ck0001540305-20231231
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Grayscale
Future of Finance ETF
(GFOF)
a
series of ETF Series Solutions
listed
on NYSE
Arca, Inc.
STATEMENT
OF ADDITIONAL INFORMATION
April
30, 2024 |
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with the Prospectus for the Grayscale Future of Finance ETF
(the “Fund”), a series of ETF Series Solutions (the “Trust”), dated April
30, 2024, as may be supplemented from time to time (the “Prospectus”).
Capitalized terms used in this SAI that are not defined have the same meaning as
in the Prospectus, unless otherwise noted. A copy of the Prospectus may be
obtained without charge, by calling the Fund at 1‑800‑617‑0004, visiting
etfs.grayscale.com/gfof or writing to the Fund, c/o U.S. Bank Global Fund
Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
The
Fund’s audited financial statements for the most recent fiscal year ended
December 31, 2023 are incorporated into this SAI by reference to the Fund’s
most recent Annual
Report
to Shareholders (File No. 811-22668). A copy of the Fund’s Annual Report may be
obtained without charge by request to the Fund at the address or phone number
noted above.
TABLE
OF CONTENTS
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Custodian
and Securities Lending Agent |
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GENERAL
DESCRIPTION
OF THE TRUST
The
Trust is an open-end management investment company consisting of multiple
investment series. This SAI relates to the Fund. The Trust was organized as a
Delaware statutory trust on February 9, 2012. The Trust is registered with
the U.S. Securities and Exchange Commission (“SEC”) under the Investment Company
Act of 1940, as amended (together with the rules and regulations adopted
thereunder, as amended, the “1940 Act”), as an open-end management investment
company and the offering of the Fund’s shares (“Shares”) is registered under the
Securities Act of 1933, as amended (the “Securities Act”). The Trust is governed
by its Board of Trustees (the “Board”). Grayscale Advisors, LLC (the “Adviser”)
serves as investment adviser to the Fund, and Vident Asset Management (the
“Sub-Adviser”) serves as sub-adviser to the Fund. The investment objective of
the Fund is to seek to track the performance, before fees and expenses, of its
underlying index (the “Index”).
The
Fund offers and issues Shares at its net asset value (“NAV”) only in
aggregations of a specified number of Shares (each, a “Creation Unit”). The Fund
generally offers and issues Shares in exchange for a basket of securities
(“Deposit Securities”) together with the deposit of a specified cash payment
(“Cash Component”). The Trust reserves the right to permit or require the
substitution of a “cash in lieu” amount (“Deposit Cash”) to be added to the Cash
Component to replace any Deposit Security. Shares are listed on the NYSE Arca,
Inc. (the “Exchange”) and trade on the Exchange at market prices that may differ
from the Shares’ NAV. Shares are also redeemable only in Creation Unit
aggregations, primarily for a basket of Deposit Securities together with a Cash
Component. A Creation Unit of the Fund generally consists of 25,000 Shares,
though this may change from time to time. As a practical matter, only
institutions or large investors purchase or redeem Creation Units. Except when
aggregated in Creation Units, Shares are not redeemable securities.
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain on deposit with the Trust cash
at least equal to a specified percentage of the value of the missing Deposit
Securities, as set forth in the Participant Agreement (as defined below). The
Trust may impose a transaction fee for each creation or redemption. In all
cases, such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities. As
in the case of other publicly traded securities, brokers’ commissions on
transactions in the secondary market will be based on negotiated commission
rates at customary levels.
ADDITIONAL
INFORMATION
ABOUT
INVESTMENT
OBJECTIVES,
POLICIES,
AND
RELATED
RISKS
The
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments, see “Description
of Permitted Investments”
in this SAI.
With
respect to the Fund’s investments, unless otherwise noted, if a percentage
limitation on investment is adhered to at the time of investment or contract, a
subsequent increase or decrease as a result of market movement or redemption
will not result in a violation of such investment limitation.
Non-Diversification
The
Fund is classified as a non-diversified investment company under the 1940 Act. A
“non-diversified” classification means that the Fund is not limited by the 1940
Act with regard to the percentage of its total assets that may be invested in
the securities of a single issuer. This means that the Fund may invest a greater
portion of its total assets in the securities of a single issuer or a small
number of issuers than if it was a diversified fund. The securities of a
particular issuer may constitute a greater portion of the Index and, therefore,
those securities may constitute a greater portion of the Fund’s portfolio. This
may have an adverse effect on the Fund’s performance or subject Shares to
greater price volatility than more diversified investment companies. Moreover,
in pursuing its objective, the Fund may hold the securities of a single issuer
in an amount exceeding 10% of the value of the outstanding securities of the
issuer, subject to restrictions imposed by the Internal Revenue Code of 1986, as
amended (the “Code”). In particular, as the Fund’s size grows and its assets
increase, it will be more likely to hold more than 10% of the securities of a
single issuer if the issuer has a relatively small public float as compared to
other components in the Index.
Although
the Fund is non-diversified for purposes of the 1940 Act, the Fund intends to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a “regulated investment company” (“RIC”) for
purposes of the Code. Compliance with the diversification requirements of the
Code may limit the investment flexibility of the Fund and may make it less
likely that the Fund will meet its investment objectives. To qualify as a RIC
under the Code, the Fund must meet the Diversification Requirement described in
the section titled “Federal
Income Taxes”
in this SAI.
General
Risks
The
value of the Fund’s portfolio securities may fluctuate with changes in the
financial condition of an issuer or counterparty, changes in specific economic
or political conditions that affect a particular security or issuer and changes
in general economic or political conditions. An investor in the Fund could lose
money over short or long periods of time.
There
can be no guarantee that a liquid market for the securities held by the Fund
will be maintained. The existence of a liquid trading market for certain
securities may depend on whether dealers will make a market in such securities.
There can be no assurance that a market will be made or maintained or that any
such market will be or remain liquid. The price at which securities may be sold
and the value of Shares will be adversely affected if trading markets for the
Fund’s portfolio securities are limited or absent, or if bid-ask spreads are
wide.
Recent
Events. Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers experienced particularly large losses as a result of these disruptions.
Although the immediate effects of the COVID-19 pandemic have begun to dissipate,
global markets and economies continue to contend with the ongoing and long-term
impact of the COVID-19 pandemic and the resultant market volatility and economic
disruptions. It is unknown how long circumstances related to the pandemic will
persist, whether they will reoccur in the future, whether efforts to support the
economy and financial markets will be successful, and what additional
implications may follow from the pandemic. The impact of these events and other
epidemics or pandemics in the future could adversely affect Fund
performance.
Russia’s
military invasion of Ukraine in February 2022, the resulting responses by the
United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely
affect regional and global economies. The United States and other countries have
imposed broad-ranging economic sanctions on Russia, certain Russian individuals,
banking entities and corporations, and Belarus as a response to Russia’s
invasion of Ukraine, and may impose sanctions on other countries that provide
military or economic support to Russia. The sanctions restrict companies from
doing business with Russia and Russian companies, prohibit transactions with the
Russian central bank and other key Russian financial institutions and entities,
ban Russian airlines and ships from using many other countries’ airspace and
ports, respectively, and place a freeze on certain Russian assets. The sanctions
also removed some Russian banks from the Society for Worldwide Interbank
Financial Telecommunications (SWIFT), the electronic network that connects banks
globally to facilitate cross-border payments. In addition, the United States and
the United Kingdom have banned oil and other energy imports from Russia, and the
European Union has banned most Russian crude oil imports and refined petroleum
products, with limited exceptions. The extent and duration of Russia’s military
actions and the repercussions of such actions (including any retaliatory actions
or countermeasures that may be taken by those subject to sanctions, including
cyber attacks) are impossible to predict, but could result in significant market
disruptions, including in certain industries or sectors, such as the oil and
natural gas markets, and may negatively affect global supply chains, inflation
and global growth. These and any related events could significantly impact the
Fund’s performance and the value of an investment in the Fund, even if the Fund
does not have direct exposure to Russian issuers or issuers in other countries
affected by the invasion.
Cyber
Security Risk. Investment
companies, such as the Fund, and their service providers may be subject to
operational and information security risks resulting from cyber attacks. Cyber
attacks include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized
release of confidential information or various other forms of cyber security
breaches. Cyber attacks affecting the Fund or the Adviser, Sub-Adviser,
custodian, transfer agent, intermediaries and other third-party service
providers may adversely impact the Fund. For instance, cyber attacks may
interfere with the processing of shareholder transactions, impact the Fund’s
ability to calculate its NAV, cause the release of private shareholder
information or confidential company information, impede trading, subject the
Fund to regulatory fines or financial losses, and cause reputational damage. The
Fund may also incur additional costs for cyber security risk management
purposes. Similar types of cyber security risks are also present for issuers of
securities in which the Fund invests, which could result in material adverse
consequences for such issuers, and may cause the Fund’s investments in such
portfolio companies to lose value.
Description
of Permitted Investments
The
following are descriptions of the permitted investments and investment practices
and the associated risk factors. The Fund will only invest in any of the
following instruments or engage in any of the following investment practices if
such investment or activity is consistent with the Fund’s investment objective
and permitted by the Fund’s stated investment policies.
Borrowing.
Although the Fund does not intend to borrow money, the Fund may do so to the
extent permitted by the 1940 Act. Under the 1940 Act, the Fund may borrow up to
one-third (1/3) of its total assets. The Fund will borrow money only for
short-term or emergency purposes. Such borrowing is not for investment purposes
and will be repaid by the Fund promptly. Borrowing will tend to exaggerate the
effect on NAV of any increase or decrease in the market value of the Fund’s
portfolio. Money borrowed will be subject to interest costs that may or may not
be recovered by earnings on the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with a 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.
Depositary
Receipts.
To the extent the Fund invests in stocks of foreign corporations, the Fund’s
investment in securities of foreign companies may be in the form of depositary
receipts or other securities convertible into securities of foreign issuers.
American Depositary Receipts (“ADRs”) are dollar-denominated receipts
representing interests in the securities of a foreign issuer, which securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by United States
banks and trust companies which evidence ownership of underlying securities
issued by a foreign corporation. Generally, ADRs in registered form are designed
for use in domestic securities markets and are traded on exchanges or
over-the-counter in the United States. Global Depositary Receipts (“GDRs”),
European Depositary Receipts (“EDRs”), and International Depositary Receipts
(“IDRs”) are similar to ADRs in that they are certificates evidencing ownership
of shares of a foreign issuer, however, GDRs, EDRs, and IDRs may be issued in
bearer form and denominated in other currencies, and are generally designed for
use in specific or multiple securities markets outside the U.S. EDRs, for
example, are designed for use in European securities markets, while GDRs are
designed for use throughout the world. Depositary receipts will not necessarily
be denominated in the same currency as their underlying securities.
The
Fund will not invest in any unlisted Depositary Receipts or any Depositary
Receipt that the Sub-Adviser deems to be illiquid or for which pricing
information is not readily available. In addition, all Depositary Receipts
generally must be sponsored. However, the Fund may invest in unsponsored
Depositary Receipts under certain limited circumstances. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the value of the Depositary Receipts. The use of Depositary
Receipts may increase tracking error relative to the underlying Index.
Equity
Securities.
Equity
securities, such as the common stocks of an issuer, are subject to stock market
fluctuations and therefore may experience volatile changes in value as market
conditions, consumer sentiment or the financial condition of the issuers change.
A decrease in value of the equity securities in the Fund’s portfolio may also
cause the value of Shares to decline.
An
investment in the Fund should be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the
value of the Fund’s portfolio securities and therefore a decrease in the value
of Shares). Common stocks are susceptible to general stock market fluctuations
and to volatile increases and decreases in value as market confidence and
perceptions change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies; inflation and interest rates; economic expansion
or contraction; and global or regional political, economic, public health, or
banking crises.
Holders
of common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, generally have
inferior rights to receive payments from the issuer in comparison with the
rights of creditors or holders of debt obligations or preferred stocks. Further,
unlike debt securities, which typically have a stated principal amount payable
at maturity (whose value, however, is subject to market fluctuations prior
thereto), or preferred stocks, which typically have a liquidation preference and
which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are
subject to market fluctuations as long as the common stock remains outstanding.
When-Issued
Securities
– A
when-issued security is one whose terms are available and for which a market
exists, but which has not been issued. When the Fund engages in when-issued
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, the Fund may miss the opportunity to obtain
the security at a favorable price or yield.
When
purchasing a security on a when-issued basis, the Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
changes. At the time of settlement, the value of the security may be more or
less than the purchase price. The yield available in the market when the
delivery takes place also may be higher than those obtained in the transaction
itself. Because the Fund does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other investments.
Decisions
to enter into “when-issued” transactions will be considered on a case-by-case
basis when necessary to maintain continuity in a company’s index membership. The
Fund will segregate cash or liquid securities equal in value to commitments for
the when-issued transactions. The Fund will segregate additional liquid assets
daily so that the value of such assets is equal to the amount of the
commitments.
Types
of Equity Securities:
Common
Stocks
— Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company’s board of directors.
Preferred
Stocks
— Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated
to the liabilities of the issuer. Unlike common stocks, preferred stocks are
generally not entitled to vote on corporate matters. Types of preferred stocks
include adjustable-rate preferred stock, fixed dividend preferred stock,
perpetual preferred stock, and sinking fund preferred stock.
Generally,
the market values of preferred stock with a fixed dividend rate and no
conversion element vary inversely with interest rates and perceived credit risk.
Rights
and Warrants
— A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitles the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Real
Estate Investment Trusts
(“REITs”)
—
A U.S. REIT is a corporation or business trust (that would otherwise be taxed as
a corporation) which meets the definitional requirements of the Code. The Code
permits a qualifying REIT to deduct from taxable income the dividends paid,
thereby effectively eliminating corporate level federal income tax. To meet the
definitional requirements of the Code, a REIT must, among other things: invest
substantially all of its assets in interests in real estate (including mortgages
and other REITs), cash and government securities; derive most of its income from
rents from real property or interest on loans secured by mortgages on real
property; and, in general, distribute annually 90% or more of its taxable income
(other than net capital gains) to shareholders.
REITs
are sometimes informally characterized as Equity REITs and Mortgage REITs. An
Equity REIT invests primarily in the fee ownership or leasehold ownership of
land and buildings (e.g.,
commercial equity REITs and residential equity REITs); a Mortgage REIT invests
primarily in mortgages on real property, which may secure construction,
development or long-term loans.
REITs
may be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent that REITs in which the Fund invests may
concentrate investments in particular geographic regions or property types.
Additionally, rising interest rates may cause investors in REITs to demand a
higher annual yield from future distributions, which may in turn decrease market
prices for equity securities issued by REITs. Rising interest rates also
generally increase the costs of obtaining financing, which could cause the value
of the Fund’s investments to decline. During periods of declining interest
rates, certain Mortgage REITs may hold mortgages that the mortgagors elect to
prepay, which prepayment may diminish the yield on securities issued by such
Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of
borrowers to repay when due the debt extended by the REIT and Equity REITs may
be affected by the ability of tenants to pay rent.
Certain
REITs have relatively small market capitalization, which may tend to increase
the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
In
addition to these risks, Equity REITs may be affected by changes in the value of
the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the favorable U.S. federal income tax
treatment generally available to REITs under the Code or fail to maintain their
exemptions from registration under the 1940 Act. The above factors may also
adversely affect a borrower’s or a lessee’s ability to meet its obligations to
the REIT. In the event of default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Smaller
Companies
— The securities of small- and mid-capitalization companies may be more
vulnerable to adverse issuer, market, political, or economic developments than
securities of larger-capitalization companies. The securities of small- and
mid-capitalization companies generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger capitalization stocks
or the stock market as a whole. Some small- or mid-capitalization companies have
limited product lines, markets, and financial
and
managerial resources and tend to concentrate on fewer geographical markets
relative to larger capitalization companies. There is typically less publicly
available information concerning small- and mid-capitalization companies than
for larger, more established companies. Small- and mid-capitalization companies
also may be particularly sensitive to changes in interest rates, government
regulation, borrowing costs, and earnings.
Tracking
Stocks —
The
Fund may invest in tracking stocks. A tracking stock is a separate class of
common stock whose value is linked to a specific business unit or operating
division within a larger company and which is designed to “track” the
performance of such business unit or division. The tracking stock may pay
dividends to shareholders independent of the parent company. The parent company,
rather than the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same rights as
holders of the company’s common stock.
Exchange-Traded
Funds (“ETFs”). The
Fund may invest in shares of other investment companies (including ETFs). As the
shareholder of another ETF, the Fund would bear, along with other shareholders,
its pro rata portion of the other ETF’s expenses, including advisory
fees. Such expenses are in addition to the expenses the Fund pays in connection
with its own operations. The Fund’s investments in other ETFs may be limited by
applicable law.
Disruptions
in the markets for the securities underlying ETFs purchased or sold by the Fund
could result in losses on investments in ETFs. ETFs also carry the risk that the
price the Fund pays or receives may be higher or lower than the ETF’s NAV. ETFs
are also subject to certain additional risks, including the risks of illiquidity
and of possible trading halts due to market conditions or other reasons, based
on the policies of the relevant exchange. ETFs and other investment companies in
which the Fund may invest may be leveraged, which would increase the volatility
of the Fund’s NAV.
Fixed
Income Securities. The
Fund may invest directly or indirectly in fixed income securities. Even though
interest-bearing securities are investments that promise a stable stream of
income, the prices of such securities are affected by changes in interest rates.
