund may purchase or write
both exchange-traded and over-the-counter (OTC) options. Exchange-traded options
in the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are contracts
between a fund and its counterparty (usually a securities dealer or a bank) with
no clearing organization guarantee. Thus, when a fund purchases an OTC option,
it relies on the counterparty from whom it purchased the option to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the counterparty to do so would result in the loss of any premium paid by a fund
as well as the loss of any expected benefit of the transaction.
A fund’s ability to
establish and close out positions in exchange-listed options depends on the
existence of a liquid market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. There can be no
assurance that a fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
counterparty, a fund might be unable to close out an OTC option position at any
time prior to its expiration, if at all.
If a fund were unable to
effect a closing transaction for an option it had purchased, due to the absence
of a counterparty or secondary market, the imposition of price limits or
otherwise, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a fund could cause material losses because a fund would be unable to
sell the investment used as cover for the written option until the option
expires or is exercised.
Options have varying
expiration dates. The exercise price of the options may be below, equal to or
above the current market value of the underlying security or instrument. Options
purchased by a fund that expire unexercised have no value, and a fund will
realize a loss in the amount of the premium paid and any transaction costs. If
an option written by a fund expires unexercised, a fund realizes a gain equal to
the premium received at the time the option was written. Transaction costs must
be included in these calculations.
Futures Contracts. While the Fund does
not intend to invest in futures directly, it may indirectly hold futures through
the holdings of the funds in which it invests. A futures contract is a bilateral
agreement to buy or sell a security
(or deliver a cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery at the end of trading in
the contracts) for a set price in the future. Futures contracts are designated
by boards of trade that have been designated “contracts markets” by the CFTC. No
purchase price is paid or received when the contract is entered into. Instead, a
fund, upon entering into a futures contract (and to maintain a fund’s open
positions in futures contracts), would be required to deposit with its custodian
in a segregated account in the name of the futures broker an amount of cash,
U.S. Government securities, suitable money market instruments, or liquid,
high-grade debt securities, known as “initial margin.” The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily
purchased and sold on margin that may range upward from less than 5% of the
value of the contract being traded. By using futures contracts as a risk
management technique, given the greater liquidity in the futures market than in
the cash market, it may be possible to accomplish certain results more quickly
and with lower transaction costs.
If the price of an open
futures contract changes (by increase in the case of a sale or by decrease in
the case of a purchase) such that the loss on the futures contract reaches a
point at which the margin on deposit does not satisfy margin requirements, the
broker will require an increase in the margin. However, if the value of a
position increases because of favorable price changes in the futures contract
such that the margin deposit exceeds the required margin, the broker will pay
the excess to a fund. These subsequent payments, called “variation margin,” to
and from the futures broker, are made on a daily basis as the price of the
underlying assets fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as “marking to the
market.” A fund is expected to earn interest income on initial and
variation margin deposits.
A fund will incur
brokerage fees when it purchases and sells futures contracts. Positions
taken in the futures markets are not normally held until delivery or cash
settlement is required, but are instead liquidated through offsetting
transactions that may result in a gain or a loss. While futures positions
taken by a fund will usually be liquidated in this manner, a fund may instead
make or take delivery of underlying securities whenever it appears economically
advantageous for a fund to do so. A clearing organization associated with the
exchange on which futures are traded assumes responsibility for closing out
transactions and guarantees that as between the clearing members of an exchange,
the sale and purchase obligations will be performed with regard to all positions
that remain open at the termination of the contract.
In addition to the margin
restrictions discussed above, transactions in futures contracts may involve the
segregation of funds pursuant to requirements imposed by the SEC. Under
those requirements, where a fund has a long position in a futures contract, it
may be required to establish a segregated account (not with a futures
commission merchant or broker) containing cash or certain liquid assets equal to
the purchase price of the contract (less any margin on deposit). However,
segregation of assets is not required if a fund “covers” a long position. For a
short position in futures or forward contracts held by a fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established).
Short Sales. While the Fund does not
intend to engage in short sales directly, the funds in which it invests may
engage in short sales. A short sale is a transaction in which a party
sells a security it does not own or have the right to acquire (or that it owns
but does not wish to deliver) in anticipation that the market price of that
security will decline. When a party makes a short sale, the broker-dealer
through which the short sale is made must borrow the security sold short and
deliver it to the party purchasing the security. The party is required to
make a margin deposit in connection with such short sales; the party may have to
pay a fee to borrow particular securities and will often be obligated to pay
over any dividends and accrued interest on borrowed securities. If the
price of the security sold short increases between the time of the short sale
and the time the party covers the short position, the party will incur a loss;
conversely, if the price declines, the party will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above.
Swaps. While the Fund does not intend to
invest in swaps directly, it may indirectly hold swaps through the holdings of
the funds in which it invests. Swaps may include in currency, equity, interest
rate, index and other swaps, which involve the exchange by an investor with
another party of their respective commitments, in an attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost than if a fund had invested directly in the asset that yielded the desired
return. In the case of interest rate swaps, an investor may exchange with
another party their respective commitments to pay or receive interest, such as
an exchange of fixed rate payments for floating rate payments. Use of swaps
subjects the investor to risk of default by the counterparties. If there
is a default by the counterparty to such a transaction, there may be contractual
remedies pursuant to the agreements related to the transaction although
contractual remedies may not be sufficient in the event that the counterparty to
the transaction is insolvent. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with the markets for
other similar instruments which are traded in the interbank market. An
investor may also enter into currency swaps or other swaps which are similar to
interest rate swaps but may be surrogates for other instruments such as currency
forwards or options.
Forward Commitment and When-Issued
Securities. While the Fund does not intend to purchase securities
on a when-issued basis or for settlement at a future date directly, it may
indirectly engage in such transactions through the holdings of the funds in
which it invests. A fund may purchase securities on a when-issued basis or for
settlement at a future date if a fund holds sufficient assets to meet the
purchase price. In such purchase transactions, a fund will not accrue interest
on the purchased security until the actual settlement. Similarly, if a security
is sold for a forward date, the Fund will accrue the interest until the
settlement of the sale. When-issued security purchases and forward commitments
have a higher degree of risk of price movement before settlement due to the
extended time period between the execution and settlement of the purchase or
sale. As a result, the exposure to the counterparty of the purchase or
sale is increased. Although a fund would generally purchase securities on a
forward commitment or when-issued basis with the intention of taking delivery, a
fund may sell such a security prior to the settlement date if the Advisor feels
such action is appropriate. In such a case, a fund could incur a
short-term gain or loss.
Repurchase Agreements. While the fund
does not intend to enter into repurchase agreements directly, it may indirectly
engage in such transactions through the holdings of the funds in which it
invests. A repurchase transaction occurs when an investor purchases a security
(normally a U.S. Treasury obligation), and it then resells it to the vendor
(normally a member bank of the Federal Reserve or a registered government
securities dealer) and is required to deliver the security (and/or securities
substituted for them under the repurchase agreement) to the vendor on an agreed
upon date in the future. The repurchase price exceeds the purchase price
by an amount which reflects an agreed upon market interest rate effective for
the period of time during which the repurchase agreement is in effect. Delivery
pursuant to the resale normally will occur within one to seven days of the
purchase. Repurchase agreements are considered “loans” under the 1940 Act,
collateralized by the underlying security. The Trust has implemented procedures
to monitor on a continuous basis the value of the collateral serving as security
for repurchase obligations. The Advisor will consider the creditworthiness
of the vendor. If the vendor fails to pay the agreed upon resale price on
the delivery date, a fund will retain or attempt to dispose of the collateral. A
fund’s risk is that such default may include any decline in value of the
collateral to an amount which is less than 100% of the repurchase price, any
costs of disposing of such collateral, and any loss resulting from any delay in
foreclosing on the collateral. Repurchase agreements that do not provide for
payment within seven days will be treated as illiquid securities.
Illiquid Investments. The Fund may invest
up to 15% of net assets in illiquid securities, which are investments that
cannot be sold or disposed of in the ordinary course of business within seven
days at approximately the prices at which they are valued. This restriction is
not limited to the time of purchase. Under the supervision of the Board of
Trustees of the Trust (the “Board” or the “Trustees”), the Advisor determines
the liquidity of the Fund’s investments, and through reports from the Advisor,
the Trustees monitor investments in illiquid instruments. In determining the
liquidity of the Fund’s investments, the Advisor may consider various factors
including (i) the frequency of trades and quotations; (ii) the number of dealers
and prospective purchasers in the marketplace; (iii) dealer undertakings to make
a market; (iv) the nature of the security (including any demand or tender
features); and (v) the nature of the marketplace for trades (including the
ability to assign or offset the Fund’s rights and obligations relating to the
investment). If through a change in values, net assets, or other
circumstances, the Fund was in a position where more than 15% of its net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity. Investment in illiquid securities poses risks of
potential delays in resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the Fund may be unable to dispose of illiquid securities promptly or at
reasonable prices.
Restricted Securities. Within its
limitation on investment in illiquid securities, the Fund may purchase
restricted securities that generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the federal
securities laws, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If during such a period adverse market
conditions were to develop, the Fund might obtain a less favorable price than
prevailed when it decided to seek registration of the security. Restricted
securities that can be offered and sold to qualified institutional buyers under
Rule 144A of the Securities Act of 1933 and are determined to be liquid under
guidelines adopted by and subject to the supervision of the Trustees are not
subject to the limitations on illiquid securities.
Lending of Portfolio Securities. In order
to generate additional income, the Fund may lend portfolio securities in an
amount up to 33% of total Fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities which the Advisor has
determined are creditworthy under guidelines established by the Board. In
determining whether the Fund will lend securities, the Advisor will consider all
relevant facts and circumstances. The Fund may not lend securities to any
company affiliated with the Advisor. Each loan of securities will be
collateralized by cash, U.S. Government securities, or standby letters of credit
not issued by the Fund’s bank lending agent. The Fund might experience a loss if
the borrower defaults on the loan.
The borrower at all times
during the loan must maintain with the Fund cash or cash equivalent collateral.
While the loan is outstanding, the borrower will pay the Fund any interest paid
on the loaned securities, and the Fund may invest the cash collateral to earn
additional income. Alternatively, the Fund may receive an agreed-upon
amount of interest income from the borrower who has delivered equivalent
collateral. It is anticipated that the Fund may share with the borrower some of
the income received on the collateral for the loan or the Fund will be paid a
premium for the loan. Voting rights for loaned securities will typically
pass to the borrower, but the Fund will retain the right to call any security in
anticipation of a vote that the Advisor deems material to the security on loan.
Loans are subject to termination at the option of the Fund or the borrower at
any time. The Fund may pay reasonable administrative and custodial fees in
connection with a loan, and may pay a negotiated portion of the income earned on
the cash to the borrower or placing broker. As with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
collateral should the borrower fail financially.
Securities lending
involves counterparty risk, including the risk that the loaned securities may
not be returned or returned in a timely manner and/or a loss of rights in the
collateral if the borrower or the lending agent defaults or fails financially.
This risk will be increased if a continuation of the current downturn in the
economic conditions in the United States and around the world, particularly the
recent failures of several major financial services firms, causes further
declines in the securities markets and/or causes further financial instability
in the borrowers or lending agents. This risk is increased when the Fund’s
loans are concentrated with a single or limited number of borrowers. There are
no limits on the number of borrowers the Fund may use, and the Fund may lend
securities to only one or a small group of borrowers. Mutual funds participating
in securities lending bear the risk of loss in connection with investments of
the cash collateral received from the borrowers, which do not trigger additional
collateral requirements from the borrower.
Borrowing. The Fund may borrow money for
investment purposes, which is a form of leveraging. Leveraging
investments, by purchasing securities with borrowed money, is a speculative
technique that increases investment risk while increasing investment
opportunity. Any such borrowing may make the Fund’s NAV more volatile than funds
that do not borrow for investment purposes because leverage magnifies changes in
the Fund’s NAV and on the Fund’s investments. Although the principal of such
borrowings will be fixed, the Fund's assets may change in value during the time
the borrowing is outstanding. Leverage also creates interest expenses for
the Fund. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than it would be if leverage were not used. Conversely,
if the income from the assets obtained with borrowed funds is not sufficient to
cover the cost of leveraging, the net income of the Fund will be less than it
would be if leverage were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The use of
derivatives in connection with leverage creates the potential for significant
loss. The Fund does not intend to use leverage in excess of 5% of total assets
and will not make additional investments when outstanding borrowings exceed 5%
of the Fund’s total assets. Any leveraging will comply with the applicable
requirements of the 1940 Act and the guidance of no-action letters issued by the
SEC, including Investment Company Act Release No. 10666 (Apr. 18, 1979),
intended to minimize the use of leverage and the possibility that the Fund’s
liabilities will exceed the value of its assets.
The Fund may also borrow
money to meet redemptions or for other emergency purposes. Such borrowings may
be on a secured or unsecured basis at fixed or variable rates of interest. The
1940 Act requires the Fund to maintain continuous asset coverage of not less
than 300% with respect to all borrowings. If such asset coverage should
decline to less than 300% due to market fluctuations or other reasons, the Fund
may be required to dispose of some of its portfolio holdings within three days
in order to reduce the Fund's debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to dispose of
assets at that time. The Fund also may be required to maintain minimum
average balances in connection with such borrowing 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.