In general, fixed income security prices rise when interest rates fall and fall
when interest rates rise. Securities with shorter maturities, while offering
lower yields, generally provide greater price stability than longer term
securities and are less affected by changes in interest rates. The values
of fixed income securities also may be affected by changes in the credit rating
or financial condition of the issuing entities. Once the rating of a portfolio
security has been changed, the Fund will consider all circumstances deemed
relevant in determining whether to continue to hold the security.
Fixed
income investments bear certain risks, including credit risk, or the ability of
an issuer to pay interest and principal as they become due. Generally, higher
yielding bonds are subject to more credit risk than lower yielding bonds.
Interest rate risk refers to the fluctuations in value of fixed income
securities resulting from the inverse relationship between the market value of
outstanding fixed income securities and changes in interest rates. An increase
in interest rates will generally reduce the market value of fixed income
investments and a decline in interest rates will tend to increase their
value.
A
number of factors, including changes in a central bank’s monetary policies or
general improvements in the economy, may cause interest rates to rise. Fixed
income securities with longer durations are more sensitive to interest rate
changes than securities with shorter durations, making them more volatile. This
means their prices are more likely to experience a considerable reduction in
response to a rise in interest rates.
Fixed-Income
Securities Ratings. The
nationally recognized statistical rating organizations (“NRSROs”) publish
ratings based upon their assessment of the relative creditworthiness of the
rated fixed-income securities. Generally, a lower rating indicates higher credit
risk, and higher yields are ordinarily available from fixed-income securities in
the lower rating categories to compensate investors for the increased credit
risk. Any use of credit ratings in evaluating fixed-income securities can
involve certain risks. For example, ratings assigned by the rating agencies are
based upon an analysis completed at the time of the rating of the obligor’s
ability to pay interest and repay principal, typically relying to a large extent
on historical data. Rating agencies typically rely to a large extent on
historical data which may not accurately represent present or future
circumstances. Ratings do not purport to reflect to risk of fluctuations in
market value of the fixed-income security and are not absolute standards of
quality and only express the rating agency’s current opinion of an obligor’s
overall financial capacity to pay its financial obligations. A credit rating is
not a statement of fact or a recommendation to purchase, sell or hold a
fixed-income obligation. Also, credit quality can change suddenly and
unexpectedly, and credit ratings may not reflect the issuer’s current financial
condition or events since the security was last rated. Rating agencies may have
a financial interest in generating business, including the arranger or issuer of
the security that normally pays for that rating, and a low rating might affect
future business. While rating agencies have policies and procedures to address
this potential conflict of interest, there is a risk that these policies will
fail to prevent a conflict of interest from impacting the rating. Additionally,
legislation has been enacted in an effort to reform rating agencies. Rules have
also been adopted by the SEC to require rating agencies to provide additional
disclosure and reduce conflicts of interest, and further reform has been
proposed. It is uncertain how such legislation or additional regulation might
impact the ratings agencies business and the Adviser’s or sub-adviser’s
investment process.
Illiquid
Investments.
The
Fund may invest up to an aggregate amount of 15% of its net assets in illiquid
investments, as such term is defined by Rule 22e-4 under the 1940 Act. The Fund
may not invest in illiquid investments if, as a result of such investment, more
than
15% of the Fund’s net assets would be invested in illiquid investments. Illiquid
investments include securities subject to contractual or other restrictions on
resale and other instruments that lack readily available markets. The inability
of the Fund to dispose of illiquid investments readily or at a reasonable price
could impair the Fund’s ability to raise cash for redemptions or other purposes.
The liquidity of securities purchased by the Fund that are eligible for resale
pursuant to Rule 144A, except for certain 144A bonds, will be monitored by the
Fund on an ongoing basis. In the event that more than 15% of its net assets are
invested in illiquid investments, the Fund, in accordance with Rule
22e-4(b)(1)(iv), will report the occurrence to both the Board and the SEC and
seek to reduce its holdings of illiquid investments within a reasonable period
of time.
Investment
Company Securities. The
Fund may invest in the securities of other investment companies, including money
market funds and ETFs, subject to applicable limitations under
Section 12(d)(1) of the 1940 Act and Rule 12d1-4 under the 1940 Act.
Investing in another pooled vehicle exposes the Fund to all the risks of that
pooled vehicle. Pursuant to Section 12(d)(1), the Fund may invest in the
securities of another investment company (the “acquired company”) provided that
the Fund, immediately after such purchase or acquisition, does not own in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of the Fund; or
(iii) securities issued by the acquired company and all other investment
companies (other than treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the total assets of the Fund. To the extent
allowed by law or regulation, the Fund may invest its assets in securities of
investment companies that are money market funds in excess of the limits
discussed above.
The
Fund may rely on Section 12(d)(1)(F) and Rule 12d1-3 under the 1940 Act, which
provide an exemption from Section 12(d)(1) that allows the Fund to invest all of
its assets in other registered funds, including ETFs, if, among other
conditions: (a) the Fund, together with its affiliates, acquires no more than
three percent of the outstanding voting stock of any acquired fund, and (b) the
sales load charged on the Fund’s Shares is no greater than the limits set forth
in Rule 2341 of the Rules of the Financial Industry Regulatory Authority, Inc.
(“FINRA”). In addition, the Fund may invest beyond the limits of Section
12(d)(1) subject to certain terms and conditions set forth in Rule 12d1-4 under
the 1940 Act, including that the Fund enters into an agreement with the acquired
company.
If
the Fund invests in and, thus, is a shareholder of, another investment company,
the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund’s own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund’s own operations.
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies (“Investing Funds”) in the securities of other registered investment
companies, including the Fund. The acquisition of Shares by Investing Funds is
subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as may
be permitted by exemptive rules under the 1940 Act such as Rule 12d1-4 under the
1940 Act, subject to certain terms and conditions, including that the Investing
Fund enter into an agreement with the Fund regarding the terms of the
investment.
Non-U.S.
Securities.
Investments in non-U.S. securities involve certain risks that may not be present
in investments in U.S. securities. For example, non-U.S. securities may be
subject to currency risks or to political or economic instability. There may be
less information publicly available about a non-U.S. issuer than about a U.S.
issuer, and a foreign issuer may or may not be subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those in
the U.S. Investments in non-U.S. securities may be subject to withholding or
other taxes and may be subject to additional trading, settlement, custodial, and
operational risks. Other risks of investing in such securities include political
or economic instability in the country involved, the difficulty of predicting
international trade patterns and the possibility of imposition of exchange
controls. The prices of such securities may be more volatile than those of
domestic securities. With respect to certain foreign countries, there is a
possibility of expropriation of assets or nationalization, imposition of
withholding taxes on dividend or interest payments, difficulty in obtaining and
enforcing judgments against foreign entities or diplomatic developments which
could affect investment in these countries. Losses and other expenses may be
incurred in converting between various currencies in connection with purchases
and sales of foreign securities. Since foreign exchanges may be open on days
when the Fund does not price its Shares, the value of the securities in the
Fund’s portfolio may change on days when shareholders will not be able to
purchase or sell Shares. Conversely, Shares may trade on days when foreign
exchanges are closed. Each of these factors can make investments in the Fund
more volatile and potentially less liquid than other types of investments.
Non-U.S.
stock markets may not be as developed or efficient as, and may be more volatile
than, those in the U.S. While the volume of shares traded on non-U.S. stock
markets generally has been growing, such markets usually have substantially less
volume than U.S. markets. Therefore, the Fund’s investment in non-U.S. equity
securities may be less liquid and subject to more rapid and erratic price
movements than comparable securities listed for trading on U.S. exchanges.
Non-U.S. equity securities may trade at price/earnings multiples higher than
comparable U.S. securities and such levels may not be sustainable. There may be
less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the U.S. Moreover, settlement
practices for transactions in foreign markets may differ from those in U.S.
markets. Such differences may include delays beyond periods customary in the
U.S. and practices, such as delivery of securities prior to receipt of payment,
that increase the likelihood of a failed
settlement,
which can result in losses to the Fund. The value of non-U.S. investments and
the investment income derived from them may also be affected unfavorably by
changes in currency exchange control regulations. Foreign brokerage commissions,
custodial expenses and other fees are also generally higher than for securities
traded in the U.S. This may cause the Fund to incur higher portfolio transaction
costs than domestic equity funds. Fluctuations in exchange rates may also affect
the earning power and asset value of the foreign entity issuing a security, even
one denominated in U.S. dollars. Dividend and interest payments may be
repatriated based on the exchange rate at the time of disbursement, and
restrictions on capital flows may be imposed.
Set
forth below for certain markets in which the Fund may invest are brief
descriptions of some of the conditions and risks in each such market.
Investments
in Emerging Markets.
Investments in securities listed and traded in emerging markets are subject to
additional risks that may not be present for U.S. investments or investments in
more developed non-U.S. markets. Such risks may include: (i) greater market
volatility; (ii) lower trading volume; (iii) greater social, political
and economic uncertainty; (iv) governmental controls on foreign investments
and limitations on repatriation of invested capital; (v) the risk that
companies may be held to lower disclosure, corporate governance, auditing and
financial reporting standards than companies in more developed markets;
(vi) the risk that there may be less protection of property rights than in
other countries; and (vii) fewer investor rights and limited legal or practical
remedies available to investors against emerging market companies. Emerging
markets are generally less liquid and less efficient than developed securities
markets.
Investments
in Europe.
Most developed countries in Western Europe are members of the European Union
(“EU”), and many are also members of the European Monetary Union (EMU), which
requires compliance with restrictions on inflation rates, deficits, and debt
levels. Unemployment in certain European nations is historically high and
several countries face significant debt problems. These conditions can
significantly affect every country in Europe. The euro is the official currency
of the EU. The Fund, through its investments in Europe, may have significant
exposure to the euro and events affecting the euro. Recent market events
affecting several of the EU member countries have adversely affected the
sovereign debt issued by those countries, and ultimately may lead to a decline
in the value of the euro. A significant decline in the value of the euro may
produce unpredictable effects on trade and commerce generally and could lead to
increased volatility in financial markets worldwide.
The
UK formally exited from the EU on January 31, 2020 (known as “Brexit”), and
effective December 31, 2020, the UK ended a transition period during which it
continued to abide by the EU’s rules and the UK’s trade relationships with the
EU were generally unchanged. During this transition period and beyond, the
impact on the UK and European economies and the broader global economy could be
significant, resulting in negative impacts, such as increased volatility and
illiquidity, potentially lower economic growth on markets in the UK, Europe, and
globally, and changes in legal and regulatory regimes to which certain Fund
assets are or become subject, any of which may adversely affect the value of
Fund investments.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, including, but not limited to, current trade and
finance agreements. Brexit could lead to legal and tax uncertainty and
potentially divergent national laws and regulations, as the UK determines which
EU laws to replace or replicate. The extent of the impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of Fund investments. If one or more other countries
were to exit the EU or abandon the use of the euro as a currency, the value of
investments tied to those countries or the euro could decline significantly and
unpredictably.
Russia’s
large-scale invasion of Ukraine on February 24, 2022 has led to various
countries imposing economic sanctions on certain Russian individuals and Russian
corporate and banking entities. A number of jurisdictions have also instituted
broader sanctions on Russia, including banning Russia from global payments
systems that facilitate cross-border payments. In response, the government of
Russia has imposed capital controls to restrict movements of capital entering
and exiting the country. As a result, the value and liquidity of Russian
securities and the Russian currency have experienced significant declines.
Further, as of January 1, 2023, the Russian securities markets effectively have
been closed for trading by foreign investors since February 28, 2022.
Russia’s
military incursion and resulting sanctions could have a severe adverse effect on
the region’s economies and more globally, including significant negative impacts
on the financial markets for certain securities and commodities and could affect
the value of the Fund’s investments. Eastern European markets are particularly
sensitive to social, political, economic, and currency events in Russia and may
suffer heavy losses as a result of their trading and investment links to the
Russian economy and currency. Changes in regulations on trade, decreasing
imports or exports, changes in the exchange rate of the euro, a significant
influx of refugees, and recessions among European countries may have a
significant adverse effect on the economies of other European countries
including those of Eastern Europe.
Investments
in Japan.
Economic growth in Japan is heavily dependent on international trade, government
support, and consistent government policy. Slowdowns in the economies of key
trading partners such as the United States, China, and countries in Southeast
Asia could have a negative impact on the Japanese economy as a whole. The
Japanese economy has in the past been negatively affected by, among other
factors, government intervention and protectionism and an unstable financial
services sector. While the Japanese economy has recently emerged from a
prolonged economic downturn, some of these factors, as well as other adverse
political developments, increases in government debt, changes to fiscal,
monetary or trade policies, or other events, such as natural disasters, could
have a negative impact on Japanese securities. Japan also has few natural
resources, and any fluctuation or shortage in the commodity markets could have a
negative impact on Japanese securities.
Other
Short-Term Instruments.
In addition to repurchase agreements, the Fund may invest in short-term
instruments, including money market instruments, on an ongoing basis to provide
liquidity or for other reasons. Money market instruments are generally
short-term investments that may include but are not limited to: (i) shares
of money market funds; (ii) obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities (including government-sponsored
enterprises); (iii) negotiable certificates of deposit (“CDs”), bankers’
acceptances, fixed time deposits and other obligations of U.S. and foreign banks
(including foreign branches) and similar institutions; (iv) commercial
paper rated at the date of purchase “Prime-1” by Moody’s or “A‑1” by S&P or,
if unrated, of comparable quality as determined by the Sub-Adviser;
(v) non-convertible corporate debt securities (e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than 397 days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of
the Sub-Adviser, are of comparable quality to obligations of U.S. banks which
may be purchased by the Fund. Any of these instruments may be purchased on a
current or a forward-settled basis. Money market instruments also include shares
of money market funds. Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated interest rates.
Bankers’ acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international transactions.
Repurchase
Agreements.
The Fund may invest in repurchase agreements to generate income from its excess
cash balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which the Fund acquires a financial instrument
(e.g.,
a security issued by the U.S. government or an agency thereof, a banker’s
acceptance or a certificate of deposit) from a seller, subject to resale to the
seller at an agreed upon price and date (normally, the next Business Day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument.
In
these repurchase agreement transactions, the securities acquired by the Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of the Fund’s net assets will be
invested in illiquid investments, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The
use of repurchase agreements involves certain risks. For example, if the other
party to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, the Fund may
incur a loss upon disposition of the security. If the other party to the
agreement becomes insolvent and subject to liquidation or reorganization under
the U.S. Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and, therefore, the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor of
the other party to the agreement.
Securities
Lending. The
Fund may lend portfolio securities in an amount up to one-third of its total
assets to brokers, dealers and other financial institutions. In a portfolio
securities lending transaction, the Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of the Fund’s loans permit
the Fund to reacquire loaned securities on five business days’ notice or in time
to vote on any important matter. Loans are subject to termination at the option
of the Fund or borrower at any time, and the borrowed securities must be
returned when the loan is terminated. The Fund may pay fees to arrange for
securities loans.
The
SEC currently requires that the following conditions must be met whenever the
Fund’s portfolio securities are loaned: (1) the Fund must receive at least 100%
cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights
on the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs; and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from
such
loans. These conditions may be subject to future modification. Such loans will
be terminable at any time upon specified notice. The Fund might experience the
risk of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund. In addition, the Fund will not
enter into any portfolio security lending arrangement having a duration of
longer than one year. The principal risk of portfolio lending is potential
default or insolvency of the borrower. In either of these cases, the Fund could
experience delays in recovering securities or collateral or could lose all or
part of the value of the loaned securities. As part of participating in a
lending program, the Fund may be required to invest in collateralized debt or
other securities that bear the risk of loss of principal. In addition, all
investments made with the collateral received are subject to the risks
associated with such investments. If such investments lose value, the Fund will
have to cover the loss when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that the Fund may receive as collateral
will not become part of the Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay the Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent collateral.
Tax
Risks. As
with any investment, you should consider how your investment in Shares will be
taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in Shares.
Unless
your investment in Shares is made through a tax-exempt entity or tax-deferred
retirement account, such as an individual retirement account, you need to be
aware of the possible tax consequences when a Fund makes distributions or you
sell Shares.
U.S.
Government Securities.
The Fund may invest in U.S. government securities. Securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities include
U.S. Treasury securities, which are backed by the full faith and credit of the
U.S. Treasury and which differ only in their interest rates, maturities, and
times of issuance. U.S. Treasury bills have initial maturities of one-year or
less; U.S. Treasury notes have initial maturities of one to ten years; and U.S.
Treasury bonds generally have initial maturities of greater than ten years.
Certain U.S. government securities are issued or guaranteed by agencies or
instrumentalities of the U.S. government including, but not limited to,
obligations of U.S. government agencies or instrumentalities such as the Federal
National Mortgage Association (“Fannie Mae”), the Government National Mortgage
Association (“Ginnie Mae”), the Small Business Administration, the Federal Farm
Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives
(including the Central Bank for Cooperatives), the Federal Land Banks, the
Federal Intermediate Credit Banks, the Tennessee Valley Authority, the
Export-Import Bank of the United States, the Commodity Credit Corporation, the
Federal Financing Bank, the Student Loan Marketing Association, the National
Credit Union Administration and the Federal Agricultural Mortgage Corporation
(“Farmer Mac”).
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury. Other
obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury, while the U.S. government provides financial support to
such U.S. government-sponsored federal agencies, no assurance can be given that
the U.S. government will always do so, since the U.S. government is not so
obligated by law. U.S. Treasury notes and bonds typically pay coupon interest
semi-annually and repay the principal at maturity.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury
announced that it was amending the Agreement to allow the $200 billion cap on
the U.S. Treasury’s funding commitment to increase as necessary to accommodate
any cumulative reduction in net worth over the next three years. As a result of
this Agreement, the investments of holders, including the Fund, of
mortgage-backed securities and other obligations issued by Fannie Mae and
Freddie Mac are protected.
The
total public debt of the United States as a percentage of gross domestic product
has grown rapidly since the beginning of the 2008–2009 financial downturn.
Although high debt levels do not necessarily indicate or cause economic
problems, they may create certain systemic risks if sound debt management
practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when
they are due. This increase has also necessitated the need for
the
U.S. Congress to negotiate adjustments to the statutory debt limit to increase
the cap on the amount the U.S. government is permitted to borrow to meet its
existing obligations and finance current budget deficits. In August 2023, Fitch
lowered its long-term sovereign credit rating on the U.S. In explaining the
downgrade, Fitch cited, among other reasons, expected fiscal deterioration of
the U.S. government and extended and contentious negotiations related to raising
the government's debt ceiling. An increase in national debt levels may also
necessitate the need for the U.S. Congress to negotiate adjustments to the
statutory debt ceiling to increase the cap on the amount the U.S. Government is
permitted to borrow to meet its existing obligations and finance current budget
deficits. Future downgrades could increase volatility in domestic and foreign
financial markets, result in higher interest rates, lower prices of U.S.
Treasury securities and increase the costs of different kinds of debt. Any
controversy or ongoing uncertainty regarding the statutory debt ceiling
negotiations may impact the U.S. long-term sovereign credit rating and may cause
market uncertainty. As a result, market prices and yields of securities
supported by the full faith and credit of the U.S. government may be adversely
affected.
INVESTMENT
RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Fund. These restrictions cannot be changed with respect to
the Fund without the approval of the holders of a majority of the Fund’s
outstanding voting securities. For the purposes of the 1940 Act, a “majority of
outstanding shares” means the vote of the lesser of: (1) 67% or more of the
voting securities of the Fund present at the meeting if the holders of more than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of the
Fund.
Except
with the approval of a majority of the outstanding voting securities, the Fund
may not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries, except that the Fund will concentrate to approximately the same
extent that the Index concentrates in the securities of such particular industry
or group of related industries. For purposes of this limitation, securities of
the U.S. government (including its agencies and instrumentalities), repurchase
agreements collateralized by U.S. government securities, registered investment
companies, and tax-exempt securities of state or municipal governments and their
political subdivisions are not considered to be issued by members of any
industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
In
determining its compliance with the fundamental investment restriction on
concentration, the Fund will consider the investments of other investment
companies in which the Fund invests to the extent it has sufficient information
about such investment companies. With respect to the Fund’s investments in
affiliated investment companies, the Fund will consider its entire investment in
any investment company with a policy to concentrate, or having otherwise
disclosed that it is concentrated, in a particular industry or group of related
industries as being invested in such industry or group of related
industries.
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitation with respect to the borrowing of money will be
observed continuously.
The
following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
Concentration.
The
SEC has defined concentration as investing more than 25% of the Fund’s net
assets in an industry or group of industries, with certain
exceptions.
Borrowing.
The 1940 Act presently allows the Fund to borrow from a bank (including
pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its
total assets (not including temporary borrowings up to 5% of its total
assets).
Senior
Securities.
Senior securities may include any obligation or instrument issued by the Fund
evidencing indebtedness. The 1940 Act generally prohibits a fund from issuing
senior securities.
An
exemptive rule under the 1940 Act, however, permits a fund to enter into
transactions that might otherwise be deemed to be senior securities, such as
derivative transactions, reverse repurchase agreements and similar financing
transactions, and short sales, subject to certain conditions.
Lending.
Under the 1940 Act, the Fund may only make loans if expressly permitted by its
investment policies. The Fund’s current investment policy on lending is that the
Fund may not make loans if, as a result, more than 33 1/3% of its total assets
would be lent to other parties, except that the 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 this SAI.
Real
Estate and Commodities.
The 1940 Act does not directly restrict the Fund’s ability to invest in real
estate or commodities, but the 1940 Act requires every investment company to
have a fundamental investment policy governing such investments.
Underwriting.
Under the 1940 Act, underwriting securities involves the Fund purchasing
securities directly from an issuer for the purpose of selling (distributing)
them or participating in any such activity either directly or
indirectly.
EXCHANGE
LISTING
AND
TRADING
Shares
are listed for trading and trade throughout the day on the Exchange.
There
can be no assurance that the Fund will continue to meet the requirements of the
Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the
Shares if any of the requirements set forth in the Exchange rules, including
compliance with Rule 6c-11(c) under the 1940 Act, are not continuously
maintained or such other event shall occur or condition shall exist that,
in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable. The Exchange will remove the Shares of the Fund from listing and
trading upon termination of the Fund.
The
Trust reserves the right to adjust the price levels of Shares in the future to
help maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the Fund.
MANAGEMENT
OF THE
TRUST
Board
Responsibilities. The
management and affairs of the Trust and its series are overseen by the Board,
which elects the officers of the Trust who are responsible for administering the
day-to-day operations of the Trust and the Fund. The Board has approved
contracts, as described below, under which certain companies provide essential
services to the Trust.
The
day-to-day business of the Trust, including the management of risk, is performed
by third-party service providers, such as the Adviser, the Sub-Adviser, the
Distributor, and the Administrator. The Board is responsible for overseeing the
Trust’s service providers and, thus, has oversight responsibility with respect
to risk management performed by those service providers. Risk management seeks
to identify and address risks, i.e.,
events or circumstances that could have material adverse effects on the
business, operations, shareholder services, investment performance, or
reputation of the Fund. The Fund and its service providers employ a variety of
processes, procedures, and controls to identify such events or circumstances, to
lessen the probability of their occurrence and/or to mitigate the effects of
such events or circumstances if they do occur. Each service provider is
responsible for one or more discrete aspects of the Trust’s business
(e.g.,
the Sub-Adviser is responsible for the day-to-day management of the Fund’s
portfolio investments) and, consequently, for managing the risks associated with
those aspects for which it is responsible. The Board has emphasized to the
Fund’s service providers the importance of maintaining vigorous risk
management.
The
Board’s role in risk oversight begins before the inception of the Fund, at which
time certain of the Fund’s service providers present the Board with information
concerning the investment objectives, strategies, and risks of the Fund as well
as proposed investment limitations for the Fund. Additionally, the Adviser and
Sub-Adviser provide the Board with an overview of, among other things, their
investment philosophy, brokerage practices, and compliance infrastructure.
Thereafter, the Board continues its oversight function as various personnel,
including the Trust’s Chief Compliance Officer, as well as personnel of the
Sub-Adviser, and other service providers such as the Fund’s independent
registered public accounting firm, make periodic reports to the Audit Committee
or to the Board with respect to various aspects of risk management. The Board
and the Audit Committee oversee efforts by management and service providers to
manage risks to which the Fund may be exposed.
The
Board is responsible for overseeing the nature, extent, and quality of the
services provided to the Fund by the Adviser and the Sub-Adviser and receives
information about those services at its regular meetings. In addition, on an
annual basis (following the initial two-year period), in connection with its
consideration of whether to renew the Investment Advisory Agreement with the
Adviser, and the Sub-Advisory Agreement with the Sub-Adviser, the Board or its
designee may meet with the Adviser and/or the Sub-Adviser to review such
services. Among other things, the Board regularly considers the Adviser’s and
the Sub-Adviser’s adherence to the Fund’s investment restrictions and compliance
with various Fund policies and procedures and with applicable securities
regulations. The Board also reviews information about the Fund’s performance and
the Fund’s investments, including, for example, portfolio holdings schedules.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund, Adviser, or Sub-Adviser risk assessments. At
least annually, the Trust’s Chief Compliance Officer provides the Board with a
report reviewing the adequacy and effectiveness of the Trust’s policies and
procedures and those of its service providers, including the Adviser and the
Sub-Adviser. The report addresses the operation of the policies and procedures
of the Trust and each service provider since the date of the last report; any
material changes to the policies and procedures since the date of the last
report; any recommendations for material changes to the policies and procedures;
and any material compliance matters since the date of the last report.
The
Board receives reports from the Fund’s service providers regarding operational
risks and risks related to the valuation and liquidity of portfolio securities.
Annually, the Fund’s independent registered public accounting firm reviews with
the Audit Committee its audit of the Fund’s financial statements, focusing on
major areas of risk encountered by the Fund and noting any significant
deficiencies or material weaknesses in the Fund’s internal controls.
Additionally, in connection with its oversight function, the Board oversees Fund
management’s implementation of disclosure controls and procedures, which are
designed to ensure that information required to be disclosed by the Trust in its
periodic reports with the SEC are recorded, processed, summarized, and reported
within the required time periods. The Board also oversees the Trust’s internal
controls over financial reporting, which comprise policies and procedures
designed to provide reasonable assurance regarding the reliability of the
Trust’s financial reporting and the preparation of the Trust’s financial
statements.
From
their review of these reports and discussions with the Adviser, the Sub-Adviser,
the Chief Compliance Officer, the independent registered public accounting firm
and other service providers, the Board and the Audit Committee learn in detail
about the material risks of the Fund, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The
Board recognizes that not all risks that may affect the Fund can be identified
and/or quantified, that it may not be practical or cost-effective to eliminate
or mitigate certain risks, that it may be necessary to bear certain risks (such
as investment-related risks) to achieve the Fund’s goals, and that the
processes, procedures and controls employed to address certain risks may be
limited in their effectiveness. Moreover, reports received by the Board as to
risk management matters are typically summaries of the relevant information.
Most of the Fund’s investment management and business affairs are carried out by
or through the Adviser, Sub-Adviser, and other service providers, each of which
has an independent interest in risk management but whose policies and the
methods by which one or more risk management functions are carried out may
differ from the Fund’s and each other’s in the setting of priorities, the
resources available or the effectiveness of relevant controls. As a result of
the foregoing and other factors, the Board’s ability to monitor and manage risk,
as a practical matter, is subject to limitations.
Members
of the Board. There
are four members of the Board, three of whom are not interested persons of the
Trust, as that term is defined in the 1940 Act (the “Independent Trustees”).
Mr. Michael A. Castino serves as Chairman of the Board, and Mr. Leonard M.
Rush serves as the Trust’s Lead Independent Trustee. As Lead Independent
Trustee, Mr. Rush acts as a spokesperson for the Independent Trustees in between
meetings of the Board, serves as a liaison for the Independent Trustees with the
Trust’s service providers, officers, and legal counsel to discuss ideas
informally, and participates in setting the agenda for meetings of the Board and
separate meetings or executive sessions of the Independent Trustees.
The
Board is comprised of a super-majority (75 percent) of Independent Trustees.
There is an Audit Committee of the Board that is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Audit Committee chair
presides at the Audit Committee meetings, participates in formulating agendas
for Audit Committee meetings, and coordinates with management to serve as a
liaison between the Independent Trustees and management on matters within the
scope of responsibilities of the Audit Committee as set forth in its
Board-approved charter. There is a Nominating and Governance Committee of the
Board that is chaired by an Independent Trustee and comprised solely of
Independent Trustees. The Nominating and Governance Committee chair presides at
the Nominating and Governance Committee meetings, participates in formulating
agendas for Nominating and Governance Committee meetings, and coordinates with
management to serve as a liaison between the Independent Trustees and management
on matters within the scope of responsibilities of the Nominating and Governance
Committee as set forth in its Board-approved charter. The Trust has determined
its leadership structure is appropriate given the specific characteristics and
circumstances of the Trust. The Trust made this determination in consideration
of, among other things, the fact that the Independent Trustees of the Trust
constitute a super-majority of the Board, the number of Independent Trustees
that constitute the Board, the amount of assets under management in the Trust,
and the number of funds overseen by the Board. The Board also believes that its
leadership structure facilitates the orderly and efficient flow of information
to the Independent Trustees from Fund management.
Additional
information about each Trustee of the Trust is set forth below. The address of
each Trustee of the Trust is c/o U.S. Bank Global Fund Services, 615 E.
Michigan Street, Milwaukee, WI 53202.
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorships Held by Trustee
During
Past 5 Years |
Independent
Trustees |
Leonard
M. Rush, CPA Born: 1946 |
Lead
Independent Trustee and Audit Committee Chairman |
Indefinite
term; since 2012 |
Retired;
formerly Chief Financial Officer, Robert W. Baird & Co. Incorporated
(wealth management firm) (2000–2011). |
56 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
David
A. Massart Born: 1967 |
Trustee
and Nominating and Governance Committee Chairman |
Indefinite
term; Trustee
since
2012;
Committee
Chairman
since
2023 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder, President, and Chief Investment Strategist, Next Generation
Wealth Management, Inc. (2005–2021). |
56 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
Janet
D. Olsen Born: 1956 |
Trustee |
Indefinite
term; since 2018 |
Retired;
formerly Managing Director and General Counsel, Artisan Partners Limited
Partnership (investment adviser) (2000–2013); Executive Vice President and
General Counsel, Artisan Partners Asset Management Inc. (2012–2013); Vice
President and General Counsel, Artisan Funds, Inc. (investment company)
(2001–2012). |
56 |
Independent
Trustee, PPM Funds (2 portfolios) (since 2018). |
Interested
Trustee |
Michael
A. Castino Born: 1967 |
Trustee
and Chairman |
Indefinite
term; Trustee since 2014; Chairman since 2013 |
Managing
Director, Investment Manager Solutions, Sound Capital Solutions LLC (since
2023); Senior Vice President, U.S. Bancorp Fund Services, LLC (2013–2023);
Managing Director of Index Services, Zacks Investment Management
(2011–2013). |
56 |
None. |
Individual
Trustee Qualifications. The
Trust has concluded that each of the Trustees should serve on the Board because
of their ability to review and understand information about the Fund provided to
them by management, to identify and request other information they may deem
relevant to the performance of their duties, to question management and other
service providers regarding material factors bearing on the management and
administration of the Fund, and to exercise their business judgment in a manner
that serves the best interests of the Fund’s shareholders. The Trust has
concluded that each of the Trustees should serve as a Trustee based on his or
her own experience, qualifications, attributes and skills as described below.
The
Trust has concluded that Mr. Rush should serve as a Trustee because of his
substantial industry experience, including serving in several different senior
executive roles at various global financial services firms, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He most recently served as Managing Director and Chief Financial Officer
of Robert W. Baird & Co. Incorporated and several other affiliated entities
and served as the Treasurer for Baird Funds. He also served as the Chief
Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial
Expert for the Trust.
The
Trust has concluded that Mr. Massart should serve as a Trustee because of his
substantial industry experience, including over two decades working with high
net worth individuals, families, trusts, and retirement accounts to make
strategic and tactical asset allocation decisions, evaluate and select
investment managers, and manage complex client relationships, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He is currently a Partner and Managing Director at
Beacon
Pointe Advisors, LLC. Previously, he served as President and Chief Investment
Strategist of an SEC-registered investment advisory firm he co-founded, as a
Managing Director of Strong Private Client, and as a Manager of Wells Fargo
Investments, LLC.
The
Trust has concluded that Ms. Olsen should serve as a Trustee because of her
substantial industry experience, including nearly 20 years as a practicing
attorney representing primarily registered investment companies and investment
advisers, over a decade serving as a senior executive of an investment
management firm and a related public company, and the experience she has gained
by serving as an executive officer of another investment company from 2001 to
2012. Ms. Olsen most recently served as Managing Director and General Counsel of
Artisan Partners Limited Partnership, a registered investment adviser serving
primarily investment companies and institutional investors, and several
affiliated entities, including its general partner, Artisan Partners Asset
Management Inc. (NYSE: APAM), and as an executive officer of Artisan Funds Inc.
The
Trust has concluded that Mr. Castino should serve as Trustee because of the
experience he gained as Chairman of the Trust since 2013, as a senior officer of
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Fund Services” or the “Transfer Agent”), from 2012 to 2023, and in
his past roles with investment management firms and indexing firms involved with
ETFs, as well as his experience in and knowledge of the financial services
industry. Mr. Castino currently serves as Managing Director, Investment Manager
Solutions, of Sound Capital Solutions, LLC, a state-registered investment
adviser.
In
its periodic assessment of the effectiveness of the Board, the Board considers
the complementary individual skills and experience of the individual Trustees
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the funds.
Board
Committees.
The Board has established the following standing committees of the Board:
Audit
Committee.
The Board has a standing Audit Committee that is composed of each of the
Independent Trustees of the Trust. The Audit Committee operates under a written
charter approved by the Board. The principal responsibilities of the Audit
Committee include: recommending which firm to engage as the Fund’s independent
registered public accounting firm and whether to terminate this relationship;
reviewing the independent registered public accounting firm’s compensation, the
proposed scope and terms of its engagement, and the firm’s independence;
pre-approving audit and non-audit services provided by the Fund’s independent
registered public accounting firm to the Trust and certain other affiliated
entities; serving as a channel of communication between the independent
registered public accounting firm and the Trustees; reviewing the results of
each external audit, including any qualifications in the independent registered
public accounting firm’s opinion, any related management letter, management’s
responses to recommendations made by the independent registered public
accounting firm in connection with the audit, reports submitted to the Committee
by the internal auditing department of the Trust’s Administrator that are
material to the Trust as a whole, if any, and management’s responses to any such
reports; reviewing the Fund’s audited financial statements and considering any
significant disputes between the Trust’s management and the independent
registered public accounting firm that arose in connection with the preparation
of those financial statements; considering, in consultation with the independent
registered public accounting firm and the Trust’s senior internal accounting
executive, if any, the independent registered public accounting firms’ report on
the adequacy of the Trust’s internal financial controls; reviewing, in
consultation with the Fund’s independent registered public accounting firm,
major changes regarding auditing and accounting principles and practices to be
followed when preparing the Fund’s financial statements; and other audit related
matters. During the fiscal year ended December 31, 2023, the Audit
Committee met four times.