Temporary Defensive Positions. The Fund
may, from time to time, take temporary defensive positions that are inconsistent
with the Fund’s principal investment strategies in an attempt to respond to
adverse market, economic, political, or other conditions. During such an
unusual set of circumstances, the Fund may hold up to 100% of its portfolios in
cash or cash equivalent positions (e.g., money market securities, U.S.
Government securities, and/or similar securities). When the Fund takes a
temporary defensive position, the Fund may not be able to achieve its investment
objective.
Fundamental Investment Restrictions. The
following investment restrictions have been adopted by the Board with respect to
the Fund. Except as otherwise stated, these investment restrictions are
fundamental policies , which be changed without the approval of the holders of a
majority of the outstanding voting securities of the Fund. A vote of a majority
of the outstanding voting securities of the Fund is defined in the 1940 Act as
the lesser of (i) 67% or more of the voting securities present at a shareholder
meeting if the holders of more than 50% of the outstanding voting securities of
the Fund are present or represented by proxy ; or (ii) more than 50% of the
outstanding voting securities of the Fund .
As a matter of fundamental
policy, the Fund may:
(1) |
Not invest 25% or more of its total assets in a particular industry
or group of industries. This limitation is not applicable to investments
in obligations issued or guaranteed by the U.S. government, its agencies,
and instrumentalities or repurchase agreements with respect
thereto. |
(2) |
Not 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) |
Not 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) |
Not 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) |
Not 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. |
With respect to the
fundamental investment restrictions above (other than those involving senior
securities and borrowings), if a percentage limitation is adhered to at the time
of investment, a later increase or decrease in percentage resulting from any
change in value or net assets will not result in a violation of such restriction
(i.e., percentage limitations are determined at the time of purchase).
Illiquid
Securities. The Fund may invest up to 15% of net assets in illiquid
securities, which are investments that cannot be sold or disposed of in the
ordinary course of business within seven days at approximately the prices at
which they are valued. This restriction is not limited to the time of
purchase.
The following descriptions
of certain provisions of the 1940 Act may assist investors in understanding the
above policies and restrictions:
Concentration. For
purposes of the Fund’s concentration policy, if the Fund invests in one or more
investment companies, the Fund will examine the holdings of such investment
companies to ensure that the Fund is not indirectly concentrating its
investments in a particular industry. In determining the exposure of the Fund to
a particular industry for purposes of the fundamental investment restriction on
concentration, the Fund currently uses Standard & Poor’s Global Industry
Classification Standard (GICS) in order to classify industries.
Borrowing.
The 1940 Act allows a fund 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 not in excess of 5% of its total
assets). The Fund will not make additional investments in securities when
outstanding borrowings exceed 5% of the Fund’s total assets.
Senior
Securities. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness. The 1940 Act generally prohibits
funds from issuing senior securities, although it does not treat certain
transactions as senior securities, such as certain borrowings, short sales,
reverse repurchase agreements, firm commitment agreements and standby
commitments, with appropriate earmarking or segregation of assets to cover such
obligation. The Fund’s specific policies for segregation of assets are
described in “Additional Information About Investment Policies” above.
Lending.
Under the 1940 Act, a fund may only make loans if expressly permitted by its
investment policies. The Fund's current investment policy on lending is as
follows: 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 Fund 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 its Statement of Additional
Information.
Underwriting. Under the 1940 Act, underwriting
securities involves a fund purchasing securities directly from an issuer for the
purpose of selling (distributing) them or participating in any such activity
either directly or indirectly. Under the 1940 Act, a diversified fund may
not make any commitment as underwriter, if immediately thereafter the amount of
its outstanding underwriting commitments, plus the value of its investments in
securities of issuers (other than investment companies) of which it owns more
than 10% of the outstanding voting securities, exceeds 25% of the value of its
total assets.
Commodities and Real
Estate. The 1940 Act does not directly restrict an investment
company's ability to invest in commodities or real estate, but does require that
every investment company have a fundamental investment policy governing such
investments. The Fund has adopted a fundamental policy that would permit
direct investment in commodities or real estate. However, the Fund's
current investment policy is as follows: the Fund will not purchase or sell real
estate, physical commodities, or commodities contracts, except that the Fund may
purchase: (i) marketable securities issued by companies which own or invest in
real estate (including REITs), commodities, or commodities contracts; and (ii)
commodities contracts relating to financial instruments, such as financial
futures contracts and options on such contracts.
Non-Fundamental Restrictions. The
following investment policies are not fundamental and may be changed without
shareholder approval. As a matter of non-fundamental policy, the Fund may:
(1) |
Not borrow money in an amount exceeding 33 1/3% of the value of its
total assets, provided that, for purposes of this limitation, investment
strategies that either obligate the Fund to purchase securities or require
the Fund to segregate assets are not considered to be borrowing. Asset
coverage of at least 300% is required for all borrowing, except where the
Fund has borrowed money for temporary purposes in an amount not exceeding
5% of its total assets. |
(2) |
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 Fund may: (i) purchase or
hold debt instruments in accordance with its investment objective and
policies; (ii) enter into repurchase agreements; and (iii) lend its
securities. |
(3) |
Not purchase or sell real estate, real estate limited partnership
interests, physical commodities, or commodities contracts except that the
Fund may purchase: (i) marketable securities issued by companies which own
or invest in real estate (including real estate investment trusts),
commodities or commodities contracts; and (ii) commodities contracts
relating to financial instruments, such as financial futures contracts and
options on such contracts. |
Subject to the policies
established by the Board , the Advisor makes decisions with respect to, and
places orders for all purchases and sales of portfolio securities for the Fund.
The Advisor shall manage the Fund’s portfolios in accordance with the terms of
the investment advisory agreement by and between the Advisor and the Trust on
behalf of the Fund (the “Advisory Agreement”), which is described in detail
under “Management and Other Service Providers – Investment Advisor.” The
Advisor serves as investment advisor for a number of client accounts, including
the Fund. Investment decisions for the Fund are made independently from
those for any other series of the Trust, if any, and for any other investment
companies and accounts advised or managed by the Advisor.
Brokerage Selection. The Board has adopted, and
the Trustees have approved, policies and procedures relating to the direction of
mutual fund portfolio securities transactions to broker-dealers. The Advisor may
not give consideration to sales of shares of the Fund as a factor in selecting
broker-dealers to execute portfolio securities transactions. The Advisor may,
however, place portfolio transactions with broker-dealers that promote or sell
the Fund’s shares so long as such transactions are done in accordance with the
policies and procedures established by the Trustees that are designed to ensure
that the selection is based on the quality of the broker’s execution and not on
its sales efforts. In selecting brokers to be used in portfolio transactions,
the Advisor’s general guiding principle is to obtain the best overall execution
for each trade, which is a combination of price and execution. With
respect to execution, the Advisor considers a number of discretionary factors,
including, without limitation, the actual handling of the order, the ability of
the broker to settle the trade promptly and accurately, the financial standing
of the broker, the ability of the broker to position stock to facilitate
execution, the Advisor’s past experience with similar trades, and other factors
that may be unique to a particular order. Recognizing the value of these
discretionary factors, the Advisor may select brokers who charge a brokerage
commission that is higher than the lowest commission that might otherwise be
available for any given trade.
Under Section 28(e) of the
Securities Exchange Act of 1934, as amended, and the Advisory Agreement, the
Advisor is authorized to pay a brokerage commission in excess of that which
another broker might have charged for effecting the same transaction, in
recognition of the value of brokerage and/or research services provided by the
broker. The research received by the Advisor may include, without limitation:
information on the United States and other world economies; information on
specific industries, groups of securities, individual companies, and political
and other relevant news developments affecting markets and specific securities;
technical and quantitative information about markets; analysis of proxy
proposals affecting specific companies; accounting and performance systems that
allow the Advisor to determine and track investment results; and trading systems
that allow the Advisor to interface electronically with brokerage firms,
custodians, and other providers. Research is received in the form of written
reports, telephone contacts, personal meetings, research seminars, software
programs, and access to computer databases. In some instances, research
products or services received by the Advisor may also be used by the Advisor for
functions that are not research related (i.e. not related to the making of
investment decisions). Where a research product or service has a mixed
use, the Advisor will make a reasonable allocation according to the use and will
pay for the non-research function in cash using its own funds.
The research and
investment information services described above make available to the Advisor
for its analysis and consideration the views and information of individuals and
research staffs of other securities firms. These services may be useful to the
Advisor in connection with advisory clients other than the Fund and not all such
services may be useful to the Advisor in connection with the Fund. Although such
information may be a useful supplement to the Advisor’s own investment
information in rendering services to the Fund, the value of such research and
services is not expected to reduce materially the expenses of the Advisor in the
performance of its services under the Advisory Agreement and will not reduce the
management fees payable to the Advisor by the Fund.
The Fund may invest in
securities traded in the OTC market. In these cases, the Fund may initiate
trades through brokers on an agency basis and pay a commission in connection
with the transaction. The Fund may also effect these transactions by dealing
directly with the dealers who make a market in the securities involved, in which
case the costs of such transactions would involve dealer spreads rather than
brokerage commissions. With respect to securities traded only in the OTC
market, orders will be executed on a principal basis with primary market makers
in such securities except where better prices or executions may be obtained on
an agency basis or by dealing with those other than a primary market
maker.
The Fund’s fixed income
portfolio transactions may be executed through broker-dealers on an agency basis
or be principal transactions executed in over the counter markets on a “net”
basis, which may include a dealer mark up. Where possible, the Advisor will deal
directly with the broker-dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such broker-dealers usually act as principal for their own account.
The Fund may participate,
if and when practicable, in bidding for the purchase of Fund securities directly
from an issuer in order to take advantage of the lower purchase price available
to members of a bidding group. The Fund will engage in this practice, however,
only when the Advisor, in its sole discretion, believes such practice to be
otherwise in the Fund’s interest.
For the fiscal years ended
September 30, 2019, September 30, 2018, and September 30, 2017, 2016, the Fund
paid brokerage commissions in the amount of $11,700, $16,996, and $30,674,
respectively. The brokerage commissions paid by the Fund decreased for the
fiscal year ended September 30, 201 9 , from the previous fiscal year s
primarily due to a decrease in trading volume .
Aggregated Trades. While investment decisions
for the Fund are made independently of the Advisor’s other client accounts, the
Advisor’s other client accounts may invest in the same securities as the Fund.
To the extent permitted by law, the Advisor may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for other
investment companies or accounts in executing transactions. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another investment company or account, the transaction will be
averaged as to price and available investments allocated as to amount in a
manner which the Advisor believes to be equitable to the Fund and such other
investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund.
Portfolio Turnover. Portfolio turnover is
a ratio that indicates how often the securities in a mutual fund’s portfolio
change during a year’s time. Higher numbers indicate a greater number of
changes, and lower numbers indicate a smaller number of changes. The annualized
portfolio turnover rate for the Fund is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average value of the portfolio securities owned during the fiscal year . The
calculation excludes all securities whose maturities or expiration dates at the
time of acquisition are one year or less. Portfolio turnover of the Fund
may vary greatly from year to year as well as within a particular year, and may
be affected by cash requirements for redemption of shares and by requirements
that enable the Fund to receive favorable tax treatment. Portfolio turnover will
not be a limiting factor in making Fund decisions, and the Fund may engage in
short-term trading to achieve its investment objectives. High rates of
portfolio turnover could lower performance of the Fund due to increased
transaction costs and may also result in the realization of short-term capital
gains taxed at ordinary income tax rates. Under normal circumstances, the
anticipated portfolio turnover rate for the Fund is expected to be greater than
100%. The portfolio turnover rate for the fiscal year ended September 30, 2019,
was 184.39%. The portfolio turnover rate for the fiscal year ended September 30,
2018 was 219.74%.
The Trust, which is a
statutory trust organized under Delaware law on May 13, 2009, is an open-end
management investment company. The Trust’s Declaration of Trust (“Trust
Instrument”) authorizes the Trustees to divide shares into series, each series
relating to a separate portfolio of investments, and to classify and reclassify
any unissued shares into one or more classes of shares of each such series. The
Trust currently consists of 1 6 series. Additional series and/or classes may be
created from time to time. The number of shares in each series of the Trust
shall be unlimited. When issued for payment as described in the P
rospectus and this SAI, shares of the Fund will be fully paid and non‑assessable
and shall have no preemptive rights. The Trust does not issue share
certificates.
In the event of a
liquidation or dissolution of the Trust or an individual series, such as the
Fund, shareholders of a particular series would be entitled to receive the
assets available for distribution belonging to such series. Shareholders
of a series are entitled to participate equally in the net distributable assets
of the particular series involved on liquidation, based on the number of shares
of the series that are held by each shareholder. If there are any assets,
income, earnings, proceeds, funds, or payments, that are not readily
identifiable as belonging to any particular series, the Trustees shall allocate
them among any one or more of the series as they, in their sole discretion, deem
fair and equitable.