The
Audit Committee also serves as the Qualified Legal Compliance Committee (“QLCC”)
for the Trust for the purpose of compliance with Rules 205.2(k) and 205.3(c) of
the Code of Federal Regulations, regarding alternative reporting procedures for
attorneys retained or employed by an issuer who appear and practice before the
SEC on behalf of the issuer (the “issuer attorneys”). An issuer attorney who
becomes aware of evidence of a material violation by the Trust, or by any
officer, director, employee, or agent of the Trust, may report evidence of such
material violation to the QLCC as an alternative to the reporting requirements
of Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities).
Nominating
and Governance Committee.
The Board has a standing Nominating and Governance Committee that is composed of
each of the Independent Trustees of the Trust. The Nominating and Governance
Committee operates under a written charter approved by the Board. The principal
responsibility of the Nominating and Governance Committee is to consider,
recommend and nominate candidates to fill vacancies on the Trust’s Board, if
any. The Nominating and Governance Committee generally will not consider
nominees recommended by shareholders. The Nominating and Governance Committee is
also responsible for, among other things, reviewing and making recommendations
regarding Independent Trustee compensation and the Trustees’ annual
“self-assessment.” The Nominating and Governance Committee meets periodically,
as necessary. During the fiscal year ended December 31, 2023, the
Nominating and Governance Committee met two times.
Principal
Officers of the Trust
The
officers of the Trust conduct and supervise its daily business. The address of
each officer of the Trust is c/o U.S. Bank Global Fund Services,
615 E. Michigan Street, Milwaukee, WI 53202. Additional information about
the Trust’s officers is as follows:
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Name
and
Year
of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s)
During
Past 5 Years |
Kristina
R. Nelson Born: 1982 |
President |
Indefinite
term;
since
2019 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2020); Vice
President, U.S. Bancorp Fund Services, LLC (2014–2020). |
Cynthia
L. Andrae Born: 1971 |
Chief
Compliance Officer and Anti-Money Laundering Officer |
Indefinite
term; since 2022 (other roles since 2021) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2019); Deputy Chief
Compliance Officer, U.S. Bancorp Fund Services, LLC (2021–2022);
Compliance Officer, U.S. Bancorp Fund Services, LLC
(2015-2019). |
Kristen
M. Weitzel Born: 1977 |
Treasurer |
Indefinite
term;
since
2014
(other
roles since 2013) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2015). |
Joshua
J. Hinderliter Born: 1983 |
Vice
President and Secretary |
Indefinite
term;
since
2023 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Managing
Associate, Thompson Hine LLP (2016–2022). |
Jason
E. Shlensky Born: 1987 |
Assistant
Treasurer |
Indefinite
term;
since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2019); Officer,
U.S. Bancorp Fund Services, LLC (2014–2019). |
Jessica
L. Vorbeck Born: 1984 |
Assistant
Treasurer |
Indefinite
term; since 2020 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Officer,
U.S. Bancorp Fund Services, LLC (2014–2017,
2018–2022). |
Trustee
Ownership of Shares. The
Fund is required to show the dollar amount ranges of each Trustee’s “beneficial
ownership” of Shares and each other series of the Trust as of the end of the
most recently completed calendar year. Dollar amount ranges disclosed are
established by the SEC. “Beneficial ownership” is determined in accordance with
Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the
“1934 Act”).
As
of December 31, 2023, Mr. Rush owned, in the aggregate, between $1 and $10,000
of shares in other series of the Trust. No other Trustee owned Shares or shares
of any other series of the Trust.
Board
Compensation. The
Trustees each receive an annual trustee fee of $212,800 for attendance at the
four regularly scheduled quarterly meetings and one annual meeting, if
necessary, and receive additional compensation for each additional meeting
attended of $2,000, as well as reimbursement for travel and other out-of-pocket
expenses incurred in connection with attendance at Board meetings. The Lead
Independent Trustee receives an additional annual fee of $18,000. The Chairman
of the Audit Committee receives an additional annual fee of $18,000. The
Chairman of the Nominating and Governance Committee receives an additional
annual fee of $8,000. The Trust has no pension or retirement plan.
The
following table shows the compensation earned by each Trustee for the Fund’s
fiscal year ended December 31, 2023. Trustee fees are paid by the Adviser
and not by the Fund. Trustee compensation does not include reimbursed
out-of-pocket expenses in connection with attendance at meetings.
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Name |
Aggregate
Compensation From Fund |
Total
Compensation From Fund Complex Paid to Trustees |
Interested
Trustee |
Michael
A. Castino |
$0 |
$141,094* |
Independent
Trustees |
Leonard
M. Rush, CPA |
$0 |
$251,321 |
David
A. Massart |
$0 |
$227,321 |
Janet
D. Olsen |
$0 |
$221,321 |
*Prior
to his departure from U.S. Bancorp Fund Services, LLC in May 2023, Michael
Castino did not receive compensation from the Fund Complex.
PRINCIPAL
SHAREHOLDERS,
CONTROL
PERSONS,
AND
MANAGEMENT
OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding Shares. A control person is a shareholder that owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter
affecting and voted on by shareholders of the Fund. As of April 1, 2024, the
Trustees and officers, as a group, owned less than 1% of the Shares of the Fund,
and the following shareholders were considered to be a principal shareholder of
the Fund:
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Name
and Address |
%
Ownership |
Type
of Ownership |
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Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
27.24% |
Record |
National
Financial Services, LLC 200 Liberty Street New York, NY
10281 |
18.79% |
Record |
BOFA
Securities, Inc. One Bryant Park New York, NY 10036 |
18.34% |
Record |
Vanguard
Marketing Corporation 5951 Luckett Court, Suite A1 El Paso, TX
79932 |
8.28% |
Record |
CODES
OF
ETHICS
The
Trust, the Adviser, and the Sub-Adviser have each adopted codes of ethics
pursuant to Rule 17j-1 under the 1940 Act. These codes of ethics are
designed to prevent affiliated persons of the Trust, the Adviser, and the
Sub-Adviser from engaging in deceptive, manipulative or fraudulent activities in
connection with securities held or to be acquired by the Fund (which may also be
held by persons subject to the codes of ethics). Each Code of Ethics permits
personnel subject to that Code of Ethics to invest in securities for their
personal investment accounts, subject to certain limitations, including
limitations related to securities that may be purchased or held by the Fund. The
Distributor (as defined below) relies on the principal underwriters exception
under Rule 17j-1(c)(3), specifically where the Distributor is not affiliated
with the Trust, the Adviser, or the Sub-Adviser, and no officer, director, or
general partner of the Distributor serves as an officer, director, or general
partner of the Trust, the Adviser, or the Sub-Adviser.
There
can be no assurance that the codes of ethics will be effective in preventing
such activities. Each code of ethics may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the SEC’s website at
http://www.sec.gov.
PROXY
VOTING
POLICIES
The
Fund has delegated proxy voting responsibilities to the Adviser, subject to the
Board’s oversight. In delegating proxy responsibilities, the Board has directed
that proxies be voted consistent with the Fund’s and its shareholders’ best
interests and in compliance with all applicable proxy voting rules and
regulations. The Adviser has adopted proxy voting policies and guidelines for
this purpose (“Proxy Voting Policies”) and has engaged a third-party proxy
solicitation firm to assist with voting proxies in a timely manner and making
voting recommendations under guidelines adopted by the Adviser. A copy of the
Proxy Voting Policies is set forth in Appendix
A
to this SAI. The Trust’s Chief Compliance Officer is responsible for monitoring
the effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have
been adopted by the Trust as the policies and procedures that the Adviser will
use when voting proxies on behalf of the Fund.
The
Proxy Voting Policies address, among other things, material conflicts of
interest that may arise between the interests of the Fund and the interests of
the Adviser. The Proxy Voting Policies will ensure that all issues brought to
shareholders are analyzed in light of the Adviser’s fiduciary responsibilities.
When
available, information on how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available (1) without charge, upon request, by calling 1–800–617–0004 and (2) on
the SEC’s website at www.sec.gov.
INVESTMENT
ADVISER
AND
SUB-ADVISER
Investment
Adviser
Grayscale
Advisors, LLC, a Delaware limited liability company located at 290 Harbor Drive,
4th Floor, Stamford, Connecticut 06902, serves as the investment adviser to the
Fund. The Adviser was founded in 2021 and is a wholly-owned subsidiary of
Grayscale Investments, LLC, which is indirectly controlled by Barry E. Silbert
by virtue of his indirect ownership of more than 25% of the outstanding equity
interests in the Adviser.
Pursuant
to the Investment Advisory Agreement (the “Advisory Agreement”), the Adviser
provides investment advice to the Fund and oversees the day-to-day operations of
the Fund, subject to the direction and control of the Board and the officers of
the Trust. The Adviser is responsible for trading portfolio securities on behalf
of the Fund, including selecting broker-dealers to execute purchase and sale
transactions, subject to the oversight of the Board. Under the Advisory
Agreement, the Adviser is also responsible for arranging
transfer
agency, custody, fund administration and accounting, and other related services
necessary for the Fund to operate. The Adviser administers the Fund’s business
affairs, provides office facilities and equipment and certain clerical,
bookkeeping and administrative services. Under the Advisory Agreement, in
exchange for a single unitary management fee, the Adviser has agreed to pay all
expenses incurred by the Fund except for interest charges on any borrowings,
dividends and other expenses on securities sold short, taxes, brokerage
commissions and other expenses incurred in placing orders for the purchase and
sale of securities and other investment instruments, acquired fund fees and
expenses, accrued deferred tax liability, extraordinary expenses, distribution
fees and expenses paid by the Fund under any distribution plan adopted pursuant
to Rule 12b-1 under the 1940 Act, and the unified management fee payable to the
Adviser. For services provided to the Fund, the Fund pays the Adviser a unified
management fee at an annual rate of 0.70% based on the Fund’s average daily net
assets.
The
Advisory Agreement with respect to the Fund will continue in force for an
initial period of two years. Thereafter, the Advisory Agreement will be
renewable from year to year with respect to the Fund, so long as its continuance
is approved at least annually (1) by the vote, cast in person at a meeting
called for that purpose, of a majority of those Trustees who are not “interested
persons” of the Adviser or the Trust; and (2) by the majority vote of either the
full Board or the vote of a majority of the outstanding Shares. The Advisory
Agreement automatically terminates on assignment and is terminable on a 60-day
written notice either by the Trust or the Adviser.
The
Adviser shall not be liable to the Trust or any shareholder for anything done or
omitted by it, except acts or omissions involving willful misfeasance, bad
faith, negligence or reckless disregard of the duties imposed upon it by its
agreement with the Trust or for any losses that may be sustained in the
purchase, holding or sale of any security.
The
table below shows management fees paid by the Fund to the Adviser for the fiscal
year/period ended December 31.
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2023 |
2022 |
$36,372
|
$46,083(1) |
(1)
For the fiscal period February 1, 2022 (commencement of operations) through
December 31, 2022.
Sub-Adviser
The
Trust, on behalf of the Fund, and the Adviser have retained Vident Asset
Management, 1125 Sanctuary Parkway, Suite 515, Alpharetta, Georgia 30009, to
serve as sub-adviser for the Fund. The Sub-Adviser was established in 2016 and
is owned by Vident Capital Holdings, LLC. Vident Capital Holdings, LLC is
controlled by MM VAM, LLC which is owned by Casey Crawford.
Pursuant
to the Sub-Advisory Agreement between the Adviser and the Sub-Adviser (the
“Sub-Advisory Agreement”), the Sub-Adviser is responsible for trading portfolio
securities on behalf of the Fund, including selecting broker-dealers to execute
purchase and sale transactions as instructed by the Adviser or in connection
with any rebalancing or reconstitution of the Index, subject to the supervision
of the Adviser and the Board. For the services it provides to the Fund, the
Sub-Adviser is compensated by the Adviser from the management fees paid by the
Fund to the Adviser.
The
Sub-Advisory Agreement was approved by the Trustees (including all the
Independent Trustees) and the Adviser, as sole shareholder of the Fund, in
compliance with the 1940 Act. The Sub-Advisory Agreement will continue in force
for an initial period of two years. Thereafter, the Sub-Advisory Agreement is
renewable from year to year with respect to the Fund, so long as its continuance
is approved at least annually (1) by the vote, cast in person at a meeting
called for that purpose, of a majority of those Trustees who are not “interested
persons” of the Trust; and (2) by the majority vote of either the full Board or
the vote of a majority of the outstanding Shares. The Sub-Advisory Agreement
will terminate automatically in the event of its assignment, and is terminable
at any time without penalty by the Board or, with respect to the Fund, by a
majority of the outstanding Shares of the Fund, on not less than 30 days’
nor more than 60 days’ written notice to the Sub-Adviser, or by the Sub-Adviser
on 60 days’ written notice to the Adviser and the Trust. The Sub-Advisory
Agreement provides that the Sub-Adviser shall not be protected against any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or from
reckless disregard of its obligations or duties thereunder.
The
Adviser paid the Sub-Adviser for sub-advisory services provided to the Fund for
the fiscal year/period ended December 31.
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2023 |
2022 |
$24,563 |
$18,301(1) |
(1)
For the fiscal period February 1, 2022 (commencement of operations) through
December 31, 2022.
PORTFOLIO
MANAGERS
The
Fund is managed by Rafael Zayas, CFA and Austin Wen, CFA for the Sub-Adviser
(the “Portfolio Managers”).
Other
Accounts.
In addition to the Fund, the Portfolio Managers managed the following other
accounts as of December 31, 2023, none of which were subject to a
performance-based management fee:
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| |
Portfolio
Manager |
Type
of Accounts |
Total
Number of Accounts |
Total
Assets of Accounts |
| |
Austin
Wen, CFA |
Registered
Investment Companies |
33 |
$4.57
billion |
| |
Other
Pooled Investment Vehicles |
7 |
$767
million |
| |
Other
Accounts |
1 |
$21
million |
| |
Rafael
Zayas, CFA |
Registered
Investment Companies |
21 |
$3.17
billion |
| |
Other
Pooled Investment Vehicles |
22 |
$1.45
billion |
| |
Other
Accounts |
0 |
$0 |
| |
Portfolio
Managers Fund Ownership. The
Fund is required to show the dollar range of its portfolio managers’ “beneficial
ownership” of Shares as of the end of the most recently completed fiscal year.
Dollar amount ranges disclosed are established by the SEC. “Beneficial
ownership” is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
As of December 31, 2023, the Portfolio Managers did not beneficially own
shares of the Fund.
Portfolio
Managers Compensation. The
Portfolio Managers receive a fixed base salary and discretionary bonus that are
not tied to the performance of the Fund.
Description
of Material Conflicts of Interest. The
Portfolio Managers’ management of “other accounts” may give rise to potential
conflicts of interest in connection with their management of the Fund’s
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have similar investment objectives as the Fund.
Therefore, a potential conflict of interest may arise as a result of the
identical investment objectives, whereby a Portfolio Manager could favor one
account over another. Another potential conflict could include a Portfolio
Manager’s knowledge about the size, timing and possible market impact of Fund
trades, whereby such Portfolio Manager could use this information to the
advantage of other accounts and to the disadvantage of the Fund. However, the
Sub-Adviser has established policies and procedures to ensure that the purchase
and sale of securities among all accounts the Sub-Adviser manages are fairly and
equitably allocated.
THE
DISTRIBUTOR
The
Trust and Foreside Fund Services, LLC (the “Distributor”), a wholly-owned
subsidiary of Foreside Financial Group, LLC (d/b/a ACA Group), are parties to a
distribution agreement (“Distribution Agreement”), whereby the Distributor acts
as principal underwriter for the Trust and distributes Shares. Shares are
continuously offered for sale by the Distributor only in Creation Units. The
Distributor will not distribute Shares in amounts less than a Creation Unit and
does not maintain a secondary market in Shares. The principal business address
of the Distributor is Three Canal Plaza, Suite 100, Portland, Maine 04101.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will review
orders for the purchase and redemption of Creation Units, provided that any
subscriptions and orders will not be binding on the Trust until accepted by the
Trust. The Distributor is a broker-dealer registered under the 1934 Act and a
member of FINRA.
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers may also be Authorized Participants (as discussed in
“Procedures
for Purchase of Creation Units”
below) or DTC participants (as defined below).
The
Distribution Agreement will continue for two years from its effective date and
is renewable annually thereafter. The continuance of the Distribution Agreement
must be specifically approved at least annually (i) by the vote of the Trustees
or by a vote of the shareholders of the Fund and (ii)
by
the vote of a majority of the Independent Trustees who have no direct or
indirect financial interest in the operations of the Distribution Agreement or
any related agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement is terminable without
penalty by the Trust on 60 days’ written notice when authorized either by
majority vote of its outstanding voting Shares or by a vote of a majority of its
Board (including a majority of the Independent Trustees), or by the Distributor
on 60 days’ written notice, and will automatically terminate in the event of its
assignment. The Distribution Agreement provides that in the absence of willful
misfeasance, bad faith, or gross negligence on the part of the Distributor, or
reckless disregard by it of its obligations thereunder, the Distributor shall
not be liable for any action or failure to act in accordance with its duties
thereunder.
Intermediary
Compensation.
The Adviser, the Sub-Adviser, or their affiliates, out of their own resources
and not out of Fund assets (i.e.,
without additional cost to the Fund or its shareholders), may pay certain broker
dealers, banks and other financial intermediaries (“Intermediaries”) for certain
activities related to the Fund, including participation in activities that are
designed to make Intermediaries more knowledgeable about exchange traded
products, including the Fund, or for other activities, such as marketing and
educational training or support. These arrangements are not financed by the Fund
and, thus, do not result in increased Fund expenses. They are not reflected in
the fees and expenses listed in the fees and expenses sections of the Fund’s
Prospectus and they do not change the price paid by investors for the purchase
of Shares or the amount received by a shareholder as proceeds from the
redemption of Shares.
Such
compensation may be paid to Intermediaries that provide services to the Fund,
including marketing and education support (such as through conferences, webinars
and printed communications). The Adviser and Sub-Adviser periodically assess the
advisability of continuing to make these payments. Payments to an Intermediary
may be significant to the Intermediary, and amounts that Intermediaries pay to
your adviser, broker or other investment professional, if any, may also be
significant to such adviser, broker or investment professional. Because an
Intermediary may make decisions about what investment options it will make
available or recommend, and what services to provide in connection with various
products, based on payments it receives or is eligible to receive, such payments
create conflicts of interest between the Intermediary and its clients. For
example, these financial incentives may cause the Intermediary to recommend the
Fund over other investments. The same conflict of interest exists with respect
to your financial adviser, broker or investment professional if he or she
receives similar payments from his or her Intermediary firm.
Intermediary
information is current only as of the date of this SAI. Please contact your
adviser, broker, or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the
Adviser, Sub-Adviser or their affiliates to an Intermediary may create the
incentive for an Intermediary to encourage customers to buy Shares.
If
you have any additional questions, please call 1-800-617-0004.
Distribution
and Service Plan.
The Trust has adopted a Distribution and Service Plan (the “Plan”) in accordance
with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. No payments pursuant to the
Plan are expected to be made during the twelve (12) month period from the date
of this SAI. Rule 12b-1 fees to be paid by the Fund under the Plan may only be
imposed after approval by the Board.
Continuance
of the Plan must be approved annually by a majority of the Trustees of the Trust
and by a majority of the Trustees who are not interested persons (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the Plan or in any agreements related to the Plan (“Qualified Trustees”). The
Plan requires that quarterly written reports of amounts spent under the Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding Shares. All
material amendments of the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
The
Plan provides that the Fund pays the Distributor an annual fee of up to a
maximum of 0.25% of the average daily net assets of the Shares. Under the Plan,
the Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations and
insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor’s affiliates and subsidiaries (collectively,
“Agents”) as compensation for services and reimbursement of expenses incurred in
connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the
FINRA rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, the Fund
is authorized to compensate the Distributor up to the maximum amount to finance
any activity primarily intended to result in the sale of Creation Units of the
Fund or for providing or arranging for others to provide shareholder services
and for the maintenance of shareholder accounts. Such activities may include,
but are not limited to: (i) delivering copies of the Fund’s then current
reports, prospectuses, notices, and similar materials, to prospective purchasers
of Creation Units; (ii) marketing and promotional services, including
advertising; (iii) paying the costs of and compensating others, including
Authorized Participants (as discussed in “Procedures for Purchase of Creation
Units” below) with whom the Distributor has entered into written Authorized
Participant Agreements, for performing shareholder servicing on behalf of the
Fund; (iv) compensating certain Authorized Participants for providing assistance
in distributing the Creation Units of the Fund, including the travel and
communication expenses and salaries and/or commissions of sales personnel in
connection with the distribution of the Creation Units of the Fund; (v) payments
to financial institutions and intermediaries such as banks, savings and loan
associations, insurance companies and investment counselors, broker-dealers,
mutual fund supermarkets and the affiliates and subsidiaries of the Trust’s
service providers as compensation for services or reimbursement of expenses
incurred in connection with
distribution
assistance; (vi) facilitating communications with beneficial owners of
Shares, including the cost of providing (or paying others to provide) services
to beneficial owners of Shares, including, but not limited to, assistance in
answering inquiries related to shareholder accounts; and (vii) such other
services and obligations as are set forth in the Distribution Agreement. The
Distributor does not retain Fund monies for profit. Instead, it keeps them in
retention for future distribution related expenses. The Adviser compensates the
Distributor for certain distribution related services.
THE
ADMINISTRATOR
AND
TRANSFER
AGENT
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services,
located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the
Fund’s transfer agent, administrator, and index receipt agent.
Pursuant
to a Fund Administration Servicing Agreement and a Fund Accounting Servicing
Agreement between the Trust and Fund Services, Fund Services provides the Trust
with administrative and management services (other than investment advisory
services) and accounting services, including portfolio accounting services, tax
accounting services, and furnishing financial reports. In this capacity, Fund
Services does not have any responsibility or authority for the management of the
Fund, the determination of investment policy, or for any matter pertaining to
the distribution of Shares. As compensation for the administration, accounting
and management services, the Adviser pays Fund Services a fee based on the
Fund’s average daily net assets, subject to a minimum annual fee. Fund Services
also is entitled to certain out-of-pocket expenses for the services mentioned
above, including pricing expenses.
The
table below shows fees earned by Fund Services for services provided to the Fund
for the fiscal year/period ended December 31.
|
|
|
|
| |
2023 |
2022 |
$78,823 |
$43,690(1) |
(1)
For the fiscal period February 1, 2022 (commencement of operations) through
December 31, 2022.
CUSTODIAN
AND
SECURITIES
LENDING
AGENT
Pursuant
to a Custody Agreement, U.S. Bank National Association (the “Custodian” or “U.S.
Bank”), 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin
53212, serves as the custodian of the Fund’s assets. The Custodian holds and
administers the assets in the Fund’s portfolio. Pursuant to the Custody
Agreement, the Custodian receives an annual fee from the Adviser based on the
Trust’s total average daily net assets, subject to a minimum annual fee, and
certain settlement charges. The Custodian also is entitled to certain
out-of-pocket expenses.
U.S.
Bank (the “Securities Lending Agent”) also serves as securities lending agent to
the Fund. The Securities Lending Agent is responsible for the implementation and
administration of the Fund’s securities lending program pursuant to an agreement
between the Trust, on behalf of the Fund, and the Securities Lending Agent (the
“Securities Lending Agreement”). The Securities Lending Agent acts as agent to
the Fund to lend available securities with any person on its list of borrowers
approved by the Board and (i) determines whether a loan shall be made and
negotiates and establishes the terms and conditions of the loan with the
borrower; (ii) ensures that all substitute interest, dividends, and other
distributions paid with respect to loan securities is credited to the Fund’s
relevant account on the date such amounts are delivered by the borrower to the
Securities Lending Agent; (iii) receives and holds, on the Fund’s behalf,
collateral from borrowers to secure obligations of borrowers with respect to any
loan of available securities; (iv) marks loaned securities and collateral to
their market value each business day based upon the market value of the loaned
securities and collateral at the close of business employing the most recently
available pricing information and receives and delivers collateral to maintain
the value of the collateral at no less than 100% of the market value of the
loaned securities; (v) at the termination of a loan, returns the collateral to
the borrower upon the return of the loaned securities to the Securities Lending
Agent; (vi) invests cash collateral in accordance with the Securities Lending
Agreement; and (vii) maintains such records as are reasonably necessary to
account for loans that are made and the income derived therefrom and makes
available to the Fund a monthly statement describing the loans outstanding,
including an accounting of all securities lending transactions.
The
dollar amounts of gross and net income from securities lending activities
received and the related fees and/or compensation paid by the Fund during the
most recent fiscal year are set forth in the following table.
|
|
|
|
|
|
|
|
|
|
| |
|
Grayscale
Future of Finance ETF |
Gross
Income from securities lending activities (including
income from cash collateral reinvestment) |
$145,998
|
| |
Fees
and/or compensation for securities lending activities and related
services |
| |
Fees
paid to securities lending agent from a revenue split |
($25,027) |
| |
Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
($1,973) |
| |
Administrative
fees not included in revenue split |
$0 |
| |
Indemnification
fee not included in revenue split |
$0 |
| |
Rebate
(paid to borrower) |
($18,887) |
| |
Other
fees not included in revenue split |
$0 |
| |
Aggregate
fees/compensation for securities lending activities |
($45,887) |
| |
Net
Income from securities lending activities |
$100,111
|
| |
LEGAL
COUNSEL
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue NW, Washington, DC
20004-2541, serves as legal counsel for the Trust.
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
Cohen
& Company, Ltd., located at 342 North Water Street, Suite 830, Milwaukee,
Wisconsin 53202, serves as the independent registered public accounting firm for
the Fund.
PORTFOLIO
HOLDINGS
DISCLOSURE
POLICIES
AND
PROCEDURES
The
Trust’s Board has adopted a policy regarding the disclosure of information about
the Fund’s security holdings. The Fund’s entire portfolio holdings are publicly
disseminated each day the Fund is open for business through financial reporting
and news services, including publicly available internet web sites. In addition,
the composition of the Deposit Securities is publicly disseminated daily prior
to the opening of the Exchange via the National Securities Clearing Corporation
(“NSCC”).
DESCRIPTION
OF
SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of funds and
Shares. Each Share represents an equal proportionate interest in the Fund with
each other Share. Shares are entitled upon liquidation to a pro rata share in
the net assets of the Fund. Shareholders have no preemptive rights. The
Declaration of Trust provides that the Trustees may create additional series or
classes of Shares. All consideration received by the Trust for shares of any
additional funds and all assets in which such consideration is invested would
belong to that fund and would be subject to the liabilities related thereto.
Share certificates representing Shares will not be issued. Shares, when issued,
are fully paid and non-assessable.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required, consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all funds of the Trust vote together as a
single class, except that if the matter being voted on affects only a particular
fund it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. As a Delaware statutory trust, the Trust is not required, and does not
intend, to hold annual meetings of shareholders. Approval of shareholders will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Upon the written request
of shareholders owning at least 10% of the Trust’s shares, the Trust will call
for a meeting of shareholders to consider the removal of one or more Trustees
and other certain matters. In the event that such a meeting is requested, the
Trust will provide appropriate assistance and information to the shareholders
requesting the meeting.
Under
the Declaration of Trust, the Trustees have the power to liquidate the Fund
without shareholder approval. While the Trustees have no present intention of
exercising this power, they may do so if the Fund fails to reach a viable size
within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION
OF
TRUSTEES’
LIABILITY
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and shall not be
liable for errors of judgment or
mistakes
of fact or law. The Trustees shall not be responsible or liable in any event for
any neglect or wrong-doing of any officer, agent, employee, adviser or principal
underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee. The Declaration of Trust also provides that the
Trust shall indemnify each person who is, or has been, a Trustee, officer,
employee or agent of the Trust, any person who is serving or has served at the
Trust’s request as a Trustee, officer, trustee, employee or agent of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise to the extent and in the manner provided in the Amended and Restated
By-laws. However, nothing in the Declaration of Trust shall protect or indemnify
a Trustee against any liability for his or her willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
the office of Trustee. Nothing contained in this section attempts to disclaim a
Trustee’s individual liability in any manner inconsistent with the federal
securities laws.
BROKERAGE
TRANSACTIONS
The
policy of the Trust regarding purchases and sales of securities for the Fund is
that primary consideration will be given to obtaining the most favorable prices
and efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust’s policy is
to pay commissions which are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
The Trust believes that a requirement always to seek the lowest possible
commission cost could impede effective portfolio management and preclude the
Fund and the Sub-Adviser from obtaining a high quality of brokerage and research
services. In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Sub-Adviser will rely upon its experience and
knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage services received from the broker effecting
the transaction. Such determinations are necessarily subjective and imprecise,
as in most cases, an exact dollar value for those services is not ascertainable.
The Trust has adopted policies and procedures that prohibit the consideration of
sales of Shares as a factor in the selection of a broker or dealer to execute
its portfolio transactions.
The
Sub-Adviser owes a fiduciary duty to its clients to seek to provide best
execution on trades effected. In selecting a broker-dealer for each specific
transaction, the Sub-Adviser chooses the broker-dealer deemed most capable of
providing the services necessary to obtain the most favorable execution. “Best
execution” is generally understood to mean the most favorable cost or net
proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when
making this judgment, which may include, but is not limited to: liquidity,
price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker-dealers. The Sub-Adviser will also use electronic crossing
networks (“ECNs”) when appropriate.
Subject
to the foregoing policies, brokers or dealers selected to execute the Fund’s
portfolio transactions may include the Fund’s Authorized Participants (as
discussed in “Procedures
for Purchase of Creation Units”
below) or their affiliates. An Authorized Participant or its affiliates may be
selected to execute the Fund’s portfolio transactions in conjunction with an
all-cash creation unit order or an order including “cash-in-lieu” (as described
below under “Purchase
and Redemption of Shares in Creation Units”),
so long as such selection is in keeping with the foregoing policies. As
described below under “Purchase
and Redemption of Shares in Creation Units—Creation Transaction Fee”
and “—Redemption
Transaction Fee”,
the Fund may determine to not charge a variable fee on certain orders when the
Adviser has determined that doing so is in the best interests of Fund
shareholders, e.g.,
for creation orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such order, even if the
decision to not charge a variable fee could be viewed as benefiting the
Authorized Participant or its affiliate selected to execute the Fund’s portfolio
transactions in connection with such orders.
The
Sub-Adviser is responsible, subject to oversight by the Adviser and the Board,
for placing orders on behalf of the Fund for the purchase or sale of portfolio
securities. If purchases or sales of portfolio securities of the Fund and one or
more other investment companies or clients supervised by the Sub-Adviser are
considered at or about the same time, transactions in such securities are
allocated among the several investment companies and clients in a manner deemed
equitable and consistent with its fiduciary obligations to all by the
Sub-Adviser. In some cases, this procedure could have a detrimental effect on
the price or volume of the security so far as the Fund is concerned. However, in
other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund. The primary consideration is prompt execution of orders at the most
favorable net price.
The
Fund may deal with affiliates in principal transactions to the extent permitted
by exemptive order or applicable rule or regulation.
The
table below shows brokerage commissions paid in the aggregate amount by the Fund
for the fiscal year/period ended December 31.
|
|
|
|
| |
2023 |
2022 |
$3,008 |
$3,492(1) |
(1)
For the fiscal period February 1, 2022 (commencement of operations) through
December 31, 2022.
Directed
Brokerage. For
the fiscal year ended December 31, 2023, the Fund did not pay any
commissions on brokerage transactions directed to brokers pursuant to an
agreement or understanding whereby the broker provides research or other
brokerage services to the Adviser or Sub-Adviser.
Brokerage
with Fund Affiliates.
The Fund may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Fund, the Adviser, the Sub-Adviser, or the
Distributor for a commission in conformity with the 1940 Act, the 1934 Act and
rules promulgated by the SEC. These rules require that commissions paid to the
affiliate by the Fund for exchange transactions not exceed “usual and customary”
brokerage commissions. The rules define “usual and customary” commissions to
include amounts which are “reasonable and fair compared to the commission, fee
or other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on a securities exchange during a comparable period of time.” The Trustees,
including those who are not “interested persons” of the Fund, have adopted
procedures for evaluating the reasonableness of commissions paid to affiliates
and review these procedures periodically. During the three most recent fiscal
years ended December 31, 2023, the Fund did not pay brokerage commissions
to any registered broker-dealer affiliates of the Fund, the Adviser, the
Sub-Adviser, or the Distributor.
Securities
of “Regular Broker-Dealers.”
The Fund is required to identify any securities of its “regular brokers and
dealers” (as such term is defined in the 1940 Act) that it may hold at the close
of its most recent fiscal year. “Regular brokers or dealers” of the Fund are the
ten brokers or dealers that, during the most recent fiscal year: (i) received
the greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Fund; or (iii) sold the largest dollar amounts of
Shares. For the fiscal year ended December 31, 2023, the Fund did not
acquire any securities of its “regular broker-dealers.”
PORTFOLIO
TURNOVER
RATE
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by the Sub-Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services. The
Fund’s portfolio turnover rates for the fiscal year/period ended December
31.
(1)
For the fiscal period February 1, 2022 (commencement of operations) through
December 31, 2022.
BOOK
ENTRY
ONLY
SYSTEM
The
Depository Trust Company (“DTC”) acts as securities depositary for Shares.
Shares are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
Shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and
FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers, and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to in this SAI as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares. The
Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered
in their names and will not receive or be entitled to physical delivery of
Share
certificates. Each Beneficial Owner must rely on the procedures of DTC and any
DTC Participant and/or Indirect Participant through which such Beneficial Owner
holds its interests, to exercise any rights of a holder of Shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as follows. DTC will make available to the Trust upon request and for a
fee a listing of Shares held by each DTC Participant. The Trust shall obtain
from each such DTC Participant the number of Beneficial Owners holding Shares,
directly or indirectly, through such DTC Participant. The Trust shall provide
each such DTC Participant with copies of such notice, statement, or other
communication, in such form, number and at such place as such DTC Participant
may reasonably request, in order that such notice, statement or communication
may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant
a fair and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in the Fund as
shown on the records of DTC or its nominee. Payments by DTC Participants to
Indirect Participants and Beneficial Owners of Shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in Shares, or for maintaining, supervising, or reviewing any
records relating to such beneficial ownership interests, or for any other aspect
of the relationship between DTC and the DTC Participants or the relationship
between such DTC Participants and the Indirect Participants and Beneficial
Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to the Fund at
any time by giving reasonable notice to the Fund and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Fund shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
PURCHASE
AND
REDEMPTION
OF
SHARES
IN
CREATION
UNITS
The
Trust issues and redeems Shares only in Creation Units on a continuous basis
through the Transfer Agent, without a sales load (but subject to transaction
fees, if applicable), at their NAV per share next determined after receipt of an
order, on any Business Day, in proper form pursuant to the terms of the
Authorized Participant Agreement (“Participant Agreement”). The NAV of Shares is
calculated each business day as of the scheduled close of regular trading on the
NYSE, generally 4:00 p.m., Eastern time. The Fund will not issue fractional
Creation Units. A “Business Day” is any day on which the NYSE is open for
business.