Shareholders of all of the
series of the Trust, including the Fund, will vote together and not separately
on a series‑by‑series or class-by-class basis, except as otherwise required by
law or when the Trustees determine that the matter to be voted upon affects only
the interests of the shareholders of a particular series or class. Rule 18f-2
under the 1940 Act provides that any matter required to be submitted to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each series
or class affected by the matter. A series or class is affected by a matter
unless it is clear that the interests of each series or class in the matter are
substantially identical or that the matter does not affect any interest of the
series or class. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in a fundamental investment policy would be effectively
acted upon with respect to a series only if approved by a majority of the
outstanding shares of such series. However, the rule also provides that the
ratification of the appointment of independent accountants, the approval of
principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting together, without
regard to a particular series or class. Rights of shareholders can only be
modified by a majority vote.
When used in the
Prospectus or this SAI, a “majority” of shareholders means the vote of the
lesser of (i) 67% of the shares of the Trust or the applicable series or class
present at a meeting if the holders of more than 50% of the outstanding shares
are present in person or by proxy or (ii) more than 50% of the outstanding
shares of the Trust or the applicable series or class.
Shareholders are entitled
to one vote for each full share and a fractional vote for each fractional share
held. Shares have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of Trustees can elect 100%
of the Trustees, and in this event, the holders of the remaining shares voting
will not be able to elect any Trustees.
The Trustees will hold
office indefinitely, except that: (i) any Trustee may resign or retire, and (ii)
any Trustee may be removed: (a) any time by written instrument signed by at
least two-thirds of the number of Trustees prior to such removal; (b) at any
meeting of shareholders of the Trust by a vote of two-thirds of the outstanding
shares of the Trust; or (c) by a written declaration signed by shareholders
holding not less than two-thirds of the outstanding shares of the Trust.
In case a vacancy on the Board shall for any reason exist, the vacancy shall be
filled by the affirmative vote of a majority of the remaining Trustees, subject
to certain restrictions under the 1940 Act. Otherwise, there will normally be no
meeting of shareholders for the purpose of electing Trustees, and the Trust does
not expect to have an annual meeting of share-holders.
The Trust Instrument
provides that the Trustees will not be liable in any event in connection with
the affairs of the Trust, except as such liability may arise from a Trustee’s
bad faith, willful misfeasance, gross negligence, or reckless disregard of
duties. It also provides that all third parties shall look solely to the
Trust’s property for satisfaction of claims arising in connection with the
affairs of the Trust. With the exceptions stated, the Trust Instrument
provides that a Trustee or officer is entitled to be indemnified against all
liability in connection with the affairs of the Trust.
The Trust is governed by
the Board, which is responsible for the management and supervision of the Fund.
The Trustees meet periodically throughout the year to review contractual
arrangements with companies that furnish services to the Fund; review
performance of the Advisor and the Fund; and oversee activities of the Fund.
This section of the SAI provides information about the persons who serve as
Trustees and officers to the Trust as well as the entities that provide services
to the Fund.
Trustees and Officers. Following are the
Trustees and officers of the Trust, their age and address, their present
position with the Trust or the Fund, and their principal occupation during the
past five years. The Trustees in the following table who are not
“interested persons” of the Trust within the meaning of the 1940 Act
(“Independent Trustees”) are indicated as such. The address of each
Trustee and officer of the Trust, unless otherwise indicated, is 116 South
Franklin Street, Rocky Mount, North Carolina 27804.
Name
and Date of Birth |
Position
held with Funds or Trust |
Length
of Time
Served
|
Principal
Occupation During Past 5 Years |
Number
of
Portfolios
in Fund
Complex
Overseen
by
Trustee |
Other
Directorships Held by Trustee During Past 5 Years |
Independent
Trustees |
James H. Speed, Jr. (06/1953) |
Independent Trustee, Chairman |
Trustee since 7/09, Chair since 5/12 |
Previously President and
CEO of NC Mutual Insurance Company (insurance company) from 2003 to 2015.
|
16 |
Independent Trustee of
the Brown Capital Management Mutual Funds for all its series from 2011 to
present, Hillman Capital Management Investment Trust for all its series
from 2009 to present, Centaur Mutual Funds Trust for all its series from
2013 to present, Chesapeake Investment Trust for all its series from 2016
to present, Leeward Investment Trust for all its series from 2018 to
present, and WST Investment Trust for all its series (all registered
investment companies) from 2013 to present. Member of Board of Directors
of Communities in Schools of N.C. from 2001 to present. Member of Board of
Directors of Mechanics & Farmers Bank from 2009 to present. Member of
Board of Directors of Investors Title Company from 2010 to present. Member
of Board of Directors of AAA Carolinas from 2011 to present. Previously,
member of Board of Directors of M&F Bancorp from 2009 to 2019; member
of Board of Visitors of North Carolina Central University School of
Business from 1990 to 2016; Board of Directors of NC Mutual Life Insurance
Company from 2004 to 2016; and President and CEO of North Carolina
Mutual Life Insurance Company from 2003 to 2015. |
Theo H. Pitt, Jr. (04/1936) |
Independent Trustee |
Since 9/10 |
Senior Partner, Community
Financial Institutions Consulting (financial consulting) since 1999.
|
16 |
Independent Trustee of
World Funds Trust for all its series from 2013 to present, Chesapeake
Investment Trust for all its series from 2002 to present, Leeward
Investment Trust for all its series from 2011 to present, and Hillman
Capital Management Investment Trust for all its series from 2000 to
present (all registered investment companies). Senior Partner of Community
Financial Institutions Consulting from 1997 to present. Previously,
Partner at Pikar Properties from 2001 to 2017. |
Michael G. Mosley (01/1953) |
Independent Trustee |
Since 7/10 |
Owner of Commercial
Realty Services (real estate) since 2004. |
16 |
None. |
J. Buckley Strandberg (03/1960) |
Independent Trustee |
Since 7/09 |
President of Standard
Insurance and Realty since 1982. |
16 |
None. |
Name
and Date of Birth |
Position
held with Funds or Trust |
Length
of Time Served |
Principal
Occupation During Past 5 Years |
Officers
|
Katherine M. Honey (09/1973) |
President and Principal Executive Officer
|
Since 05/15 |
EVP of The Nottingham
Company since 2008. |
Ashley H. Lanham
(03/1984) |
Treasurer, Assistant Secretary and Principal
Financial Officer |
Since 05/15 |
Fund Accounting Manager
and Financial Reporting, The Nottingham Company since 2008. |
Tracie A. Coop (12/1976) |
Secretary |
Since 12/19 |
General Counsel, The
Nottingham Company since 2019. Formerly, Vice President and Managing
Counsel, State Street Bank and Trust Company from 2015 to 2019. Formerly,
General Counsel for Santander Asset Management USA, LLC from 2013 to 2015.
|
Stacey Gillespie (05/1974) |
Chief Compliance Officer |
Since 03/16 |
Compliance Director,
Cipperman Compliance Services, LLC since 2015. Formerly, Chief Compliance
Officer of Boenning & Scattergood, Inc. from 2013 to 2015.
|
Qualification of
Trustees. The Board believes that each Trustee’s experience,
qualifications, attributes or skills on an individual basis and in combination
with those of the other Trustees on the Board lead to the conclusion that the
Board possesses the requisite skills and attributes to carry out its oversight
responsibilities with respect to the Trust. The Board believes that its
Trustees’ ability to review, critically evaluate, question, and discuss
information provided to them, to interact effectively with the Advisor, other
service providers, counsel and independent auditors, and to exercise effective
business judgment in the performance of its duties, support this conclusion. The
Board also has considered the following experience, qualifications, attributes
and/or skills, among others, of its members, as applicable, in reaching its
conclusion: (i) such person’s business and professional experience and
accomplishments, including prior experience in the financial services and
investment management fields or on other boards; (ii) such person’s ability to
work effectively with the other members of the Board; (iii) how the individual’s
skills, experiences, and attributes would contribute to an appropriate mix of
relevant skills and experience on the Board; (iv) such person’s character and
integrity; (v) such person’s willingness to serve and willingness and ability to
commit the time necessary to perform the duties of a Trustee; and (vi) as to
each Trustee his status as an Independent Trustee.
In addition, the following
specific experience, qualifications, attributes and/or skills were considered in
respect of the listed Trustee.
Mr. Mosley has had
business experience as an owner of a real estate company. Mr. Pitt has
experience as an investor, including his role as trustee of several other
investment companies and business experience as senior partner of a financial
consulting company, as a partner of a real estate partnership and as an account
administrator for a money management firm. Mr. Speed also has experience
as an investor as trustee of several other investment companies and business
experience as president and chief executive officer of an insurance company and
as president of a company in the business of consulting and private investing.
Mr. Strandberg also has investment experience as a former trustee of another
investment company and business experience as president of an insurance and
property management company.
The
Board has determined that each of the Trustees’ careers and background, combined
with their interpersonal skills and general understanding of financial and other
matters, enable the Trustees to effectively participate in and contribute to the
Board’s functions and oversight of the Trust.
Board Structure. The Board currently
consists of four Trustees , all of whom are Independent . Mr. Speed serves as
the Independent Chairman of the Board. The Board has established several
standing committees: Audit Committee, Nominating Committee, Fair Valuation
Committee, Governance Committee, and Qualified Legal Compliance Committee.
These standing committees are comprised entirely of the Independent Trustees.
Other information about these standing committees is set forth below. The
Board has determined that the Board’s structure is appropriate given the
characteristics, size, and operations of the Trust. The Board also
believes that its leadership structure, including its committees, helps
facilitate effective oversight of Trust management. The Board reviews its
structure annually.
With respect to risk
oversight, the Board considers risk management issues as part of its general
oversight responsibilities throughout the year. The Board holds four regular
board meetings each year during which the Board receives risk management reports
and/or assessments from Trust management, the Fund’s advisor, administrator,
transfer agent, and distributor, and receives an annual report from the Trust’s
Chief Compliance Officer (“CCO”). The Audit Committee also meets with the
Trust’s independent registered public accounting firm on an annual basis, to
discuss among other things, the internal control structure of the Trust’s
financial reporting function. When appropriate, the Board may hold special
meeting or communicate directly with Trust management, the CCO, the Trust’s
third party service providers, legal counsel, or independent public accountants
to address matters arising between regular board meeting or needing special
attention. In addition, the Board has adopted policies and procedures for the
Trust to help detect and prevent and, if necessary, correct violations of
federal securities laws.
The
Board met eight times during the fiscal year ended September 30, 2019 .
Trustee Standing Committees. The Trustees
have established the following standing committees:
Audit
Committee. All of the Independent Trustees are members of the Audit
Committee. The Audit Committee oversees the Fund’s accounting and
financial reporting policies and practices, reviews the results of the annual
audits of the Fund’s financial statements, and interacts with the Fund’s
independent auditors on behalf of all the Trustees. The Audit Committee
operates pursuant to an Audit Committee Charter and meets periodically as
necessary. The Audit Committee met nine times during the fiscal year ended
September 30, 201 9 .
Fair Valuation
Committee. An Independent Trustee and a representative of the advisor
are members of the Fair Valuation Committee. The Fair Valuation Committee has
the authority to determine the fair value of specific securities under the
methods established by the adopted Guidelines for Valuing Portfolio Securities.
The Fair Valuation Committee meets only as necessary. The Fair Valuation
Committee met 24 times during the fiscal year ended September 30, 2019 .
Governance
Committee. All of the Independent Trustees are members of the Governance
Committee. The Governance Committee assists the Board in adopting fund
governance practices and meeting certain fund governance standards. The
Governance Committee operates pursuant to a Governance Committee Charter and
normally meets annually, but may also meet as often as necessary to carry out
its purpose. The Governance Committee met once during the fiscal year
ended September 30, 2019 .
Nominating
Committee. All of the Independent Trustees are members of the
Nominating Committee. The Nominating Committee nominates, selects, and
appoints independent trustees to fill vacancies on the Board and to stand for
election at meetings of the shareholders of the Trust. The Nominating
Committee generally will not consider nominees recommended by shareholders of
the Trust. The Nominating Committee meets only as necessary and did not
meet during the fiscal year ended September 30, 201 9 .
Qualified Legal
Compliance Committee. All of the Independent Trustees are members of
the Qualified Legal Compliance Committee. The Qualified Legal Compliance
Committee receives, investigates, and makes recommendations as to appropriate
remedial action in connection with any report of evidence of a material
violation of securities laws or breach of fiduciary duty or similar violation by
the Trust, its officers, Trustees, or agents. The Qualified Legal
Compliance Committee meets only as necessary and did not meet during the fiscal
year ended September 30, 201 9 .
Beneficial Equity Ownership Information.
The table below sets forth, as of December 31, 2019, the dollar range of equity
securities beneficially owned by each Trustee in the Fund , and the aggregate
dollar range of equity securities in the Fund complex .
A = None; B = $1-$10,000;
C = $10,001-$50,000; D = $50,001-$100,000; and E = over $100,000.
Name of
Trustee |
Dollar Range
of Equity Securities in the Fund |
Aggregate Dollar
Range of Equity Securities in All Registered Investment
Companies Overseen
By Trustee in Family of Investment Companies |
Michael G. Mosley |
A |
A |
Theo H. Pitt, Jr. |
A |
A |
James H. Speed, Jr. |
A |
A |
J. Buckley Strandberg |
A |
A |
Ownership of Securities of Advisor, Distributor, or
Related Entities. As of December 31, 201 9 , none of the
Independent Trustees and/or their immediate family members own securities of the
Advisor, Capital Investment Group, Inc. (the “Distributor”), or any entity
controlling, controlled by, or under common control with the Advisor or Fund’s
distributor.
Compensation. Officers of the Trust and
Trustees who are interested persons of the Trust or the Advisor will receive no
salary or fees from the Trust. Independent Trustees receive $2,000 per series of
the Trust each year and may receive up to an additional $500 per series of the
Trust per special meeting in the event that special meetings are held. This
amount may be paid pro rata in the event that a fund closes during the fiscal
year. The Trust reimburses each Trustee and officers of the Trust for his or her
travel and other expenses relating to attendance at such meetings. Each of
the Trustees serves as a Trustee to all series of the Trust, including the Fund.
During the fiscal year ended September 30, 2019, the Trustees received the
amounts set forth in the following table for services to the Fund and the Fund
Complex.
Name of
Trustee |
Aggregate
Compensation
f rom the
Fund* |
Pension or
Retirement
Benefits Accrued a s Part of
Fund Expenses |
Estimated Annual
Benefits Upon
Retirement |
Total
Compensation
from Fund and
Fund Complex Paid
to
Trustees* |
Independent
Trustees |
Michael G. Mosley |
$2,000 |
None |
None |
$ 31,250 |
Theo H. Pitt, Jr. |
$2,000 |
None |
None |
$ 31,250 |
James H. Speed, Jr. |
$2,000 |
None |
None |
$ 31,250 |
J. Buckley Strandberg |
$2,000 |
None |
None |
$ 31,250 |
*Each of the Trustees
serves as a Trustee to all series of the Trust.
Codes of Ethics. The Trust, Advisor, and
Distributor each have adopted a code of ethics, as required under Rule 17j-1 of
the 1940 Act, which is designed to prevent affiliated persons of the Trust,
Advisor, and Distributor from engaging in deceptive, manipulative, or fraudulent
activities in connection with securities held or to be acquired by the Fund
(which securities may also be held by persons subject to each such code of
ethics). There can be no assurance that the codes will be effective in
preventing such activities. The codes permit employees and officers of the
Trust, Advisor, and Distributor to invest in securities held by the Fund,
subject to certain restrictions and pre-approval requirements. In
addition, the Advisor’s code requires that portfolio managers and other
investment personnel of the Advisor report their personal securities
transactions and holdings, which are reviewed for compliance with the Trust’s
and Advisor’s codes of ethics.
Anti-Money Laundering Program. The Trust
has adopted an anti-money laundering program, as required by applicable law,
which is designed to prevent the Fund from being used for money laundering or
the financing of terrorist activities. The Trust’s CCO is responsible for
implementing and monitoring the operations and internal controls of the program.
Compliance officers at certain of the Fund’s service providers are also
responsible for monitoring the program. The anti-money laundering program is
subject to the continuing oversight of the Trustees.
Proxy Voting Policies. The Trust has
adopted a proxy voting and disclosure policy that delegates to the Advisor the
authority to vote proxies for the Fund, subject to oversight by the Board
. A copy of the Advisor’s Proxy Voting Policy and Procedures is included
as Appendix B to this SAI. No later than August 31st of each year, the
Fund will file Form N-PX stating how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30th.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling the Fund at 1-800-773-3863; and (ii) on
the SEC’s website at http://www.sec.gov.
Principal Holders of Voting Securities.
As of December 31, 201 9 , the Trustees and officers of the Trust as a group
owned beneficially (i.e., had direct or indirect voting and/or investment power)
less than 1% of the then outstanding shares of the Fund. As of December 31,
2019, to the Trust’s knowledge, the following shareholders owned of record or
beneficially 5% or more of the outstanding shares of the Fund.
Shareholders owning 25% or more of outstanding shares may be in control and may
be able to affect the outcome of certain matters presented for a vote of
Shareholders.
Name and Address
of Owner
|
Percent
age of Ownership
|
Type of Ownership
|
Charles Schwab & Company, Inc. 211 Main Street San
Francisco, CA 94104 |
81.55% |
Record*
|
* The Fund believes that such entity does not
have a beneficial ownership interest in such shares.
Investment Advisor. Grimaldi Portfolio
Solutions, Inc. (formerly Navigator Money Management, Inc.), located at Route 9,
Suite 10, Wappingers Falls, NY 12590 , serves as the investment advisor to the
Fund pursuant to an investment advisory agreement between the Trust, on behalf
of the Fund, and Grimaldi Portfolio Solutions, Inc. The Advisor is controlled by
Mark Anthony Grimaldi, principal and president, and Joseph V. Visconti,
principal and vice president. The Advisor supervises the Fund’s investments
pursuant to the Advisory Agreement. The Advisory Agreement is effective
for an initial two-year period and will be renewed thereafter only so long as
such renewal and continuance is specifically approved at least annually : (i) by
the Board of the Trust or by vote of a majority of the outstanding voting
securities of the Fund; and (ii) by vote of a majority of the Independent
Trustees , cast in person at a meeting called for the purpose of voting on such
approval . The Advisory Agreement is terminable without penalty by the Trust by
a vote of the Board of the Trust or by vote of a majority of the outstanding
voting securities upon 60 calendar days’ written notice or by the Advisor upon
60 calendar days’ written notice . The Advisory Agreement provides that it
will terminate automatically in the event of its “assignment,” as such term is
defined in the 1940 Act.
The Advisor manages the
Fund’s investments in accordance with the stated policies of the Fund, subject
to oversight by the Board . The Advisor is responsible for investment decisions,
and provides the Fund with portfolio managers who are authorized to execute
purchases and sales of securities.
Under the Advisory
Agreement, the Advisor is not liable for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the performance of such
agreement, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services; or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Advisor in the
performance of its duties; or from its reckless disregard of its duties and
obligations under the Advisory Agreement.
For its investment
advisory services to the Fund, the Advisor is paid a management fee by the Fund,
based on a percentage of the Fund’s daily net assets, at an annual rate of 1.00%
of the Fund’s net assets. In the interest of limiting expenses of the Fund, the
Advisor has entered into an Expense Limitation Agreement with the Fund, pursuant
to which the Advisor has agreed to waive or reduce its management fee and to
assume other expenses of the Fund so that the total annual operating expenses of
the Fund (exclusive of (i) any front-end or contingent deferred loads; (ii)
brokerage fees and commissions, (iii) acquired fund fees and expenses; (iv) fees
and expenses associated with investments in other collective investment vehicles
or derivative instruments (including for example option and swap fees and
expenses); (v) borrowing costs (such as interest and dividend expense on
securities sold short); (vi) taxes; and (vii) extraordinary expenses, such as
litigation expenses (which may include indemnification of Fund officers and
Trustees and contractual indemnification of Fund service providers (other than
the Advisor)) is limited to 2.14%. This contractual arrangement is in effect
through January 31, 2021, unless terminated by the Board at any time. The
Advisor cannot recoup from the Fund any amounts paid by the Advisor under the
Expense Limitation Agreement.
For the last three fiscal
years, the Fund paid fees for the services of the Advisor in the amounts shown
below.
Fiscal Year Ended
September 30, |
Advisory Fees
Incurred |
Advisory Fees
Waived |
2019 |
$248,332 |
$3,851 |
2018 |
$248,975 |
$0 |
2017 |
$224,166 |
$3,444 |
Portfolio Managers. The Fund’s portfolio
is managed on a day-to-day basis by Mark Anthony Grimaldi.
Compensation.
The portfolio manager’s compensation varies with the general success of the
Advisor as a firm. The portfolio manager’s compensation consists of a fixed
annual salary, plus additional remuneration based on the Advisor’s assets under
management. The portfolio manager’s compensation is not directly linked to the
Fund’s performance, although positive performance and growth in managed assets
are factors that may contribute to the Advisor’s distributable profits and
assets under management.
Ownership of Fund
Shares. The table below shows the amount of the Fund’s equity
securities beneficially owned by each portfolio manager as of September 30, 201
9 , and stated as one of the following ranges: A = None; B = $1-$10,000; C =
$10,001-$50,000; D = $50,001-$100,000; E = $100,001-$500,000; F =
$500,001-$1,000,000; and G = over $1,000,000.
Name of Portfolio
Manager |
Dollar Range
of Equity Securities in the Fund |
Mark Anthony Grimaldi |
F |
Other
Accounts. In addition to the
Fund, the portfolio manager is responsible for the day-to-day management of
certain other accounts. The table below shows the number of, and total
assets in, such other accounts as of the end of the Fund’s fiscal year ended
September 30, 201 9 .
Portfolio
Manager |
Registered
Investment Companies |
Other Pooled
Investment Vehicles |
Other
Accounts |
Number of
Accounts |
Total Assets |
Number of
Accounts |
Total Assets |
Number of
Accounts |
Total
Assets |
All
Accounts |
Mark Anthony Grimaldi |
0 |
$0 |
0 |
$0 |
425 |
$55,000,000 |
Accounts with
Performance-Based Advisory Fee |
Mark Anthony Grimaldi |
0 |
$0 |
0 |
$0 |
0 |
$0 |
Conflicts
of Interests. The portfolio manager’s management of “other accounts”
may give rise to potential conflicts of interest in connection with their
management of the Fund’s investments, on the one hand, and the investments of
the other accounts, on the other. The other accounts consist of separately
managed private clients (“Other Accounts”). The Other Accounts might have
similar investment objectives as the Fund, be compared to the same index as the
Fund, or otherwise hold, purchase, or sell securities that are eligible to be
held, purchased, or sold by the Fund.
Knowledge
of the Timing and Size of Fund Trades: A potential conflict of
interest may arise as a result of the portfolio manager’s day-to-day management
of the Fund. The portfolio manager knows the size and timing of trades for the
Fund and the Other Accounts, and may be able to predict the market impact of
Fund trades. It is theoretically possible that the portfolio manager could use
this information to the advantage of Other Accounts it manages and to the
possible detriment of the Fund, or vice versa.
Investment
Opportunities: The Advisor provides investment supervisory services
for a number of investment products that have varying investment guidelines. The
portfolio manager works across different investment products. Differences
in the compensation structures of the Advisor’s investment products may give
rise to a conflict of interest by creating an incentive for the Advisor to
allocate the investment opportunities it believes might be the most profitable
to the client accounts where it might benefit the most from the investment
gains.
Administrator. The Trust has entered into
a Fund Accounting and Administration Agreement with The Nottingham Company
(“Administrator”), located at 116 South Franklin Street, Post Office Box 69,
Rocky Mount, North Carolina 27802-0069. The Administrator performs the following
services for the Fund: (i) procures on behalf of the Trust, and coordinates with
the custodian and monitors the services it provides to the Fund; (ii)
coordinates with and monitors any other third parties furnishing services to the
Fund; (iii) provides the Fund with necessary office space, telephones, and
other communications facilities and personnel competent to perform
administrative and clerical functions for the Fund; (iv) assists or supervises
the maintenance by third parties of such books and records of the Fund as may be
required by applicable federal or state law; (v) assists in the preparation
of all federal, state, and local tax returns and reports of the Fund required by
applicable law; (vi) assists in the preparation of and, after approval by the
Trust, files and arranges for the distribution of proxy materials and periodic
reports to shareholders of the Fund as required by applicable law; (vii) assists
in the preparation of and, after approval by the Trust, arranges for the filing
of such registration statements and other documents with the SEC and other
federal and state regulatory authorities as may be required by applicable law;
(viii) reviews and submits to the officers of the Trust for their approval
invoices or other requests for payment of Fund expenses and instructs the
Custodian to issue checks in payment thereof; and (ix) takes such other action
with respect to the Fund as may be necessary in the opinion of the Administrator
to perform its duties under the agreement. The Administrator will also provide
certain accounting and pricing services for the Fund.
Compensation of the
Administrator, which is based upon an administration fee on the average daily
net assets of the Fund, is at the following annual rates: 0.100% of the Fund’s
first $250 million, 0.080% on the next $250 million, 0.060% on the next $250
million, and 0.050% on the next $250 million, 0.040% on the next $1 billion, and
0.035% on the average daily net assets over $2 billion, with a monthly minimum
general administration fee of $2,000. The Administrator currently receives a
monthly fund accounting fee of $2,250 per Fund for accounting and recordkeeping
services with an additional fee of $500 per month for each additional class of
shares plus an asset-based fee of 0.01% of the net assets of the Fund. The
Administrator will also receive the following to procure and pay the custodian
for the Fund: 0.02% on the first $200 million of the Fund’s net assets and
0.009% on all assets over $200 million plus transaction fees with a minimum
annual fee of $5,000. The Administrator also charges the Fund for certain costs
involved with the daily valuation of investment securities and is reimbursed for
out-of-pocket expenses.
For the fiscal year ended
September 30, 2019, the Fund paid $24,981 in general administration fees and
$29,504 in fund accounting fees to the Administrator. For the fiscal year ended
September 30, 2018, the Fund paid $24,951 in general administration fees and
$29,489 in fund accounting fees to the Administrator. For the fiscal year
ended September 30, 2017, the Fund paid $26,499 in general administration fees
and $29,238 in fund accounting fees to the Administrator.
Transfer Agent. The Trust has entered
into a Dividend Disbursing and Transfer Agent Agreement with Nottingham
Shareholder Services, LLC (“Transfer Agent”), a North Carolina limited liability
company, to serve as transfer, dividend paying, and shareholder servicing agent
for the Fund. The address of the Transfer Agent is 116 South Franklin Street,
Post Office Box 4365, Rocky Mount, North Carolina 27803-0365.