Fund
Deposit. The
consideration for purchase of a Creation Unit of the Fund generally consists of
the in-kind deposit of a designated portfolio of securities (the “Deposit
Securities”) per each Creation Unit and the Cash Component (defined below),
computed as described below. Notwithstanding the foregoing, the Trust reserves
the right to permit or require the substitution of a “cash in lieu” amount
(“Deposit Cash”) to be added to the Cash Component to replace any Deposit
Security. When accepting purchases of Creation Units for all or a portion of
Deposit Cash, the Fund may incur additional costs associated with the
acquisition of Deposit Securities that would otherwise be provided by an in-kind
purchaser.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the Fund. The “Cash
Component” is an amount equal to the difference between the NAV of Shares (per
Creation Unit) and the value of the Deposit Securities or Deposit Cash, as
applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the value of the Deposit Securities or Deposit
Cash, as applicable), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the value of the Deposit Securities or
Deposit Cash, as applicable), the Cash Component shall be such negative amount
and the creator will be entitled to receive cash in an amount equal to the Cash
Component. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit and the value of the Deposit
Securities or Deposit Cash, as applicable. Computation of the Cash Component
excludes any stamp duty or other similar fees and expenses payable upon transfer
of beneficial ownership of the Deposit Securities, if applicable, which shall be
the sole responsibility of the Authorized Participant (as defined below).
The
Fund, through NSCC, makes available on each Business Day, prior to the opening
of business on the Exchange (currently 9:30 a.m., Eastern time), the list
of the names and the required number of shares of each Deposit Security or the
required amount of Deposit Cash, as applicable, to be included in the current
Fund Deposit (based on information at the end of the previous Business Day) for
the Fund. Such Fund Deposit is subject to any applicable adjustments as
described below, to effect purchases of Creation Units of
the
Fund until such time as the next-announced composition of the Deposit Securities
or the required amount of Deposit Cash, as applicable, is made available.
The
identity and number of Shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for a Fund Deposit for the Fund changes as
rebalancing adjustments and corporate action events are reflected from time to
time by the Adviser with a view to the investment objective of the Fund. The
composition of the Deposit Securities may also change in response to adjustments
to the weighting or composition of the component securities of the Fund’s Index.
The
Trust reserves the right to permit or require the substitution of Deposit Cash
to replace any Deposit Security, which shall be added to the Cash Component,
including, without limitation, in situations where the Deposit Security: (i) may
not be available in sufficient quantity for delivery; (ii) may not be eligible
for transfer through the systems of DTC for corporate securities and municipal
securities; (iii) may not be eligible for trading by an Authorized Participant
(as defined below) or the investor for which it is acting; (iv) would be
restricted under the securities laws or where the delivery of the Deposit
Security to the Authorized Participant would result in the disposition of the
Deposit Security by the Authorized Participant becoming restricted under the
securities laws; or (v) in certain other situations (collectively, “custom
orders”). The Trust also reserves the right to include or remove Deposit
Securities from the basket in anticipation of Index rebalancing changes. The
adjustments described above will reflect changes, known to the Adviser on the
date of announcement to be in effect by the time of delivery of the Fund
Deposit, in the composition of the subject Index being tracked by the Fund or
resulting from certain corporate actions.
Procedures
for Purchase of Creation Units. To
be eligible to place orders with the Transfer Agent to purchase a Creation Unit
of the Fund, an entity must be (i) a “Participating Party” (i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the “Clearing Process”)), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
“Book
Entry Only System”).
In addition, each Participating Party or DTC Participant (each, an “Authorized
Participant”) must execute a Participant Agreement that has been agreed to by
the Distributor, and that has been accepted by the Transfer Agent, with respect
to purchases and redemptions of Creation Units. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or
any investor on whose behalf it will act, to certain conditions, including that
it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below), if applicable, and
any other applicable fees and taxes.
All
orders to purchase Shares directly from the Fund on the next Business Day must
be submitted as a “Future Dated Trade” for one or more Creation Units between
4:30 p.m. Eastern time and 5:30 p.m. Eastern time on the prior Business Day and
in the manner set forth in the Participant Agreement and/or applicable order
form. The Business Day following the day on which such an order is submitted to
purchase Creation Units (or an order to redeem Creation Units, as set forth
below) is referred to as the “Order Placement Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g.,
to provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from the Fund in Creation Units
have to be placed by the investor’s broker through an Authorized Participant
that has executed a Participant Agreement. In such cases there may be additional
charges to such investor. At any given time, there may be only a limited number
of broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On
days when the Exchange closes earlier than normal, the Fund may require orders
to create Creation Units to be placed earlier in the day. In addition, if a
market or markets on which the Fund’s investments are primarily traded is
closed, the Fund will also generally not accept orders on such day(s). Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Transfer Agent pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order
form. On behalf of the Fund, the Transfer Agent will notify the Custodian of
such order. The Custodian will then provide such information to the appropriate
local sub-custodian(s). Those placing orders through an Authorized Participant
should allow sufficient time to permit proper submission of the purchase order
to the Transfer Agent by the cut-off time on such Business Day. Economic or
market disruptions or changes, or telephone or other communication failure may
impede the ability to reach the Transfer Agent or an Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities), and/or through such other
arrangements allowed by the Trust or its agents. With respect to foreign Deposit
Securities, the Custodian shall cause the subcustodian of the Fund to maintain
an account into which the Authorized Participant shall deliver, on behalf of
itself or the party on whose behalf it is acting, such Deposit Securities (or
Deposit Cash for all or a part of such securities, as permitted or required),
with any appropriate adjustments as advised by the Trust. Foreign Deposit
Securities must be delivered to an account maintained at the applicable local
subcustodian. The Fund Deposit transfer must be ordered by the Authorized
Participant in a timely fashion so as to ensure the delivery of the requisite
number of Deposit Securities or Deposit Cash, as applicable, to the account of
the Fund or its agents by no later than 12:00 p.m. Eastern time (or such other
time as specified by the Trust) on the Settlement Date. If the Fund or its
agents do not receive all of the Deposit Securities,
or
the required Deposit Cash in lieu thereof, by such time, then the order may be
deemed rejected and the Authorized Participant shall be liable to the Fund for
losses, if any, resulting therefrom. The “Settlement Date” for the Fund is
generally the second Business Day after the Order Placement Date. All questions
as to the number of Deposit Securities or Deposit Cash to be delivered, as
applicable, and the validity, form and eligibility (including time of receipt)
for the deposit of any tendered securities or cash, as applicable, will be
determined by the Trust, whose determination shall be final and binding. The
amount of cash represented by the Cash Component must be transferred directly to
the Custodian through the Federal Reserve Bank wire transfer system in a timely
manner so as to be received by the Custodian no later than the Settlement Date.
If the Cash Component and the Deposit Securities or Deposit Cash, as applicable,
are not received by the Custodian in a timely manner by the Settlement Date, the
creation order may be cancelled. Upon written notice to the Transfer Agent, such
canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then current NAV of the Fund.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in the appropriate amount are deposited with
the Custodian on the Settlement Date. If the order is not placed in proper form
as required, or federal funds in the appropriate amount are not received on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom.
A creation request is considered to be in “proper form” if all procedures set
forth in the Participant Agreement, order form and this SAI are properly
followed.
Issuance
of a Creation Unit. Except
as provided in this SAI, Creation Units will not be issued until the transfer of
good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities
(or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, the Transfer Agent and the Adviser shall be
notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units. The delivery of Creation Units so created generally will
occur no later than the second Business Day following the day on which the
purchase order is deemed received by the Transfer Agent. However, the Fund
reserves the right to settle Creation Unit transactions on a basis other than
the second Business Day following the day on which the purchase order is deemed
received by the Transfer Agent to accommodate foreign market holiday schedules,
to account for different treatment among foreign and U.S. markets of dividend
record dates and ex-dividend dates (that is the last day the holder of a
security can sell the security and still receive dividends payable on the
security), and in certain other circumstances. The Authorized Participant shall
be liable to the Fund for losses, if any, resulting from unsettled orders. The
Authorized Participant shall be liable to the Fund for losses, if any, resulting
from unsettled orders.
Creation
Units may be purchased in advance of receipt by the Trust of all or a portion of
the applicable Deposit Securities as described below. In these circumstances,
the initial deposit will have a value greater than the NAV of Shares on the date
the order is placed in proper form since, in addition to available Deposit
Securities, cash must be deposited in an amount equal to the sum of (i) the Cash
Component, plus (ii) an additional amount of cash equal to a percentage of the
value as set forth in the Participant Agreement, of the undelivered Deposit
Securities (the “Additional Cash Deposit”), which shall be maintained in a
separate non-interest bearing collateral account. The Authorized Participant
must deposit with the Custodian the Additional Cash Deposit, as applicable, by
12:00 p.m. Eastern time
(or
such other time as specified by the Trust) on the Settlement Date. If the Fund
or its agents do not receive the Additional Cash Deposit in the appropriate
amount, by such time, then the order may be deemed rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom.
An additional amount of cash shall be required to be deposited with the Trust,
pending delivery of the missing Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to the applicable percentage, as set forth in the Participant Agreement, of the
daily market value of the missing Deposit Securities. The Participant Agreement
will permit the Trust to buy the missing Deposit Securities at any time.
Authorized Participants will be liable to the Trust for the costs incurred by
the Trust in connection with any such purchases. These costs will be deemed to
include the amount by which the actual purchase price of the Deposit Securities
exceeds the value of such Deposit Securities on the day the purchase order was
deemed received by the Transfer Agent plus the brokerage and related transaction
costs associated with such purchases. The Trust will return any unused portion
of the Additional Cash Deposit once all of the missing Deposit Securities have
been properly received by the Custodian or purchased by the Trust and deposited
into the Trust. In addition, a transaction fee, as described below under
“Creation
Transaction Fee,”
may be charged. The delivery of Creation Units so created generally will occur
no later than the Settlement Date.
Acceptance
of Orders of Creation Units. The
Trust reserves the right to reject an order for Creation Units transmitted to it
by the Transfer Agent with respect to the Fund including, without limitation, if
(a) the order is not in proper form; (b) the Deposit Securities or Deposit Cash,
as applicable, delivered by the Participant are not as disseminated through the
facilities of the NSCC for that date by the Custodian; (c) the investor(s), upon
obtaining Shares ordered, would own 80% or more of the currently outstanding
Shares; (d) the acceptance of the Fund Deposit would, in the opinion of counsel,
be unlawful; (e) the acceptance or receipt of the order for a Creation Unit
would, in the opinion of counsel to the Trust, be unlawful; or (f) in the event
that circumstances outside the control of the Trust, the Custodian, the Transfer
Agent and/or the Adviser make it for all practical purposes not feasible to
process orders for Creation Units.
Examples
of such circumstances include acts of God or public service or utility problems
such as fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Distributor, the Custodian, a sub-custodian,
the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant
in the creation process, and other extraordinary events. The Transfer Agent
shall notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor
shall not be liable for the rejection of any purchase order for Creation Units.
All
questions as to the number of Shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
Creation
Transaction Fee. A
fixed purchase (i.e.,
creation) transaction fee, payable to the Fund’s custodian, may be imposed for
the transfer and other transaction costs associated with the purchase of
Creation Units (“Creation Order Costs”). The standard fixed creation transaction
fee for the Fund is $300, regardless of the number of Creation Units created in
the transaction. The Fund may adjust the standard fixed creation transaction fee
from time to time. The fixed creation fee may be waived on certain orders if the
Fund’s custodian has determined to waive some or all of the Creation Order Costs
associated with the order or another party, such as the Adviser, has agreed to
pay such fee.
In
addition, a variable fee, payable to the Fund, of up to a maximum of 2% of the
value of the Creation Units subject to the transaction may be imposed for cash
purchases, non-standard orders, or partial cash purchases of Creation Units. The
variable charge is primarily designed to cover additional costs (e.g.,
brokerage, taxes) involved with buying the securities with cash. The Fund may
determine to not charge a variable fee on certain orders when the Adviser has
determined that doing so is in the best interests of Fund shareholders,
e.g.,
for creation orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such order.
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Risks
of Purchasing Creation Units. There
are certain legal risks unique to investors purchasing Creation Units directly
from the Fund. Because Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. Certain activities that
a shareholder performs as a dealer could, depending on the circumstances, result
in the shareholder being deemed a participant in the distribution in a manner
that could render the shareholder a statutory underwriter and subject to the
prospectus delivery and liability provisions of the Securities Act. For example,
a shareholder could be deemed a statutory underwriter if it purchases Creation
Units from the Fund, breaks them down into the constituent shares, and sells
those shares directly to customers, or if a shareholder chooses to couple the
creation of a supply of new Shares with an active selling effort involving
solicitation of secondary-market demand for Shares. Whether a person is an
underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the examples mentioned here should not be considered a
complete description of all the activities that could cause you to be deemed an
underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
Shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C)
of the Securities Act, will be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act.
Redemption.
Shares
may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by the Fund through the Transfer
Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE FUND, THE TRUST
WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
to have such Shares redeemed by the Trust. There can be no assurance, however,
that there will be sufficient liquidity in the public trading market at any time
to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Fund, the Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on
each Business Day, the list of the names and Share quantities of the Fund’s
portfolio securities that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Fund Securities”). Fund Securities received on redemption may not be
identical to Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or combination
thereof, as determined by the Trust. With respect to in-kind redemptions of the
Fund, redemption proceeds for a Creation Unit will consist of Fund Securities -
as announced by the Custodian on the Business Day of the request for redemption
received in proper form plus cash in an amount equal to the
difference
between the NAV of Shares being redeemed, as next determined after a receipt of
a request in proper form, and the value of the Fund Securities (the “Cash
Redemption Amount”), less a fixed redemption transaction fee, as applicable, as
set forth below. In the event that the Fund Securities have a value greater than
the NAV of Shares, a compensating cash payment equal to the differential is
required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an
Authorized Participant may receive the corresponding cash value of the
securities in lieu of the in-kind securities value representing one or more Fund
Securities.
Redemption
Transaction Fee. A
fixed redemption transaction fee, payable to the Fund’s custodian, may be
imposed for the transfer and other transaction costs associated with the
redemption of Creation Units (“Redemption Order Costs”). The standard fixed
redemption transaction fee for the Fund is $300, regardless of the number of
Creation Units redeemed in the transaction. The Fund may adjust the redemption
transaction fee from time to time. The fixed redemption fee may be waived on
certain orders if the Fund’s custodian has determined to waive some or all of
the Redemption Order Costs associated with the order or another party, such as
the Adviser, has agreed to pay such fee.
In
addition, a variable fee, payable to the Fund, of up to a maximum of 2% of the
value of the Creation Units subject to the transaction may be imposed for cash
redemptions, non-standard orders, or partial cash redemptions (when cash
redemptions are available) of Creation Units. The variable charge is primarily
designed to cover additional costs (e.g.,
brokerage, taxes) involved with selling portfolio securities to satisfy a cash
redemption. The Fund may determine to not charge a variable fee on certain
orders when the Adviser has determined that doing so is in the best interests of
Fund shareholders, e.g.,
for redemption orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such order.
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Procedures
for Redemption of Creation Units.
Orders to redeem Creation Units on the next Business Day must be submitted in
proper form to the Transfer Agent as a “Future Dated Trade” for one or more
Creation Units between 4:30 p.m. Eastern Time and 5:30 p.m. Eastern Time on
the prior Business Day in the manner set forth in the Participant Agreement
and/or applicable order form. A redemption request is considered to be in
“proper form” if (i) an Authorized Participant has transferred or caused to be
transferred to the Trust’s Transfer Agent the Creation Unit(s) being redeemed
through the book-entry system of DTC so as to be effective by the time as set
forth in the Participant Agreement and (ii) a request in form satisfactory to
the Trust is received by the Transfer Agent from the Authorized Participant on
behalf of itself or another redeeming investor within the time periods specified
in the Participant Agreement. If the Transfer Agent does not receive the
investor’s Shares through DTC’s facilities by the times and pursuant to the
other terms and conditions set forth in the Participant Agreement, the
redemption request shall be rejected. The Authorized Participant must transmit
the request for redemption, in the form required by the Trust, to the Transfer
Agent in accordance with procedures set forth in the Participant Agreement.
Investors should be aware that their particular broker may not have executed a
Participant Agreement, and that, therefore, requests to redeem Creation Units
may have to be placed by the investor’s broker through an Authorized Participant
who has executed a Participant Agreement. Investors making a redemption request
should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of Shares to the Trust’s Transfer Agent;
such investors should allow for the additional time that may be required to
effect redemptions through their banks, brokers or other financial
intermediaries if such intermediaries are not Authorized Participants.
Additional
Redemption Procedures. In
connection with taking delivery of Shares of Fund Securities upon redemption of
Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank or other custody providers in each jurisdiction in
which any of the Fund Securities are customarily traded, to which account such
Fund Securities will be delivered. Deliveries of redemption proceeds generally
will be made within two business days of the trade date.