Distributor. The Fund will conduct a
continuous offering of its securities. Capital Investment Group, Inc., located
at 100 E. Six Forks Road, Suite 200, Raleigh, North Carolina 27609, acts as the
underwriter and distributor of the Fund’s shares for the purpose of facilitating
the registration of shares of the Fund under state securities laws and assisting
in sales of Fund shares pursuant to a distribution agreement (“Distribution
Agreement”) between the Trust, on behalf of the Fund, and the Distributor
. In this regard, the Distributor has agreed at its own expense to qualify
as a broker‑dealer under all applicable federal or state laws in those states
that the Fund shall from time to time identify to the Distributor as states in
which the Fund wishes to offer its shares for sale, in order that state
registrations may be maintained for the Fund. The Distributor is a broker‑dealer
registered with the SEC and a member in good standing of the FINRA. The
Distributor is entitled to receive an annual fee of $5,000 per Fund for
performing certain recordkeeping, communication, and other administrative
services for the Fund. Such administrative services shall include, but are not
limited to, the following: (i) maintaining records with respect to submissions
to the FINRA, dealer discounts, brokerage fees and commissions, and selling
agreements; (ii) maintaining an account with the National Securities Clearing
Corporation's Fund/SERV System for the purpose of processing account
registrations, maintaining accounts, and communicating transaction data; (iii)
preparing reports for the Board as shall be reasonably requested from time to
time; and (iv) performing other services for the Trust as agreed to by the
Distributor and the Trust from time to time. The Distributor and Trust
agree that the services described above are of an administrative nature and such
services, as well as the fee provided in connection therewith, are not, nor are
they intended to be, payment for marketing and/or distribution services related
to, or the promotion of, the sale of the Fund’s shares. The Distribution
Agreement may be terminated by either party upon 60-days’ prior written notice
to the other party and will terminate automatically in the event of its
assignment. The Distributor serves as exclusive agent for the distribution
of the shares of the Fund.
The Distributor for the
Fund received the following commissions and other compensation during the fiscal
year ended September 30, 201 9 .
Net
Underwriting Discounts and Commissions |
Compensation on
Redemptions and Repurchases |
Brokerage Commissions
|
Other Compensation
|
$0 |
$0 |
$0 |
$5,000 |
Rule 12b-1
Plan. The Fund has adopted a Plan of Distribution pursuant to Rule
12b-1 under the 1940 Act for the Fund (the “Plan”). Pursuant to the Plan, the
Fund is authorized to pay the Distributor a fee at an annual rate of 0.25% of
the average daily net assets of the Fund as compensation for the Distributor’s
account maintenance services and as compensation for the Distributor’s sales of
the Fund. Such fees are to be paid by the Fund monthly, or at such other
intervals, as the Board shall determine. Such fees shall be based upon the
average daily net assets of the Fund during the preceding month, and shall be
calculated and accrued daily. The Fund may pay fees to the Distributor at a
lesser rate, as agreed upon by the Board and the Distributor.
Pursuant to the Plan, the
Fund may: (i) incur certain expenses, including reimbursing the Distributor and
others for items such as advertising expenses, selling expenses, commissions,
travel or other expenses reasonably intended to result in sales of the Fund;
and/or (ii) pay compensation for providing account maintenance services to Fund
shareholders, including arranging for certain dealers or brokers, administrators
and others to provide them services.
The services to be
provided by recipients may include, but are not limited to, the following:
assistance in the offering and sale of Fund shares and in other aspects of the
marketing of the shares to clients or prospective clients of the respective
recipients; answering routine inquiries concerning the Fund; assisting in the
establishment and maintenance of accounts or sub-accounts in the Fund and in
processing purchase and redemption transactions; making the Fund’s investment
plan and shareholder services available; and providing such other information
and services to investors in shares of the Fund as the Distributor for the
Trust, on behalf of the Fund, may reasonably request. The distribution services
shall also include any advertising and marketing services provided by or
arranged by the Distributor with respect to the Fund.
The Distributor is
required to provide a written report, at least quarterly, to the Board,
specifying in reasonable detail the amounts expended pursuant to the Plan and
the purposes for which such expenditures were made. Further, the Distributor
will inform the Board of any Rule 12b-1 fees to be paid by the Distributor to
recipients.
The initial term of the
Plan is one year and will continue in effect from year to year thereafter,
provided such continuance is specifically approved, at least annually, by a
majority of the Board and a majority of the Trustees who are not “interested
persons” of the Trust and do not have a direct or indirect financial interest in
the Plan (“Rule 12b-1 Trustees”) by votes cast in person at a meeting called for
the purpose of voting on the Plan. The Plan may be terminated at any time by the
Board or the Fund by vote of a majority of the Rule 12b-1 Trustees or by vote of
a majority of the outstanding voting shares of the Fund.
The Plan may not be
amended to increase materially the amount of the Distributor’s compensation to
be paid by the Fund, unless such amendment is approved by the vote of a majority
of the outstanding voting shares of the Fund (as defined in the 1940 Act). All
material amendments must be approved by a majority of the Board of the Trust and
a majority of the Rule 12b- 1 Trustees by votes cast in person at a meeting
called for the purpose of voting on the Plan. During the term of the Plan, the
selection and nomination of non-interested Trustees of the Trust will be
committed to the discretion of current non-interested Trustees. The Distributor
will preserve copies of the Plan, any related agreements, and all reports, for a
period of not less than six years from the date of such document and for at
least the first two years in an easily accessible place.
Any agreement related to
the Plan will be in writing and provide that: (a) it may be terminated by the
Trust or the Fund at any time upon sixty days’ written notice, without the
payment of any penalty, by vote of a majority of the respective Rule 12b-1
Trustees, or by vote of a majority of the outstanding voting shares of the Fund;
(b) it will automatically terminate in the event of its assignment (as defined
in the 1940 Act); and (c) it will continue in effect for a period of more than
one year from the date of its execution or adoption only so long as such
continuance is specifically approved at least annually by a majority of the
Board and a majority of the Rule 12b-1 Trustees by votes cast in person at a
meeting called for the purpose of voting on such agreement.
The Plan was effective
beginning on June 20, 2017. For the period from June 20, 2017 through September
30, 2017, the Fund accrued $16,405 in distribution and service fees. For the
fiscal year ended September 30, 2018, the Fund accrued $62,244 in distribution
and service fees. For the fiscal year ended September 30, 2019, the Fund accrued
$62,083 in distribution and service fees.
The
following chart describes the dollar amount and the manner in which amounts
accrued by the Fund under the Plan were spent during the past fiscal year ended
September 30, 2019 .
|
|
Advertising |
$ 817 |
Printing and Mailing
of Prospectuses to Other than Current Shareholders |
$0 |
Compensation to
Underwriters |
$ 0 |
Compensation to
Broker-Dealers |
$ 51,428 |
Compensation to
Sales Personnel |
$0 |
Interest, Carrying,
or Other Financing Charges |
$0 |
Other |
$0 |
Custodian. UMB Bank, n.a., with its
principal place of business located at 1010 Gran d Boulevard, Kansas City,
Missouri 64106, serves as custodian for the Fund’s assets (the
“Custodian”). The Custodian acts as the depository for the Fund, safekeeps
its portfolio securities, collects all income and other payments with respect to
portfolio securities, disburses monies at the Fund’s request, and maintains
records in connection with its duties as custodian. For its services, the
custodian is entitled to receive a monthly fee from the Administrator based on
the average net assets of the Fund plus additional out-of-pocket and transaction
expenses as incurred by the Fund
Compliance Services Administrator. The
Trust has entered into a compliance services arrangement with Cipperman
Compliance Services, LLC, located at 500 East Swedesford Road, Suite 104, Wayne,
Pennsylvania 19087. The Trust’s CCO will prepare and update the Trust’s
compliance manual and monitor and test compliance with the policies and
procedures under the Trust’s compliance manual.
Independent Registered Public Accounting
Firm. BBD, LLP, located at 1835 Market Street, 3rd Floor,
Philadelphia, Pennsylvania 19103, serve s as the independent registered public
accounting firm for the Fund . The independent registered public accounting firm
conducts an annual audit of the Fund’s financial statements, and prepare s the
Fund’s federal, state, and excise tax returns. Shareholders will receive annual
audited and semi-annual (unaudited) reports when published and written
confirmation of all transactions in their account. A copy of the most
recent annual report will accompany the SAI whenever a shareholder or a
prospective investor requests it.
Legal Counsel. Greenberg Traurig LLP
serves as legal counsel to the Trust and the Fund.
Reference is made to
“Purchasing Shares” and “Redeeming Shares” in the Prospectus for more
information concerning how to purchase and redeem shares. The following
information supplements the information regarding share purchases and share
redemptions in the Prospectus:
Regular Account. The regular account allows for
voluntary investments to be made at any time. Available to individuals,
custodians, corporations, trusts, estates, corporate retirement plans, and
others, investors are free to make additions to or withdrawals from their
account. When an investor makes an initial investment in the Fund, a shareholder
account is opened in accordance with the investor’s registration instructions.
Each time there is a transaction in a shareholder account, such as an additional
investment or the reinvestment of a dividend or distribution, the shareholder
will receive a confirm-ation statement showing the current transaction and all
prior transactions in the shareholder account during the calendar year to date,
along with a summary of the status of the account as of the transaction date. As
stated in the Prospectus, share certificates are normally not issued.
Purchases. Shares of the Fund are offered
and sold on a continuous basis and may be purchased through authorized
investment dealers or directly by contacting the Distributor, or the Fund
directly. The purchase price of shares of the Fund is based on the NAV next
determined after the order is received, subject to the order being received by
the Fund in good form. NAV is normally determined at the close of regular
trading on the NYSE on days the NYSE is open for trading, as described under
“Net Asset Value”. The NAV per share of the Fund is not calculated on days
on which the NYSE is closed for holidays . An order received prior to the
close of the NYSE will be executed at the price calculated on the date of
receipt and an order received after the close of the NYSE will be
executed at the price calculated as of that time on the next business day.
The Fund reserves the
right in its sole discretion to: (i) suspend the offering of its shares; (ii)
reject purchase orders when in the judgment of management such rejection is in
the best interest of the Fund and its shareholders; and (iii) reduce or waive
the minimum for initial and subsequent investments under circumstances where
certain economies can be achieved in sales of Fund shares.
Redemptions. The Fund may suspend
redemption privileges or postpone the date of payment (i) during any period that
the NYSE is closed for other than customary weekend and holiday closings, or
that trading on the NYSE is restricted as determined by the SEC; (ii) during any
period when an emergency exists as defined by the rules of the SEC as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or to determine fairly the value of its assets; and (iii) for such
other periods as the SEC may permit. The Fund may also suspend or postpone
the recordation of the transfer of shares upon the occurrence of any of the
foregoing conditions. Any redemption may be more or less than the
shareholder’s cost depending on the market value of the securities held by the
Fund. No charge is made by the Fund for redemptions other than the possible
charge for wiring redemption proceeds.
Involuntary Redemptions. In addition to
the situations described in the Prospectus under “Redeeming Fund Shares,” the
Fund may redeem shares involuntarily to reimburse the Fund for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Fund shares as provided in the Prospectus from time to time or to close a
shareholder’s account if the Fund is unable to verify the shareholder’s
identity.
Other Information. If an investor
realizes a gain on the redemption, the reinvestment will not affect the amount
of any federal capital gains tax payable on the gain. If an investor realizes a
loss on the redemption, the reinvestment may cause some or all of the loss to be
disallowed as a tax deduction, depending on the number of shares purchased by
reinvestment and the period of time that has elapsed after the redemption,
although for tax purposes, the amount disallowed is added to the cost of the
shares acquired upon the reinvestment.
The Fund offers the following special
shareholder services:
Automatic Investment Plan. The automatic
investment plan enables shareholders to make regular monthly or quarterly
investments in shares through automatic charges to their checking account. With
shareholder authorization and bank approval, the Administrator will
automatically charge the checking account for the amount specified ($50 minimum)
which will be automatically invested in shares at the NAV on or about the 21st
day of the month. The shareholder may change the amount of the investment or
discontinue the plan at any time by writing to the Fund.
Purchases In Kind. The Fund may accept
securities in lieu of payment for the purchase of shares in the Fund. The
acceptance of such securities is at the sole discretion of the Advisor based
upon the suitability of the securities accepted for inclusion as a long-term
investment of the Fund, the marketability of such securities, and other factors
that the Advisor may deem appropriate. If accepted, the securities will be
valued using the same criteria and methods as described in “Purchase and
Redemption Price – Determining the Fund’s Net Asset Value” in the
Prospectus.
Systematic Withdrawal Plan. Shareholders
owning shares with a value of $5,000 or more may establish a systematic
withdrawal plan (“Systematic Withdrawal Plan”). A shareholder may receive
monthly or quarterly payments, in amounts of not less than $100 per payment, by
authorizing the Fund to redeem the necessary number of shares periodically (each
month, or quarterly) in order to make the payments requested. The Fund has the
capability of electronically depositing the proceeds of the systematic
withdrawal directly to the shareholders personal bank account ($5,000 minimum
per bank wire). Instructions for establishing this service are included in the
Fund Shares Application, enclosed in the Prospectus, or are available by calling
the Fund. If the shareholder prefers to receive his or her systematic withdrawal
proceeds in cash, or if such proceeds are less than the $5,000 minimum for a
bank wire, checks will be made payable to the designated recipient and mailed
with-in seven days of the valuation date. If the designated recipient is
other than the registered shareholder, the signature of each shareholder must be
guaranteed on the application (see “Redeeming Shares – Signature Guarantees” in
the Prospectus). A corporation (or partnership) must also submit a “Corporate
Resolution” (or “Certification of Partnership”) indi-cat-ing the names, titles,
and required number of signatures auth-orized to act on its behalf. The
application must be signed by a duly authori-zed officer(s) and the corporate
seal affixed. Costs in conjunction with the administration of the plan are borne
by the Fund. Shareholders should be aware that such systematic withdrawals may
deplete or use up entirely their initial investment and may result in real-ized
long-term or short-term capital gains or losses. The Syste-matic
Withdrawal Plan may be terminated at any time by the Fund upon 60-days’ written
notice or by a shareholder upon written notice to the Fund. Applications and
further details may be obtained by calling the Fund at 1-800-773-3863 or by
writing to:
The Sector Rotation Fund
c/o Nottingham
Shareholder Services
116 South Franklin Street
Post Office Box
4365
Rocky Mount, NC 27803-0365
Redemptions In-Kind. The Fund does not intend,
under normal circumstances, to redeem its securities by payment in kind.
It is possible, however, that conditions may arise in the future which would, in
the opinion of the Trustees, make it undesirable for the Fund to pay for all
redemptions in cash. In such case the Trustees may authorize payment to be made
in readily marketable portfolio securities of the Fund. The securities will be
chosen by the Fund, may be either a pro rata payment of each of the securities
held by the Fund or a representative sample of securities, and will be valued at
the same value assigned to them in computing the NAV per share. Shareholders
receiving them would incur brokerage costs when these securities are sold.
An irrevocable election has been filed under Rule 18f‑1 of the 1940 Act, wherein
the Fund committed to pay redemptions in cash, rather than in kind, to any
shareholder of record of the Fund who redeems during any 90-day period, the
lesser of (a) $250,000 or (b) one percent (1%) of the Fund’s NAV at the
beginning of such period.
Transfer of Registration. To transfer
shares to another owner, send a written request to the Fund at the address shown
above. Your request should include the following: (i) the Fund name
and existing account registration; (ii) signature(s) of the registered owner(s)
exactly as the signature(s) appear(s) on the account registration; (iii) the new
account registration, address, social security or taxpayer identification
number, and how dividends and capital gains are to be distributed; (iv)
signature guarantees (See the Prospectus under the heading “Signature
Guarantees”); and (v) any additional documents which are required for transfer
by corporations, administrators, executors, trustees, guardians, etc. If
you have any questions about transferring shares, call or write the Fund.
Employees and Affiliates of the Fund. The Fund
has adopted initial investment minimums for the purpose of reducing the cost to
the Fund (and consequently to the shareholders) of communicating with and
servicing its shareholders. At the discretion of the Advisor, the Fund may allow
investments in the Fund with a reduced minimum initial investment from its
Trustees, officers, and employees; the Advisor and certain parties related
thereto; including clients of the Advisor or any sponsor, officer, committee
member thereof, or the immediate family of any of them. In addition,
accounts having the same mailing address may be aggregated for purposes of the
minimum investment if they consent in writing to sharing a single mailing of
shareholder reports, proxy statements (but each such shareholder would receive
his/her own proxy), and other Fund literature.
Dealers. The Distributor, at its expense,
may provide additional compensation in addition to dealer discounts and
brokerage commissions to dealers in connection with sales of shares of the Fund.
Compensation may include financial assistance to dealers in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising campaigns regarding the Fund, and/or other dealer-sponsored
special events. In some instances, this compensation may be made available only
to certain dealers whose representatives have sold or are expected to sell a
significant amount of such shares. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Dealers may not use sales of the Fund shares to qualify for this compensation to
the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the Financial Industries Regulatory
Authority. None of the aforementioned compensation is paid directly by the
Fund or its shareholders although the Distributor may use a portion of the
payment it receives under the Plan to pay these expenses.
The Board has adopted a
policy that governs the disclosure of portfolio holdings. This policy is
intended to ensure that such disclosure is in the best interests of the
shareholders of the Fund and to address possible conflicts of interest.
Under the Fund’s policy, the Fund generally will not disclose portfolio holdings
to a third party unless such information is made available to the public. The
policy provides that the Fund may disclose non-public portfolio holdings
information as required by law and under other limited circumstances that are
set forth in more detail below.
The Fund will generally
make portfolio holdings information available to the public at
http://www.ncfunds.com/holdings/current-245.htm, including the complete
portfolio holdings from the previous day as reported on a monthly basis. This
information is generally available within ten days of the month end and will
remain available until the next month’s portfolio holdings report becomes
available. You may obtain a copy of these monthly portfolio holdings
reports by calling the Fund at 1-800-773-3863. The Fund will also file these
quarterly portfolio holdings reports with the SEC on Form N-CSR or Form N-Q, as
applicable. The Fund’s Form N-CSR and Form N-Q are available on the SEC’s
website at http://www.sec.gov. The first and third quarter portfolio holdings
reports will be filed with the SEC on Form N-Q and the second and fourth fiscal
quarter portfolio holdings reports will be included with the semi-annual and
annual financial statements, respectively, which are sent to shareholders and
filed with the SEC on Form N-CSR.
To the extent that the
Fund’s portfolio holdings have previously been disclosed publicly either through
a filing made with the SEC on Form N-CSR or Form N-Q, or by being posted to the
Fund’s website, such holdings may also be disclosed to any third party that
requests them.
Consistent with policies
approved by the Board, the officers of the Fund will share non-public portfolio
holdings information with the Fund’s service providers that require such
information for legitimate business and Fund oversight purposes. Recipients of
non-public portfolio holdings information have a duty not to trade on that
confidential information. The Fund has not (and does not intend to) enter into
any arrangement providing for the receipt of compensation or other consideration
in exchange for the disclosure of non-public portfolio holdings information,
other than the benefits that result to the Fund and its shareholders from
providing such information, which include the publication of Fund ratings and
rankings.
The Advisor, as well as
the Custodian, fund accountant and Administrator, and CCO, have full daily
access to the Fund’s portfolio holdings. These service providers are subject to
obligations requiring them to keep non-public portfolio holdings information
confidential. In some, but not all, cases these confidentiality
obligations are established by written agreements. The Board has concluded that
the confidentiality obligations in place for these parties are adequate to
safeguard the Fund from unauthorized disclosure of non-public portfolio holdings
information. In addition, the Advisor has a code of ethics that prohibits
covered persons from disclosing or trading based on non-public portfolio
holdings information.
The Fund’s Distributor,
Transfer Agent, independent public accountants, and legal counsel have access to
the Fund’s portfolio holdings on an ad hoc, as needed basis. The Distributor and
Transfer Agent are subject to written agreements that establish confidentiality
obligations with respect to the Fund’s portfolio holdings. The independent
public accountants and legal counsel are subject to professional obligations
that require them to keep non-public portfolio holdings information
confidential. The Board has concluded that the confidentiality obligations in
place for these parties are adequate to safeguard the Fund from unauthorized
disclosure of non-public portfolio holdings information.
Broadridge ICS, Allegra
Design Marketing Print Mail, PrintGrafix (a division of Sunbelt Graphics
Systems, Inc.), PrinterLink Communications Group, Inc., Riverside Printing,
Inc., and V.G. Reed & Sons are financial printers the Fund may engage for,
among other things, the printing and/or distribution of regulatory and
compliance documents. These service providers are subject to written
agreements that establish confidentiality obligations with respect to the Fund’s
portfolio holdings.
The Fund and its service
providers may also provide non-public portfolio holdings information to
appropriate regulatory agencies as required by applicable laws and
regulations.
The Fund currently does
not provide non-public portfolio holdings information to any other third
parties. In the future, the Advisor may establish ongoing arrangements
with other third parties if the Advisor determines that the Fund has a
legitimate business purpose for doing so, determines that the disclosure is in
the shareholders' best interest, and the recipient is subject to a duty of
confidentiality. These parties could include, by way of example, financial data
processing companies that provide automated data scanning and monitoring
services for the Fund, research companies that allow the Advisor to perform
attribution analysis for the Fund; and the Advisor’s proxy voting agent to
assess and vote proxies on behalf of the Fund. The Advisor is responsible for
determining which other third parties have a legitimate business purpose for
receiving the Fund’s portfolio holdings information.
The Fund’s policy
regarding disclosure of portfolio holdings is subject to the continuing
oversight and direction of the Board . Oversight includes: (i) review and
approval of the policy on disclosure of portfolio holdings as necessary,
including review of the parties receiving non-public portfolio holdings
information; (ii) periodic assessment of compliance in connection with a report
from the Trust’s CCO, (iii) receipt of reports on any conflicts of interest
where disclosure of information about portfolio holdings may conflict or appear
to conflict with the interests of the Fund’s investment advisor, any principal
underwriter for the Trust, or an affiliated person of the Trust, and (iv)
receipt of reports on any known disclosure of the Fund’s portfolio holdings to
unauthorized third parties. The Fund and Advisor are obligated to report
issues that arise under the policy on disclosure of portfolio holdings to the
CCO. Material compliance matters are then reported to the Board.
The NAV of the Fund is
determined at the close of regular trading on the NYSE ( normally 4:00 p.m.,
Eastern Time). The Fund’s NAV is not calculated on the days on which the NYSE is
closed. The NYSE generally recognizes the following holidays: New Year’s
Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The days
on which these holidays are observed and any other holiday recognized by
the NYSE will be deemed a business holiday on which the NAV of the Fund will not
be calculated.
The NAV per share of the
Fund is calculated separately by adding the value of the Fund’s securities and
other assets belonging to the Fund, subtracting the liabilities charged to the
Fund, and dividing the result by the number of outstanding shares of the Fund .
“Assets belonging to” the Fund consist of the consideration received upon the
issuance of shares of the Fund together with all net investment income, realized
gains/losses and proceeds derived from the investment thereof, including any
proceeds from the sale of such investments, any funds or payments derived from
any reinvestment of such proceeds, and a portion of any general assets of the
Trust not belonging to a particular series of shares. Assets belonging to the
Fund are charged with the direct liabilities of the Fund and with a share of the
general liabilities of the Trust, which are normally allocated in proportion to
the number of or the relative NAVs of all of the Trust’s series at the time of
allocation or in accordance with other allocation methods approved by the
Trustees. Subject to the provisions of the Trust Instrument, determinations by
the Trustees as to the direct and allocable liabilities, and the allocable
portion of any general assets, with respect to the Fund are conclusive.
Values are determined
according to generally accepted accounting practices and all laws and
regulations that apply. The assets of the Fund are valued as
follows:
• |
Securities that are listed on a
securities exchange are valued at the last quoted sales price at the time
the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded by the
Fund. |
• |
Securities that are listed on an exchange
and which are not traded on the valuation date are valued at the bid
price. |
• |
Unlisted securities for which market
quotations are readily available are valued at the latest quoted sales
price, if available, at the time of valuation, otherwise, at the latest
quoted bid price. |
• |
Options are valued at the mean of the
last quoted bid and ask prices at the time of
valuation. |
• |
Foreign securities listed on foreign
exchanges are valued with quotations from the primary market in which they
are traded and are translated from the local currency into U.S. dollars
using current exchange rates. |
• |
Temporary cash investments with
maturities of 60 days or less will be valued at amortized cost, which
approximates market value. Instruments with maturities in excess of sixty
days are valued at prices provided by a third-party pricing source.
|
• |
Securities for which no current
quotations are readily available are valued at fair value as determined in
good faith using methods approved by the Trustees. Securities may be
valued on the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such
securities. |
The pricing and valuation
of portfolio securities is determined in good faith in accordance with
procedures established by, and under the direction of, the Trustees.
The following summarizes
certain additional tax considerations generally affecting the Fund and its
shareholders that are not described in the Prospectus. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or its
shareholders or any particular category of shareholders. The discussions here
and in the Prospectus are not intended as a substitute for careful tax planning
and are based on United States federal income tax laws that are in effect on the
date hereof and which may be changed by legislative, judicial, or administrative
action. In addition, no attempt is made to address tax concerns applicable
to an investor with a special tax status such as a financial institution, real
estate investment trust, insurance company, regulated investment company,
individual retirement account, other tax-exempt entity, dealer in securities or
non-U.S. investor. Furthermore, this discussion does not reflect possible
application of the alternative minimum tax. Unless otherwise noted, this
discussion assumes the common shares are held by U.S. persons and that such
shares are held as capital assets. Investors are advised to consult their
tax advisors with specific reference to their own tax situations.