However,
due to the schedule of holidays in certain countries, the different treatment
among foreign and U.S. markets of dividend record dates and dividend ex-dates
(that is the last date the holder of a security can sell the security and still
receive dividends payable on the security sold), and in certain other
circumstances, the delivery of in-kind redemption proceeds with respect to the
Fund may take longer than two Business Days after the day on which the
redemption request is received in proper form. If neither the redeeming
Shareholder nor the Authorized Participant acting on behalf of such redeeming
Shareholder has appropriate arrangements to take delivery of the Fund Securities
in the applicable foreign jurisdiction and it is not possible to make other such
arrangements, or if it is not possible to effect deliveries of the Fund
Securities in such jurisdiction, the Trust may, in its discretion, exercise its
option to redeem such Shares in cash, and the redeeming Shareholders will be
required to receive its redemption proceeds in cash.
The
Trust may in its discretion exercise its option to redeem such Shares in cash,
and the redeeming investor will be required to receive its redemption proceeds
in cash. In addition, an investor may request a redemption in cash that the Fund
may, in its sole discretion, permit. In either case, the investor will receive a
cash payment equal to the NAV of its Shares based on the NAV of Shares
next
determined after the redemption request is received in proper form (minus a
redemption transaction fee, if applicable, and additional charge for requested
cash redemptions specified above, to offset the Trust’s brokerage and other
transaction costs associated with the disposition of Fund Securities). The Fund
may also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact composition of
the Fund Securities but does not differ in NAV.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Fund (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation Units for cash
to the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of Shares to complete an order
form or to enter into agreements with respect to such matters as compensating
cash payment. Further, an Authorized Participant that is not a “qualified
institutional buyer,” (“QIB”), as such term is defined under Rule 144A of
the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status to receive Fund Securities.
Because
the portfolio securities of the Fund may trade on other exchanges on days that
the Exchange is closed or are otherwise not Business Days for the Fund,
shareholders may not be able to redeem their Shares, or to purchase or sell
Shares on the Exchange, on days when the NAV of the Fund could be significantly
affected by events in the relevant foreign markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to the Fund (1) for any period during which the Exchange is closed
(other than customary weekend and holiday closings); (2) for any period during
which trading on the Exchange is suspended or restricted; (3) for any period
during which an emergency exists as a result of which disposal of Shares or
determination of the NAV of Shares is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
DETERMINATION
OF
NAV
NAV
per Share for the Fund is computed by dividing the value of the net assets of
the Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
Shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV is calculated by Fund Services and determined at the
scheduled close of the regular trading session on the NYSE (ordinarily
4:00 p.m., Eastern time) on each day that the NYSE is open, provided that
fixed income assets may be valued as of the announced closing time for trading
in fixed income instruments on any day that the Securities Industry and
Financial Markets Association (“SIFMA”) announces an early closing time.
Pursuant
to Rule 2a-5 under the 1940 Act, the Board has appointed the Adviser as the
Fund’s valuation designee (the “Valuation Designee”) to perform all fair
valuations of the Fund’s portfolio investments, subject to the Board’s
oversight. As the Valuation Designee, the Adviser has established procedures for
its fair valuation of the Fund’s portfolio investments. These procedures
address, among other things, determining when market quotations are not readily
available or reliable and the methodologies to be used for determining the fair
value of investments, as well as the use and oversight of third-party pricing
services for fair valuation. The Adviser’s fair value determinations will be
carried out in compliance with Rule 2a-5 and based on fair value methodologies
established and applied by the Adviser and periodically tested to ensure such
methodologies are appropriate and accurate with respect to the Fund’s portfolio
investments. The Adviser’s fair value methodologies may involve obtaining inputs
and prices from third-party pricing services.
In
calculating the Fund’s NAV per Share, the Fund’s investments are generally
valued using market quotations to the extent such market quotations are readily
available. If market quotations are not readily available or are deemed to be
unreliable by the Adviser, the Adviser will fair value such investments and use
the fair value to calculate the Fund’s NAV. When fair value pricing is employed,
the prices of securities used by the Adviser to calculate the Fund’s NAV may
differ from quoted or published prices for the same securities. Due to the
subjective and variable nature of fair value pricing, it is possible that the
fair value determined for a particular security may be materially different
(higher or lower) from the price of the security quoted or published by others,
or the value when trading resumes or is realized upon its sale. There may be
multiple methods that can be used to value a portfolio investment when market
quotations are not readily available. The value established for any portfolio
investment at a point in time might differ from what would be produced using a
different methodology or if it had been priced using market quotations.
DIVIDENDS
AND
DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions, and
Taxes.”
General
Policies.
Dividends from net investment income, if any, are declared and paid at least
annually by the Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but the Fund may make distributions
on a more frequent basis to improve index tracking for the Fund or to comply
with the distribution requirements of the Code to preserve the Fund’s
eligibility for treatment as a RIC, in all events in a manner consistent with
the provisions of the 1940 Act.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust.
The
Fund makes additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the Fund, plus any net capital gains and
(ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code.
Management of the Trust reserves the right to declare special dividends if, in
its reasonable discretion, such action is necessary or advisable to preserve the
Fund’s eligibility for treatment as a RIC or to avoid imposition of income or
excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of the Fund through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables to participate in the
dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend
distributions of both income and realized gains will be automatically reinvested
in additional whole Shares issued by the Trust of the Fund at NAV per Share.
Distributions reinvested in additional Shares will nevertheless be taxable to
Beneficial Owners acquiring such additional Shares to the same extent as if such
distributions had been received in cash.
FEDERAL
INCOME
TAXES
The
following is only a summary of certain U.S. federal income tax considerations
generally affecting the Fund and its shareholders that supplements the
discussion in the Prospectus. No attempt is made to present a comprehensive
explanation of the federal, state, local or foreign tax treatment of the Fund or
its shareholders, and the discussion here and in the Prospectus is not intended
to be a substitute for careful tax planning.
The
following general discussion of certain U.S. federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders
are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, local or foreign taxes.
Taxation
of the Fund.
The Fund has elected and intends to continue to qualify each year to be treated
as a RIC under the Code. As such, the Fund should not be subject to federal
income taxes on its net investment income and capital gains, if any, to the
extent that it timely distributes such income and capital gains to its
shareholders. To qualify for treatment as a RIC, the Fund must distribute
annually to its shareholders at least the sum of 90% of its net investment
income (generally including the excess of net short-term capital gains over net
long-term capital losses) and 90% of its net tax-exempt interest income, if any
(the “Distribution Requirement”) and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund’s gross income each taxable year must be derived from dividends,
interest, payments with respect to certain securities loans, gains from the sale
or other disposition of stock, securities or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
foreign currencies and net income derived from interests in qualified publicly
traded partnerships (the “Qualifying Income Requirement”); and (ii) at the end
of each quarter of the Fund’s taxable year, the Fund’s assets must be
diversified so that (a) at least 50% of the value of the Fund’s total assets is
represented by cash and cash items, U.S. government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
to any one issuer, to an amount not greater in value than 5% of the value of the
Fund’s total assets and to not more than 10% of the outstanding voting
securities of such issuer, including the equity securities of a qualified
publicly traded partnership, and (b) not more than 25% of the value of its total
assets is invested, including through corporations in which the Fund owns a 20%
or more voting stock interest, in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer, the securities (other
than securities of other RICs) of two or more issuers which the Fund controls
and which are engaged in the same, similar, or related trades or businesses, or
the securities of one or more qualified publicly traded partnerships (the
“Diversification Requirement”).
It
may not be possible for the Fund to fully implement a replication strategy or a
representative sampling strategy while satisfying the Diversification
Requirement. The Fund’s efforts to satisfy the Diversification Requirement may
affect the Fund’s execution of its investment strategy and may cause the Fund’s
return to deviate from that of the Index, and the Fund’s efforts to represent
the Index using a sampling strategy, if such a strategy is used at any point,
may cause it inadvertently to fail to satisfy the Diversification Requirement.
To
the extent the Fund makes investments that may generate income that is not
qualifying income, the Fund will seek to restrict the resulting income from such
investments so that the Fund’s non-qualifying income does not exceed 10% of its
gross income.
Although
the Fund intends to distribute substantially all of its net investment income
and may distribute its capital gains for any taxable year, the Fund will be
subject to federal income taxation to the extent any such income or gains are
not distributed. The Fund is treated as a separate corporation for federal
income tax purposes. The Fund therefore is considered to be a separate entity in
determining its treatment under the rules for RICs described herein. The
requirements (other than certain organizational requirements) for qualifying RIC
status are determined at the Fund level rather than at the Trust level.
If
the Fund fails to satisfy the Qualifying Income Requirement or the
Diversification Requirement in any taxable year, the Fund may be eligible for
relief provisions if the failures are due to reasonable cause and not willful
neglect, and if a penalty tax is paid with respect to each failure to satisfy
the applicable requirements. Additionally, relief is provided for certain
de
minimis
failures of the Diversification Requirement where the Fund corrects the failure
within a specified period of time. To be eligible for the relief provisions with
respect to a failure to meet the Diversification Requirement, the Fund may be
required to dispose of certain assets. If these relief provisions were not
available to the Fund and it were to fail to qualify for treatment as a RIC for
a taxable year, all of its taxable income would be subject to tax at the regular
21% corporate rate without any deduction for distributions to shareholders, and
its distributions (including capital gains distributions) generally would be
taxable to the shareholders of the Fund as ordinary income dividends, to the
extent of the Fund’s current and accumulated earnings and profits, subject to
the dividends received deduction for corporate shareholders and the lower tax
rates on qualified dividend income received by non-corporate shareholders,
subject to certain limitations. To requalify for treatment as a RIC in a
subsequent taxable year, the Fund would be required to satisfy the RIC
qualification requirements for that year and to distribute any earnings and
profits from any year in which the Fund failed to qualify for tax treatment as a
RIC. If the Fund failed to qualify as a RIC for a period greater than two
taxable years, it would generally be required to pay a Fund-level tax on certain
net built in gains recognized with respect to certain of its assets upon
disposition of such assets within five years of qualifying as a RIC in a
subsequent year. The Board reserves the right not to maintain the qualification
of the Fund for treatment as a RIC if it determines such course of action to be
beneficial to shareholders. If the Fund determines that it will not qualify as a
RIC, the Fund will establish procedures to reflect the anticipated tax liability
in the Fund’s NAV.
The
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, the Fund may carry a
net capital loss from any taxable year forward indefinitely to offset its
capital gains, if any, in years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they will not result in U.S.
federal income tax liability to the Fund and may not be distributed as capital
gains to its shareholders. Generally, the Fund may not carry forward any losses
other than net capital losses. The carryover of capital losses may be limited
under the general loss limitation rules if the Fund experiences an ownership
change as defined in the Code.
As
of December 31, 2023, the Fund had accumulated short-term capital loss
carryforwards in the amount of $3,816,401 and long-term capital loss
carryforwards of $2,384,455. These amounts do not expire.
The
Fund will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year an amount at least equal to 98% of its ordinary income for the
calendar year plus 98.2% of its capital gain net income for the one-year period
ending on October 31 of that year, subject to an increase for any shortfall in
the prior year’s distribution. For this purpose, any ordinary income or capital
gain net income retained by the Fund and subject to corporate income tax will be
considered to have been distributed. The Fund intends to declare and distribute
dividends and distributions in the amounts and at the times necessary to avoid
the application of the excise tax, but the Fund can make no assurances that all
such tax liability will be completely eliminated. For example, the Fund may
receive delayed or corrected tax reporting statements from its investments that
cause the Fund to accrue additional income and gains after the Fund has already
made its excise tax distributions for the year.
In
such a situation, the Fund may incur an excess tax liability resulting from such
delayed receipt of such tax information statements. In addition, the Fund may in
certain circumstances be required to liquidate Fund investments in order to make
sufficient distributions to avoid federal excise tax liability at a time when
the investment adviser might not otherwise have chosen to do so, and liquidation
of investments in such circumstances may affect the ability of the Fund to
satisfy the requirement for qualification as a RIC.
If
the Fund meets the Distribution Requirement but retains some or all of its
income or gains, it will be subject to federal income tax to the extent any such
income or gains are not distributed. The Fund may designate certain amounts
retained as undistributed net capital gain in a notice to its shareholders, who
(i) will be required to include in income for U.S. federal income tax purposes,
as long-term capital gain, their proportionate shares of the undistributed
amount so designated, (ii) will be entitled to credit their proportionate
shares
of the income tax paid by the Fund on that undistributed amount against their
federal income tax liabilities and to claim refunds to the extent such credits
exceed their tax liabilities, and (iii) will be entitled to increase their tax
basis, for federal income tax purposes, in their Shares by an amount equal to
the excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
Taxation
of Shareholders – Distributions.
The Fund intends to distribute annually to its shareholders substantially all of
its investment company taxable income (computed without regard to the deduction
for dividends paid), its net tax-exempt income, if any, and any net capital gain
(net recognized long-term capital gains in excess of net recognized short-term
capital losses, taking into account any capital loss carryforwards). The
distribution of investment company taxable income (as so computed) and net
realized capital gain will be taxable to Fund shareholders regardless of whether
the shareholder receives these distributions in cash or reinvests them in
additional Shares.
The
Fund (or your broker) will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount of distributions of net capital
gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for
treatment as qualified dividend income, which, subject to certain limitations
and requirements, is taxable to non-corporate shareholders at rates of up to
20%. Distributions from the Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares.
Qualified
dividend income includes, in general and, subject to certain holding period and
other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign
corporations include those incorporated in possessions of the United States,
those incorporated in certain countries with comprehensive tax treaties with the
United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market
in the United States. Dividends received by the Fund from an underlying fund
taxable as a RIC may be treated as qualified dividend income generally only to
the extent so reported by such underlying fund. If 95% or more of the Fund’s
gross income (calculated without taking into account net capital gain derived
from sales or other dispositions of stock or securities) consists of qualified
dividend income, the Fund may report all distributions of such income as
qualified dividend income.
Fund
dividends will not be treated as qualified dividend income if the Fund does not
meet holding period and other requirements with respect to dividend paying
stocks in its portfolio, and the shareholder does not meet holding period and
other requirements with respect to the Shares on which the dividends were paid.
Distributions by the Fund of its net short-term capital gains will be taxable as
ordinary income. Distributions from the Fund’s net capital gain will be taxable
to shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares. Distributions may be subject to state and
local taxes.
In
the case of corporate shareholders, certain dividends received by the Fund from
U.S. corporations (generally, dividends received by the Fund in respect of any
share of stock (1) with a tax holding period of at least 46 days during the
91-day period beginning on the date that is 45 days before the date on which the
stock becomes ex-dividend as to that dividend and (2) that is held in an
unleveraged position) and distributed and appropriately so reported by the Fund
may be eligible for the 50% dividends received deduction. Certain preferred
stock must have a holding period of at least 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes
ex-dividend as to that dividend to be eligible. Capital gain dividends
distributed to the Fund from other RICs are not eligible for the dividends
received deduction. To qualify for the deduction, corporate shareholders must
meet the minimum holding period requirement stated above with respect to their
Shares, taking into account any holding period reductions from certain hedging
or other transactions or positions that diminish their risk of loss with respect
to their Shares, and, if they borrow to acquire or otherwise incur debt
attributable to Shares, they may be denied a portion of the dividends received
deduction with respect to those Shares. Since the Fund invests primarily in
securities of non-U.S. issuers, it is not expected that a significant portion of
the dividends received from the Fund will qualify for the dividends-received
deduction for corporations.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by the Fund in October, November or December and payable to
shareholders of record in such a month that is paid during the following January
will be treated for U.S. federal income tax purposes as received by shareholders
on December 31 of the calendar year in which it was declared.
U.S.
individuals with adjusted gross income (subject to certain adjustments)
exceeding certain threshold amounts ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases) are subject to a 3.8%
tax on all or a portion of their “net investment income,” which includes taxable
interest, dividends, and certain capital gains (generally including capital gain
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
Shareholders
who have not held Shares for a full year should be aware that the Fund may
report and distribute, as ordinary dividends or capital gain dividends, a
percentage of income that is not equal to the percentage of the Fund’s ordinary
income or net capital gain, respectively, actually earned during the applicable
shareholder’s period of investment in the Fund. A taxable shareholder may wish
to
avoid
investing in the Fund shortly before a dividend or other distribution, because
the distribution will generally be taxable even though it may economically
represent a return of a portion of the shareholder’s investment.
To
the extent that the Fund makes a distribution of income received by the Fund in
lieu of dividends (a “substitute payment”) with respect to securities on loan
pursuant to a securities lending transaction, such income will not constitute
qualified dividend income to individual shareholders and will not be eligible
for the dividends received deduction for corporate shareholders.
If
the Fund’s distributions exceed its earnings and profits, all or a portion of
the distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in the Fund and result in
a higher capital gain or lower capital loss when the Shares on which the
distribution was received are sold. After a shareholder’s basis in the Shares
has been reduced to zero, distributions in excess of earnings and profits will
be treated as gain from the sale of the shareholder’s Shares.
Taxation
of Shareholders – Sale or Exchange of Shares.
A sale or exchange of Shares may give rise to a gain or loss. For tax purposes,
an exchange of your Fund Shares for shares of a different fund is the same as a
sale. In general, provided that a shareholder holds Shares as capital assets,
any gain or loss realized upon a taxable disposition of Shares will be treated
as long-term capital gain or loss if Shares have been held for more than 12
months. Otherwise, the gain or loss on the taxable disposition of Shares will
generally be treated as short-term capital gain or loss. Any loss realized upon
a taxable disposition of Shares held for six months or less will be treated as
long-term capital loss, rather than short-term capital loss, to the extent of
any amounts treated as distributions to the shareholder of long-term capital
gain (including any amounts credited to the shareholder as undistributed capital
gains). All or a portion of any loss realized upon a taxable disposition of
Shares may be disallowed if substantially identical Shares are acquired (through
the reinvestment of dividends or otherwise) within a 61-day period beginning 30
days before and ending 30 days after the disposition. In such a case, the basis
of the newly acquired Shares will be adjusted to reflect the disallowed loss.