The Fund, and any other
series of the Trust, will be treated as a separate corporate entity under the
Internal Revenue Code of 1986, as amended (“Code”), and intends to qualify or
remain qualified as a regulated investment company under Subchapter M of the
Code. In order to so qualify, the Fund must elect to be a regulated
investment company or have made such an election for a previous year and must
satisfy certain requirements relating to the amount of distributions and source
of its income for a taxable year. At least 90% of the gross income of the
Fund must be derived from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stocks,
securities, or foreign currencies, and other income derived with respect to the
Fund’s business of investing in such stock, securities or currencies and net
income derived from an interest in a qualified publicly traded
partnership. Any income derived by the Fund from a partnership (other than
a qualified publicly traded partnership) or trust is treated as derived with
respect to the Fund’s business of investing in stock, securities, or currencies
only to the extent that such income is attributable to items of income that
would have been qualifying income if realized by the Fund in the same manner as
by the partnership or trust.
An investment company may
not qualify as a regulated investment company for any taxable year unless it
satisfies certain requirements with respect to the diversification of its
investments at the close of each quarter of the taxable year. In general,
at least 50% of the value of its total assets must be represented by cash, cash
items, government securities, securities of other regulated investment
companies, and other securities which, with respect to any one issuer, do not
represent more than 5% of the total assets of the Fund or more than 10% of the
outstanding voting securities of such issuer. In addition, not more than
25% of the value of the Fund’s total assets may be invested in (i) the
securities (other than government securities or the securities of other
regulated investment companies) of any one issuer; (ii) the securities of two or
more issuers (other than securities of another regulated investment company) if
the issuers are controlled by the Fund and they are, pursuant to Internal
Revenue Service Regulations, engaged in the same or similar or related trades or
businesses; or (iii) the securities of one or more publicly traded
partnerships. The Fund intends to satisfy all requirements on an ongoing
basis for continued qualification as a regulated investment company.
Some, but not all, of the
dividends paid by the Fund may be taxable at the reduced long-term capital gains
tax rate for individual shareholders. If the Fund designates a dividend as
qualified dividend income, it generally will be taxable to individual
shareholders at the long-term capital gains tax rate, provided certain holding
period requirements are met.
Taxable dividends paid by
the Fund to corporate shareholders will be taxed at corporate income tax
rates. Corporate shareholders may be entitled to a dividends received
deduction (“DRD”) for a portion of the dividends paid and designated by the Fund
as qualifying for the DRD.
If the Fund designates a
dividend as a capital gains distribution, it generally will be taxable to
shareholders as long-term capital gains, regardless of how long the shareholders
have held their Fund shares or whether they received in cash or reinvested in
additional shares. All taxable dividends paid by the Fund other than those
designated as qualified dividend income or capital gains distributions will be
taxable as ordinary income to shareholders, whether received in cash or
reinvested in additional shares. To the extent the Fund engages in increased
portfolio turnover, short-term capital gains may be realized, and any
distribution resulting from such gains will be considered ordinary income for
federal tax purposes. The Fund’s net realized capital gains from securities
transactions will be distributed only after reducing such gains by the amount of
any available capital loss carryforwards. Capital losses may be carried forward
indefinitely and retain the character of the original loss. Capital loss
carryforwards are available to offset future realized capital gains. To the
extent that these carryforwards are used to offset future capital gains it is
probable that the amount offset will not be distributed to shareholders. As of
September 30, 201 9 , the Fund had no capital loss carryforwards.
Certain individuals,
estates, and trusts must pay a 3.8% Medicare surtax on “net investment income”
including, among other things, dividends, and proceeds of sale in respect of
securities like the shares, subject to certain exceptions. Prospective investors
should consult with their own tax advisors regarding the effect, if any, of this
surtax on their ownership and disposition of the shares.
Shareholders who hold Fund
shares in a tax-deferred account, such as a retirement plan, generally will not
have to pay tax on Fund distributions until they receive distributions from
their account.
The Fund, and any other
series of the Trust, will designate (i) any dividend of qualified dividend
income as qualified dividend income; (ii) any distribution of long-term capital
gains as a capital gain dividend; and (iii) any dividend eligible for the
corporate DRD as such in a written notice mailed to shareholders within 60 days
after the close of the Fund’s taxable year. Shareholders should note that,
upon the sale or exchange of Fund shares, if such shares have not been held for
at least six months, any loss on the sale or exchange of those shares will be
treated as long-term capital loss to the extent of the capital gain dividends
received with respect to the shares.
To the extent that a
distribution from the Fund is taxable, it is generally included in a
shareholder’s gross income for the taxable year in which the shareholder
receives the distribution. However, if the Fund declares a dividend in
October, November, or December but pays it in January, it will be taxable to
shareholders as if the dividend was received in the year it was declared.
Every year, each shareholder will receive a statement detailing the tax status
of any Fund distributions for that year.
A 4% nondeductible excise
tax is imposed on regulated investment companies that fail to currently
distribute an amount equal to specified percentages of their ordinary taxable
income and capital gain net income (excess of capital gains over capital
losses). The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise
tax.
If for any taxable year
the Fund does not qualify for the special federal income tax treatment afforded
regulated investment companies, all of its taxable income will be subject to
federal income tax at regular corporate rates (without any deduction for
distributions to its shareholders) at the Fund level. In such event,
dividend distributions (whether or not derived from interest on tax-exempt
securities) would be taxable as qualified dividends to individual shareholders,
to the extent of the Fund’s current and accumulated earnings and profits, and
would be eligible for the DRD for corporations, provided in each case that
certain holding period and other requirements are met.
In general, a shareholder
who sells or redeems shares will realize a capital gain or loss, which will be
long-term or short-term, depending upon the shareholder’s holding period for the
Fund shares. An exchange of shares may be treated as a sale and any gain
may be subject to tax.
The Fund will be required
in certain cases to withhold and remit to the U.S. Treasury a percentage of
taxable dividends or of gross proceeds realized upon sale paid to shareholders
who (i) have failed to provide a correct taxpayer identification number in the
manner required; (ii) are subject to back-up withholding by the Internal Revenue
Service for failure to include properly on their return payments of taxable
interest or dividends; or (iii) have failed to certify to the Fund that they are
not subject to backup withholding when required to do so. Back-up
withholding is not an additional tax. Any amounts withheld from payments
to you may be refunded or credited against your U.S. federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service.
Depending upon the extent
of the Fund’s activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located, or in
which it is otherwise deemed to be conducting business, the Fund may be subject
to the tax laws of such states or localities. In addition, in those states
and localities that have income tax laws, the treatment of the Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws.
Dividends paid by the Fund
to non-U.S. shareholders may be subject to U.S. withholding tax unless reduced
by treaty (and the shareholder files a valid Internal Revenue Service Form
W-8BEN, or other applicable form, with the Fund certifying foreign status and
treaty eligibility) or the non-U.S. shareholder files an Internal Revenue
Service Form W-8ECI, or other applicable form, with the Fund certifying that the
investment to which the distribution relates is effectively connected to a
United States trade or business of such non-U.S. shareholder (and, if certain
tax treaties apply, is attributable to a United States permanent establishment
maintained by such non-U.S. shareholder). The Fund may elect not to
withhold the applicable withholding tax on any distribution representing a
capital gain dividend to a non-U.S. shareholder. Special rules may apply
to non-U.S. shareholders with respect to the information reporting requirements
and withholding taxes and non-U.S. shareholders should consult their tax
advisors with respect to the application of such reporting requirements and
withholding taxes.
The Fund will send
shareholders information each year on the tax status of dividends and
distributions. A dividend or capital gains distribu-tion paid shortly
after shares have been purchased, although in effect a return of investment, is
subject to federal income taxa-tion. Dividends from net investment income, along
with capital gains, will be taxable to shareholders, whether received in cash or
Fund shares and no matter how long the shareholder has held Fund shares, even if
they reduce the NAV of shares below the shareholder’s cost and thus, in effect,
result in a return of a part of the shareholder’s investment.
The audited financial
statements of the Fund for the fiscal year ended September 30, 201 9 , including
the financial highlights appearing in the Annual Report to shareholders, are
incorporated by reference and made a part of this document. You may
request a copy of the Fund’s annual and semi-annual reports at no charge by
calling the Fund at 1-800-773-3863.
The Fund may acquire from
time to time certain securities that meet the following minimum rating criteria
(“Investment-Grade Debt Securities”) (or if not rated, of equivalent quality as
determined by the Advisor). The various ratings used by the nationally
recognized securities rating services are described below.
A rating by a rating
service represents the service’s opinion as to the credit quality of the
security being rated. However, the ratings are general and are not
absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Advisor believes that the quality of
Investment-Grade Debt Securities in which the Fund may invest should be
continuously reviewed and that individual analysts give different weightings to
the various factors involved in credit analysis. A rating is not a
recommendation to purchase, sell, or hold a security, because it does not take
into account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating is
evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other sources
that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
S&P Global Ratings. The following
summarizes the highest four ratings used by S&P Global Ratings, a division
of McGraw-Hill Companies, Inc., for bonds which are deemed to be
Investment‑Grade Debt Securities by the Advisor:
AAA –
An obligation rated ‘AAA’ has the highest rating assigned by S&P Global
Ratings. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong.
AA – An
obligation rated ‘AA’ differs from the highest-rated obligations only to a small
degree. The obligor’s capacity to meet its financial commitment on the
obligation is very strong.
A – An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB
– An obligation rated ‘BBB’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
To provide more detailed
indications of credit quality, the AA, A, and BBB ratings may be modified by the
addition of a plus or minus sign to show relative standing within these major
rating categories.
Bonds rated BB, B, CCC,
CC, and C are not considered by the Advisor to be Investment‑Grade Debt
Securities and are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation and C the
highest. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or
major exposures to adverse conditions.
Commercial paper rated A‑1
by S&P Global Ratings indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A‑1+. Capacity for timely payment on
commercial paper rated A‑2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A‑1.
The rating SP‑1 is the
highest rating assigned by S&P Global Ratings to short term notes and
indicates strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
(+) designation. The rating SP‑2 indicates a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes. The rating SP-3 indicates a
speculative capacity to pay principal and interest.
Moody’s Investor Service, Inc. The
following summarizes the highest four ratings used by Moody’s Investors Service,
Inc. (“Moody’s”) for fixed-income obligations with an original maturity of one
year or more, which are deemed to be Investment-Grade Securities by the
Advisor:
Aaa –
Bond obligations rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
Aa –
Bond obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A –
Bond obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa –
Bond obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
Obligations that are rated
Ba, B, Caa, Ca, or C by Moody’s are not considered “Investment-Grade Debt
Securities” by the Advisor. Obligations rated Ba are judged to have
speculative elements and are subject to substantial credit risk.
Obligations rated B are considered speculative and are subject to high credit
risk. Obligations rated Caa are judged to be of poor standing and are
subject to very high credit risk.
Note: Moody’s appends
numerical modifiers 1, 2, and 3 to each generic rating classification from Aa
through Caa. The modifier 1 indicates that the obligation ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of that generic
rating category.
Short-Term
Ratings.
Moody’s short-term ratings
are opinions of the ability of issuers to honor short-term financial
obligations. Ratings may be assigned to issuers, short-term programs, or
individual short-term debt instruments. Such obligations generally have an
original maturity not exceeding thirteen months, unless explicitly noted.
Moody’s employs the
following designations to indicate the relative repayment ability of rated
issuers:
P-1 –
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2 –
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3 –
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term debt obligations.
NP –
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Note:
Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the
senior-most long-term rating of the issuer, its guarantor, or
support-provider.
US Municipal Short-Term
Debt And Demand Obligation Ratings.
Short-Term Debt Ratings. There are three
rating categories for short-term municipal obligations that are considered
investment grade. These ratings are designated as Municipal Investment
Grade (MIG) and are divided into three levels – MIG 1 through MIG 3. In
addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade. MIG ratings expire at the maturity of
the obligation.
MIG 1 –
This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2 –
This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG 3 –
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG –
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
Demand Obligation Ratings. In the case
of variable rate demand obligations (VRDOs), a two-component rating is assigned;
a long or short-term debt rating and a demand obligation rating. The first
element represents Moody’s evaluation of the degree of risk associated with
scheduled principal and interest payments. The second element represents
Moody’s evaluation of the degree of risk associated with the ability to receive
purchase price upon demand ("demand feature"), using a variation of the MIG
rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or
short-term aspect of a VRDO is not rated, that piece is designated NR, e.g.,
Aaa/NR or NR/VMIG 1.
VMIG rating expirations
are a function of each issue’s specific structural or credit features.
VMIG 1
– This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 2
– This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 3
– This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG –
This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
Fitch Ratings. The following summarizes the
highest four ratings used by Fitch, Inc. (“Fitch”):
Long-Term
Ratings.
AAA –
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of
credit risk. They are assigned only in cases of exceptionally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA –
Very high credit quality. ‘AA’ ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A –
High credit quality. ‘A’ ratings denote expectations of low default
risk. The capacity for payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to adverse
business or economic conditions than is the case for higher ratings.
BBB –
Good credit quality. ‘BBB’ ratings indicate that expectations of default
risk are currently low. The capacity for payment of financial commitments
is considered adequate, but adverse business or economic conditions are more
likely to impair this capacity.
Long-term securities rated
below BBB by Fitch are not considered by the Advisor to be investment-grade
securities. Securities rated BB and B are regarded as speculative with
regard to a possible credit risk developing. BB is considered speculative
and B is considered highly speculative. Securities rated CCC, CC, and C
are regarded as a high default risk. A rating CC indicates that default of
some kind appears probable, while a rating C signals imminent default.