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for Shares and then may be subsequently adjusted for other applicable
transactions as required by the Code. The difference between the selling price
and the cost basis of Shares generally determines the amount of the capital gain
or loss realized on the sale or exchange of Shares. Contact the broker through
whom you purchased your Shares to obtain information with respect to the
available cost basis reporting methods and elections for your account.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. The ability of Authorized
Participants to receive a full or partial cash redemption of Creation Units of
the Fund may limit the tax efficiency of the Fund. An Authorized Participant who
redeems Creation Units will generally recognize a gain or loss equal to the
difference between the exchanger’s basis in the Creation Units and the sum of
the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The Internal Revenue Service (“IRS”),
however, may assert that a loss realized upon an exchange of securities for
Creation Units cannot currently be deducted under the rules governing “wash
sales” (for a person who does not mark-to-market its portfolio) or on the basis
that there has been no significant change in economic position.
Any
capital gain or loss realized upon the creation of Creation Units will generally
be treated as long-term capital gain or loss if the securities exchanged for
such Creation Units have been held for more than one year. Any capital gain or
loss realized upon the redemption of Creation Units will generally be treated as
long-term capital gain or loss if Shares comprising the Creation Units have been
held for more than one year. Otherwise, such capital gains or losses will
generally be treated as short-term capital gains or losses. Any loss upon a
redemption of Creation Units held for six months or less may be treated as
long-term capital loss to the extent of any amounts treated as distributions to
the applicable Authorized Participant of long-term capital gain with respect to
the Creation Units (including any amounts credited to the Authorized Participant
as undistributed capital gains).
The
Trust, on behalf of the Fund, has the right to reject an order for Creation
Units if the purchaser (or a group of purchasers) would, upon obtaining the
Creation Units so ordered, own 80% or more of the outstanding Shares and if,
pursuant to Section 351 of the Code, the Fund would have a basis in the deposit
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require the provision of information
necessary to determine beneficial Share ownership for purposes of the 80%
determination. If the Fund does issue Creation Units to a purchaser (or a group
of purchasers) that would, upon obtaining the Creation Units so ordered, own 80%
or more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation Units.
Authorized
Participants purchasing or redeeming Creation Units should consult their own tax
advisers with respect to the tax treatment of any creation or redemption
transaction and whether the wash sales rule applies and when a loss may be
deductible.
Taxation
of Fund Investments.
Certain of the Fund’s investments may be subject to complex provisions of the
Code (including provisions relating to hedging transactions, straddles,
integrated transactions, foreign currency contracts, forward foreign currency
contracts,
and notional principal contracts) that, among other things, may affect the
Fund’s ability to qualify as a RIC, may affect the character of gains and losses
realized by the Fund (e.g.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require the Fund to mark to market certain types of
positions in its portfolio (i.e.,
treat them as if they were closed out) which may cause the Fund to recognize
income without the Fund receiving cash with which to make distributions in
amounts sufficient to enable the Fund to satisfy the RIC distribution
requirements for avoiding income and excise taxes. The Fund intends to monitor
its transactions, intends to make appropriate tax elections, and intends to make
appropriate entries in its books and records to mitigate the effect of these
rules and preserve the Fund’s qualification for treatment as a RIC. To the
extent the Fund invests in an underlying fund that is taxable as a RIC, the
rules applicable to the tax treatment of complex securities will also apply to
the underlying funds that also invest in such complex securities and
investments.
Certain
Foreign Currency Tax Issues. The
U.S. Treasury Department has authority to issue regulations that would exclude
foreign currency gains from the Diversification Requirement described above if
such gains are not directly related to the Fund’s business of investing in stock
or securities. Accordingly, regulations may be issued in the future that could
treat some or all of the Fund’s non-U.S. currency gains as non-qualifying
income, thereby potentially jeopardizing the Fund’s status as a RIC for all
years to which the regulations are applicable.
Under
Section 988 of the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such income or receivables or
pays such expenses or liabilities generally are treated as ordinary income or
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain other financial instruments (such as
forward currency contracts and currency swaps), gains or losses attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security or contract and the date of settlement or
disposition are also treated as ordinary gain or loss. The gains and losses may
increase or decrease the amount of the Fund’s income to be distributed to its
shareholders as ordinary income. The Fund may elect out of the application of
Section 988 of the Code with respect to the tax treatment of each of its foreign
currency forward contracts to the extent that (i) such contract is a capital
asset in the hands of the Fund and is not part of a straddle transaction and
(ii) the Fund makes an election by the close of the day the contract is entered
into to treat the gain or loss attributable to such contract as capital gain or
loss.
Foreign
Investments.
Dividends and interest received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax treaties between certain countries and the U.S. may reduce or
eliminate such taxes. The Fund does not expect to satisfy the requirements for
passing through to its shareholders any share of foreign taxes paid by the Fund,
with the result that shareholders will not include such taxes in their gross
incomes and will not be entitled to a tax deduction or credit for such taxes on
their own tax returns.
If
more than 50% of the value of the Fund’s assets at the close of any taxable year
consists of stock or securities of foreign corporations, which for this purpose
may include obligations of foreign governmental issuers, the Fund may elect, for
U.S. federal income tax purposes, to treat any foreign income or withholding
taxes paid by the Fund as paid by its shareholders. For any year that the Fund
is eligible for and makes such an election, each shareholder of the Fund will be
required to include in income an amount equal to his or her allocable share of
qualified foreign income taxes paid by the Fund, and shareholders will be
entitled, subject to certain holding period requirements and other limitations,
to credit their portions of these amounts against their U.S. federal income tax
due, if any, or to deduct their portions from their U.S. taxable income, if any.
No deductions for foreign taxes paid by the Fund may be claimed, however, by
non-corporate shareholders who do not itemize deductions. No deduction for such
taxes will be permitted to individuals in computing their alternative minimum
tax liability. Foreign taxes paid by the Fund will reduce the return from the
Fund’s investments.
Foreign
tax credits, if any, received by the Fund as a result of an investment in
another RIC (including an ETF or underlying fund which is taxable as a RIC) will
not be passed through to you unless the Fund qualifies as a “qualified
fund-of-funds” under the Code. If the Fund is a “qualified fund-of-funds” it
will be eligible to file an election with the IRS that will enable the Fund to
pass along these foreign tax credits to its shareholders. The Fund will be
treated as a “qualified fund-of-funds” under the Code if at least 50% of the
value of such Fund’s total assets (at the close of each quarter of the Fund’s
taxable year) is represented by interests in other RICs.
If
the Fund holds shares in a “passive foreign investment company” (“PFIC”), it may
be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains.
The
Fund may be eligible to treat a PFIC as a “qualified electing fund” (“QEF”)
under the Code in which case, in lieu of the foregoing requirements, the Fund
will be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts will be subject to the 90% and excise
tax distribution
requirements
described above. To make this election, the Fund would be required to obtain
certain annual information from the PFICs in which it invests, which may be
difficult or impossible to obtain. Alternatively, the Fund may make a
mark-to-market election that will result in such Fund being treated as if it had
sold and repurchased its PFIC stock at the end of each year. In such case, the
Fund would report any gains resulting from such deemed sales as ordinary income
and would deduct any losses resulting from such deemed sales as ordinary losses
to the extent of previously recognized gains. The election must be made
separately for each PFIC owned by the Fund and, once made, is effective for all
subsequent taxable years, unless revoked with the consent of the IRS. By making
the election, the Fund could potentially ameliorate the adverse tax consequences
with respect to its ownership of shares in a PFIC, but in any particular year
may be required to recognize income in excess of the distributions it receives
from PFICs and its proceeds from dispositions of PFIC stock. The Fund may have
to distribute this excess income to satisfy the 90% distribution requirement and
to avoid imposition of the 4% excise tax. To distribute this income and avoid a
tax at the fund level, the Fund might be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss. Amounts included in income each year by the
Fund arising from a QEF election, will be “qualifying income” under the
Qualifying Income Requirement (as described above) even if not distributed to
the Fund, if the Fund derives such income from its business of investing in
stock, securities or currencies.
Backup
Withholding.
The Fund will be required in certain cases to withhold (as “backup withholding”)
on amounts payable to any shareholder who (1) fails to provide a correct
taxpayer identification number certified under penalty of perjury; (2) is
subject to backup withholding by the IRS for failure to properly report all
payments of interest or dividends; (3) fails to provide a certified statement
that he or she is not subject to “backup withholding;” or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident
alien). The backup withholding rate is currently 24%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on
shareholders who are neither citizens nor permanent residents of the United
States.
Non-U.S.
Shareholders.
Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisors prior to investing in the
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
The Fund may, under certain circumstances, report all or a portion of a dividend
as an “interest-related dividend” or a “short-term capital gain dividend,” which
would generally be exempt from this 30% U.S. withholding tax, provided certain
other requirements are met. Short-term capital gain dividends received by a
nonresident alien individual who is present in the U.S. for a period or periods
aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders from the sale or
other disposition of Shares generally are not subject to U.S. taxation, unless
the recipient is an individual who is physically present in the U.S. for 183
days or more per year. Foreign shareholders who fail to provide an applicable
IRS form may be subject to backup withholding on certain payments from the Fund.
Backup withholding will not be applied to payments that are subject to the 30%
(or lower applicable treaty rate) withholding tax described in this paragraph.
Different tax consequences may result if the foreign shareholder is engaged in a
trade or business within the United States. In addition, the tax consequences to
a foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
Unless
certain non-U.S. entities that hold Shares comply with IRS requirements that
will generally require them to report information regarding U.S. persons
investing in, or holding accounts with, such entities, a 30% withholding tax may
apply to Fund distributions payable to such entities. A non-U.S. shareholder may
be exempt from the withholding described in this paragraph under an applicable
intergovernmental agreement between the U.S. and a foreign government, provided
that the shareholder and the applicable foreign government comply with the terms
of the agreement.
For
foreign shareholders to qualify for an exemption from backup withholding,
described above, the foreign shareholder must comply with special certification
and filing requirements. Foreign shareholders in the Fund should consult their
tax advisors in this regard.
Tax-Exempt
Shareholders.
Certain tax-exempt shareholders, including qualified pension plans, IRAs, salary
deferral arrangements, 401(k) plans, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated
business taxable income (“UBTI”). Tax-exempt entities are not permitted to
offset losses from one unrelated trade or business against the income or gain of
another unrelated trade or business. Certain net losses incurred prior to
January 1, 2018 are permitted to offset gain and income created by an
unrelated trade or business, if otherwise available. Under current law, the Fund
generally serves to block UBTI from being realized by its tax-exempt
shareholders with respect to their shares of Fund income. However,
notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by
virtue of their investment in the Fund if, for example, (i) the Fund
invests in residual interests of Real Estate Mortgage Investment Conduits
(“REMICs”), (ii) the Fund invests in a REIT that is a taxable mortgage pool
(“TMP”) or that has a subsidiary that is a TMP or that invests in the residual
interest of a REMIC, or (iii) Shares constitute debt-financed property in the
hands of the tax-exempt shareholders within the meaning of section 514(b) of the
Code. Charitable remainder trusts are subject to special rules and should
consult their tax advisers. The IRS has issued guidance with respect
to
these issues and prospective shareholders, especially charitable remainder
trusts, are strongly encouraged to consult with their tax advisers regarding
these issues.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss on
disposition of Shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on IRS Form 8886. Direct shareholders of portfolio securities are in
many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
Other
Issues.
In those states which have income tax laws, the tax treatment of the Fund and of
Fund shareholders with respect to distributions by the Fund may differ from
federal tax treatment.
FINANCIAL
STATEMENTS
The
Annual
Report
for the Fund for the fiscal year ended December 31, 2023 is a separate
document, and the respective financial statements and accompanying notes
appearing therein are incorporated by reference into this SAI. You may request a
copy of the Fund’s Annual Report at no charge by calling 1‑800‑617‑0004 or
through the Fund’s website at etfs.grayscale.com/gfof.
APPENDIX
A
GRAYSCALE
ADVISORS, LLC
PROXY
VOTING POLICY AND PROCEDURES
Introduction
SEC
Rule 206(4)-6 of the Advisors Act (the “Proxy Rule”) requires SEC-registered
investment Advisors that exercises voting authority with respect to client
securities to: (i) adopt written policies reasonably designed to ensure that the
investment Advisor votes in the best interest of its clients and addresses how
the investment Advisor will deal with material conflicts of interest that may
arise between the investment Advisor and its clients; (ii) disclose to its
clients information about such policies and procedures; and (iii) upon request,
provide information on how proxies were voted. The Advisor has retained
Institutional Shareholder Services (“ISS”), a third-party industry leader in
proxy services, to facilitate their proxy voting, record keeping and reporting
services. ISS on behalf of the Advisor is responsible for receiving copies of
proxies on behalf of the Advisor.
Policy
The
Advisor has delegated responsibility for the administration of proxy voting to
ISS, a Delaware Corporation.
Responsibilities
of ISS:
a.process
all proxies received in connection with underlying portfolio securities held by
the Advisor’s clients;
b.apply
ISS’ proxy voting procedures, which the Advisor has reviewed and determined to
be consistent with the views of the Advisor on the various types of proxy
proposals;
c.maintain
appropriate records of proxy voting that are easily-accessible by appropriate
authorized persons of ISS; and
d.in
cases where ISS cannot provide a recommendation, they will notify the Advisor,
or
otherwise
will vote “No.”
Responsibilities
of the Advisor:
The
Advisor, as appropriate, will authorize and instruct each Client’s custodian to
forward all proxy statements and ballots directly to ISS, who votes the proxies.
The Advisor reviews and updates ISS’ Client list on a periodic
basis.
When
ISS does not provide a recommendation, ISS notifies the Advisor. The CCO, their
designee or the COO will determine whether the Advisor should vote the proxy. In
determining whether to vote a particular proxy, the Advisor will consider a
variety of factors and will apply the following guidelines, as
applicable:
•The
Firm will attempt to consider all aspects of the vote that could affect the
value of the issuer or that of the Client, including the costs associated with
voting;
•The
Firm may choose not to vote securities where it determines the issues being
voted on are immaterial to the value of the issuer;
•The
Firm will vote in a manner that it believes is consistent with the Client’s
stated objectives; and
•The
Firm will generally vote in accordance with the recommendation of the issuing
company’s management on routine and administrative matters, unless the Firm has
a particular reason to vote to the contrary.
Conflicts
of Interest related to Proxy Voting
ISS
issues voting recommendations and casts proxy votes strictly in accordance with
pre-determined proxy voting guidelines, which the Advisor believes is in the
best interests of their clients. The adherence to pre- determined proxy voting
guidelines by the Advisor and ISS helps reduce conflicts of interests and helps
ensure that proxy votes are cast in accordance with the best interests of the
Advisor’s clients. If a proxy proposal were to create a conflict of interest
between the interests of a client and those of the Advisor, the proxy will be
voted strictly in conformity with the recommendation of ISS.
To
the extent that ISS has a conflict of interest as it relates to the
recommendation of a proxy proposal, the Advisor has established measures
reasonably designed to identify and address ISS’ conflict of interest. The
Advisor has contractually agreed with ISS such
that
ISS is required to immediately notify the Advisor if ISS believes there exists a
conflict with its own obligation to issue proxy proposal recommendations. Such
notice shall contain a disclosure which shall enable the Advisor to understand
the relationship or interest and the steps taken by ISS to mitigate the conflict
and to make an assessment of the reliability or objectivity of the
recommendation. The Advisor shall also periodically review the ISS report
detailing the reasoning behind particular proposal recommendations and in
instances where the Advisor determines the reasoning is biased or otherwise
inconsistent with ISS’ obligations, the Advisor shall review and vote such proxy
proposals without regard to ISS, with a goal of identifying any material
relationships with publicly traded companies that may create potential conflicts
of interest in the future. The Advisor will memorialize instances where they
were conflicted and instances where the Advisor or ISS determine that ISS is
conflicted.
To
monitor compliance with these procedures, any proposed or actual deviation from
a recommendation of ISS must be reported to the CCO of the Advisor. The CCO of
the Advisor would then provide guidance concerning the proposed deviation and
whether this deviation presents any potential conflict of interest.
In
the case of the GFOF ETF, the Advisor shall report each deviation from an ISS
recommendation regarding a proxy received in connection with underlying
portfolio securities held by a Portfolio to the ESS Trust at the next formal
meeting of the Board.
Voting
Information and Recordkeeping
Under
the Books and Records Rule, the Firm must retain: (i) its voting policies and
procedures; (ii) corporate action and proxy statements received; (iii) records
of votes cast; (iv) records of its Clients’ requests for voting information; and
(v) any documents prepared by the Firm that were material to making a decision
on how to vote. All votes will be documented and maintained by the
CCO.
Further,
Rule 30b1-4 under the 1940 Act requires registered investment companies to file
their complete proxy voting records on Form N-PX for the 12-month period ended
June 30 by August 31 of each year. As it relates to the GFOF ETF, the Advisor
will review all reports on Form N-PX and will cooperate with the ESS Trust
Platform Board and U.S. Bancorp Fund Services, LLC in preparation and filing of
such reports.