Securities rated DDD, D, and D indicate a default has occurred.
Short-Term
Ratings.
F1 –
Highest short-term credit quality. The rating F1 indicates the strongest
intrinsic capacity for timely payment of financial commitments; may have an
added “+” to denote any exceptionally strong credit feature.
F2 –
Good short-term credit quality. The rating F2 indicates good intrinsic
capacity for timely payment of financial commitments.
F3 –
Fair short-term credit quality. The rating F3 indicates the intrinsic
capacity for timely payment of financial commitments is adequate.
B –
Speculative short-term credit quality. The rating B indicates minimal
capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic
conditions.
Short-term rates B, C, and
D by Fitch are considered by the Advisor to be below investment-grade
securities. Short-term securities rated B are considered speculative,
securities rated C have a high default risk, and securities rated D denote
actual or imminent payment default.
(+) or (-) suffixes may be
appended to a rating to denote relative status within major rating
categories. Such suffixes are not added to long-term ratings “AAA”
category, categories below “CCC”, or short-term ratings other than “F1”.
The suffix “NR” indicates that Fitch does not publicly rate the issuer or issue
in question.
GRIMALDI PORTFOLIO SOLUTIONS,
INC.
Proxy and Corporate Action Voting
Policies and
Procedures
I. POLICY.
Grimaldi Portfolio
Solutions, Inc. (formerly Navigator Money Management, Inc.) (the “Adviser”) acts
as a discretionary investment adviser for various clients, including clients
governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) and
registered open-end management investment companies (i.e., “mutual funds”). The
Adviser is registered with the U.S. Securities and Exchange Commission (the
“SEC”) as an investment adviser pursuant to the Investment Advisers Act of 1940,
as amended (the “Advisers Act”). Some of the Adviser’s clients have delegated to
the Adviser the authority to vote proxies or act with respect to corporate
actions that may arise with respect to securities held within such client’s
investment portfolio. Corporate actions may include, for example and without
limitation, tender offers or exchanges, bankruptcy proceedings, and class
actions. The Adviser’s authority to vote proxies or act with respect to other
corporate actions is established through the delegation of discretionary
authority under its investment advisory agreements. Therefore, unless a client
(including a “named fiduciary” under ERISA) specifically reserves the right, in
writing, to vote its own proxies or to take shareholder action with respect to
other corporate actions requiring shareholder actions, the Adviser will vote all
proxies and act on all other actions in a timely manner as part of its full
discretionary authority over client assets in accordance with these policies and
procedures.
When voting proxies or
acting with respect to corporate actions on behalf of clients, the Adviser’s
utmost concern is that all decisions be made solely in the best interests of the
client (and for ERISA accounts, plan beneficiaries and participants, in
accordance with the letter and spirit of ERISA). The Adviser will act in a
prudent and diligent manner intended to enhance the economic value of the assets
in the client’s account.
II. PURPOSE.
The purpose of these policies and procedures is
to memorialize the procedures and policies adopted by the Adviser to enable it
to comply with its fiduciary responsibilities to clients and the requirements of
Rule 206(4)-6 under the Advisers Act. These policies and procedures also reflect
the fiduciary standards and responsibilities set forth by the Department of
Labor for ERISA accounts.
III. PROCEDURES.
The Adviser is ultimately
responsible for ensuring that all proxies received are voted in a timely manner
and in a manner consistent with the Adviser’s determination of the client’s best
interests. Although many proxy proposals may be voted in accordance with the
Guidelines described in Section V below, some proposals require special
consideration which may dictate that the Adviser makes an exception to the
Guidelines.
The Adviser is also
responsible for ensuring that all corporate action notices or requests which
require shareholder action that are received are addressed in a timely manner
and consistent action is taken across all similarly situated client
accounts.
A. Conflicts
of Interest.
Where a proxy proposal
raises a material conflict between the Adviser’s interests and a client’s
interest, including a mutual fund client, the Adviser will resolve such a
conflict in the manner described below:
1. |
Vote in Accordance with the Guidelines. To the extent that the
Adviser has little or no discretion to deviate from the Guidelines with
respect to the proposal in question, the Adviser shall vote in accordance
with such pre-determined voting
policy. |
2. |
Obtain Consent of Clients. To the extent that the Adviser has
discretion to deviate from the Guidelines with respect to the proposal in
question, the Adviser will disclose the conflict to the relevant clients
and obtain their consent to the proposed vote prior to voting the
securities. The disclosure to the client will include sufficient
detail regarding the matter to be voted on and the nature of the conflict
so that the client will be able to make an informed decision regarding the
vote. If a client does not respond to such a conflict disclosure
request or denies the request, the Adviser will abstain from voting the
securities held by that client’s
account. |
3. |
Client Directive to Use an Independent Third Party.
Alternatively, a client may, in writing, specifically direct the Adviser
to forward all proxy matters in which the Adviser has a conflict of
interest regarding the client’s securities to an identified independent
third party for review and recommendation. Where such independent third
party’s recommendations are received on a timely basis, the Adviser will
vote all such proxies in accordance with such third party’s
recommendation. If the third party’s recommendations are not timely
received, the Adviser will abstain from voting the securities held by that
client’s account. |
The Adviser will review
the proxy proposal for conflicts of interest as part of the overall vote review
process. All material conflicts of interest so identified will be addressed as
described above in this Section III, A.
B. Limitations.
In certain circumstances,
in accordance with a client’s investment advisory agreement (or other written
directive) or where the Adviser has determined that it is in the client’s best
interest, the Adviser will not vote proxies received.
The following are certain
circumstances where the Adviser will limit its role in voting proxies:
1. |
Client Maintains Proxy Voting Authority. Where a client
specifies in writing that it will maintain the authority to vote proxies
itself or that it has delegated the right to vote proxies to a third
party, the Adviser will not vote the securities and will direct the
relevant custodian to send the proxy material directly to the client. If
any proxy material is received by the Adviser for such account, it will
promptly be forwarded to the client or specified third
party. |
2. |
Terminated Account. Once a client account has been terminated in
accordance with its investment advisory agreement, the Adviser will not
vote any proxies received after the termination date. However, the client
may specify in writing that proxies should be directed to the client (or a
specified third party) for action. |
3. |
Limited Value. If the Adviser determines that the value of a client’s
economic interest or the value of the portfolio holding is indeterminable
or insignificant, the Adviser may abstain from voting a client’s proxies.
The Adviser also will not vote proxies received for securities which are
no longer held by the client’s account. In addition, the Adviser generally
will not vote securities where the economic value of the securities in the
client account is less than $500. |
4. |
Securities Lending Programs. When securities are out on loan, they
are transferred into the borrower’s name and are voted by the borrower, in
its discretion. However, where the Adviser determines that a proxy vote
(or other shareholder action) is materially important to the client’s
account, the Adviser may recall the security for the purposes of
voting. |
5. |
Unjustifiable Costs. In certain circumstances, after doing a
cost-benefit analysis, the Adviser may abstain from voting where the cost
of voting a client’s proxy would exceed any anticipated benefits from the
proxy proposal. |
IV. RECORD
KEEPING.
In accordance with Rule
204-2 under the Advisers Act, the Adviser will maintain for the time periods set
forth in the Rule: (i) these proxy voting procedures and policies, and all
amendments thereto; (ii) all proxy statements received regarding client
securities (provided however, that the Adviser may rely on the proxy statement
filed on EDGAR as its records); (iii) a record of all votes cast on behalf of
clients; (iv) records of all written client requests for proxy voting
information; (v) a copy of any written response made by the Adviser to any
written or oral client request for proxy voting information; (vi) any documents
prepared by the Adviser that were material to making a decision on how to vote
or that memorialized the basis for the decision; and (vii) all records relating
to requests made to clients regarding conflicts of interest in voting the
proxy.
The Adviser will describe
in its Form ADV, Part II (or other brochure fulfilling the requirement of Rule
204-3 under the Advisers Act) its proxy voting policies and procedures and will
inform clients how they may obtain information on how the Adviser voted proxies
with respect to the clients’ portfolio securities. The Adviser will also provide
to each mutual fund client a copy of its policies and procedures. Clients may
obtain information on how their securities were voted or a copy of the policies
and procedures by written request addressed to the Adviser.
The Adviser will
coordinate with all mutual fund clients to assist in the provision of all
information required to be filed by such mutual funds on Form N-PX. Form N-PX
will provide information concerning each matter relating to a portfolio security
considered at any shareholder meeting with respect to which a mutual fund was
entitled to vote. Each Form N-PX will need to be filed no later than August 31st
of each year, and will cover all proxy votes with respect to which a mutual fund
was entitled to vote for the period July 1st through June 30th. The Adviser
shall maintain and provide the following information concerning any shareholder
meetings with respect to which a mutual fund they manage was entitled to
vote:
o the
name of the issuer of the portfolio security;
o the
exchange ticker symbol of the portfolio security(1);
o the
CUSIP number of the portfolio security(1);
o the
shareholder meeting date;
o a
brief description of the matter voted on;
o whether
the matter was put forward by the issuer or a shareholder;
o whether
the mutual fund voted;
o how
the mutual fund cast its vote; and
o whether
the mutual fund cast its vote for or against management.
V. GUIDELINES.
Each proxy issue will be
considered individually. The following guidelines are a partial list to be used
in voting proposals contained in the proxy statements, but will not be used as
rigid rules.
A. Oppose.
The Adviser will generally
vote against any management proposal that clearly has the effect of restricting
the ability of shareholders to realize the full potential value of their
investment. Proposals in this category would include:
1. |
Issues regarding the issuer’s board entrenchment and anti-takeover
measures such as the following: |
a. Proposals
to stagger board members’ terms;
b. Proposals
to limit the ability of shareholders to call special meetings;
c. Proposals
to require super majority votes;
d.
Proposals requesting excessive increases in authorized common or preferred
shares where management provides no explanation for the use or need of these
additional shares;
e. Proposals
regarding “fair price” provisions;
f. Proposals
regarding “poison pill” provisions; and
g. Permitting
“green mail”.
2. Providing
cumulative voting rights.
B. Approve.
Routine proposals are
those which do not change the structure, bylaws, or operations of the
corporation to the detriment of the shareholders. Given the routine nature of
these proposals, proxies will nearly always be voted with management.
Traditionally, these issues include:
1. |
Election of independent accountants recommended by management, unless
seeking to replace if there exists a dispute over
policies. |
2. |
Date and place of annual
meeting. |
3. |
Limitation on charitable contributions or fees paid to
lawyers. |
4. |
Ratification of directors’ actions on routine matters since previous
annual meeting. |
5. |
Confidential voting. Confidential voting is most often proposed by
shareholders as a means of eliminating undue management pressure on
shareholders regarding their vote on proxy issues. The Adviser will
generally vote to approve these proposals as shareholders can later
divulge their votes to management on a selective basis if a legitimate
reason arises. |
6. |
Limiting directors’ liability. |
7. |
Eliminate preemptive rights. Preemptive rights give current
shareholders the opportunity to maintain their current percentage
ownership through any subsequent equity offerings. These provisions are no
longer common in the U.S., and can restrict management’s ability to raise
new capital. |
8. |
The Adviser will generally vote to approve the elimination of
preemptive rights, but will oppose the elimination of listed preemptive
rights, e.g., on proposed issues representing more than an acceptable
level of total dilution. |
9. |
Employee Stock Purchase Plans. |
10. |
Establish 40 1(k) Plans. |
The Adviser will review
each issue in this category on a case-by-case basis. Voting decisions will
he made based on the financial interest of the client involved. These matters
include proposals to:
1. |
Pay directors solely in stock; |
2. |
Eliminate director’s mandatory retirement
policy; |
3. |
Rotate annual meeting location or
date; |
4. |
Changes in the state of
incorporation; |
5. |
Social and corporate responsibility
issues; |
6. |
Option and stock grants to management and directors;
and |
7. |
Allowing indemnification of directors and/or officers after reviewing
the applicable laws and extent of protection
requested. |
D. |
Investment Company Issues. |
From time to time the
Adviser will have to vote shares of investment company securities that may be
held in a client’s account. These matters generally include proposals to:
1. Elect
directors or trustees;
2. Ratify
or approve independent accountants;
3. Approve
a new investment adviser or sub-adviser;
4. Approve
a change to an investment advisory fee;
5. Approve
a Distribution (i.e., Rule 12b-1) Plan;
6. Approve
a change in a fundamental investment objective, policy or limitation;
7. Approve
a change in the state of incorporation; and
8. Approve
a plan of reorganization or merger.
The Adviser will generally
vote with management’s recommendation on the election of directors and trustees,
the approval of independent accountants, the approval of a change in a
fundamental investment objective, policy or limitation, and the approval of a
change in the state of incorporation. On the approval of a new investment
adviser or sub-adviser, approval of a change in investment advisory fee,
approval of a distribution (i.e., Rule 12b-1) plan, or the approval of a plan of
reorganization or merger, the Adviser will review each issue on a case-by-case
basis. Voting decisions will be made based on the financial interest of the
client involved.
(1) |
The exchange ticker symbol and CUSIP number may be difficult to
obtain for certain portfolio securities, such as foreign issuers.
Accordingly, such information may be omitted if it’s not available through
reasonably practicable means. |