VICTORYSHARES
STATEMENT OF ADDITIONAL INFORMATION
STATEMENT OF ADDITIONAL INFORMATION
November
1, 2023
|
VictoryShares
US 500 Volatility Wtd ETF |
CFA |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
CSA |
|
VictoryShares
International Volatility Wtd ETF |
CIL |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
CDL |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
CSB |
|
VictoryShares
International High Div Volatility Wtd ETF |
CID |
|
VictoryShares
Dividend Accelerator ETF |
VSDA |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
VSMV |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
CFO |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
CDC |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
CSF |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
CIZ |
|
VictoryShares
Nasdaq Next 50 ETF |
QQQN |
|
VictoryShares
WestEnd U.S. Sector ETF |
MODL |
(each
a “Fund” and together, the “Funds”)
Each
Fund is a series of Victory Portfolios II (the “Trust”)
Listed
and traded on:
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with each Fund’s prospectus, dated
November 1, 2023, as it may be amended or supplemented from time to time (each,
a “Prospectus”). This SAI is incorporated by reference in its entirety into each
Prospectus. Copies of the Prospectus of each Fund can be obtained without charge
upon request made to Victory Funds, P.O. Box 182593, Columbus, OH 43218-2593, at
VictorySharesLiterature.com or by calling toll free 1-866-376-7890.
The
financial statements for each Fund and the Independent Registered Public
Accounting Firm's Report thereon for the fiscal year ended
June 30, 2023, are included in the respective Fund's annual report to
shareholders of that date and are incorporated herein by reference. The
annual report to shareholders is available, without charge, on the Fund’s
website at VictorySharesLiterature.com or by writing to the address or calling
the Trust at the above address or toll-free phone number.
The
Funds are each diversified series of the Trust (formerly named “Compass EMP
Funds Trust”), a Delaware statutory trust organized on April
11, 2012. The Trust is registered as an open-end management investment company.
The Trust currently consists of 26 series of beneficial interests (“shares”).
This SAI relates to the shares of 14 series of the Trust (each a "Fund," and
collectively, the "Funds").
Victory
Capital Management Inc. (the “Adviser” or “Victory Capital”) is the Funds’
investment adviser. Each Fund’s investment objective(s),
restrictions and policies are more fully described below and in the Fund’s
Prospectus. The Trust’s Board of Trustees (the “Board” or “Trustees”) may
organize and offer shares of a new fund or liquidate a Fund at any
time.
Much
of the information contained in this SAI expands on subjects discussed in each
Fund’s Prospectus. Capitalized terms not defined herein are
used as defined in the Prospectuses. No investment in shares of a Fund should be
made without first reading that Fund’s Prospectus.
In this
SAI, we refer to the following Funds collectively as the “International
Funds”:
• VictoryShares
International Volatility Wtd ETF,
• VictoryShares
International High Div Volatility Wtd ETF,
• VictoryShares
Developed Enhanced Volatility Wtd ETF, and
We refer
to the following Funds collectively as the “Volatility Weighted Index
Funds”:
• VictoryShares
US 500 Volatility Wtd ETF,
• VictoryShares
US Small Cap Volatility Wtd ETF,
• VictoryShares
International Volatility Wtd ETF,
• VictoryShares
US Large Cap High Div Volatility Wtd ETF,
• VictoryShares
US Small Cap High Div Volatility Wtd ETF,
• VictoryShares
International High Div Volatility Wtd ETF,
• VictoryShares
US Discovery Enhanced Volatility Wtd ETF,
• VictoryShares
US 500 Enhanced Volatility Wtd ETF,
• VictoryShares
Developed Enhanced Volatility Wtd ETF,
• VictoryShares
US EQ Income Enhanced Volatility Wtd ETF.
• We refer
to the following Fund as a Thematic ETF:
• VictoryShares
Nasdaq Next 50 ETF (the “Next 50 Fund”).
(Some
International Funds are also Volatility Weighted Index Funds.)
The
Funds’ shares (with the exception of the Next 50 Fund and the WestEnd U.S.
Sector ETF (“U.S. Sector Fund”) are offered at net asset
value (“NAV”) only in aggregations of 50,000 shares (each a “Creation Unit”).
The Next 50 Fund's shares are offered at NAV only in aggregations of 25,000
shares per Creation Unit. The U.S. Sector Fund’s shares are offered at NAV only
in aggregations of 10,000 shares per Creation Unit. The Funds will issue and
redeem Creation Units principally in exchange for a basket of securities
included in the respective Fund’s underlying index (the “Deposit Securities”),
together with the deposit of a specified cash payment (the “Cash Component”),
plus a transaction fee. The Funds are approved for listing on The Nasdaq Stock
Market LLC (“NASDAQ” or the “Exchange”). Shares trade on the Exchange at market
prices that may be below, at, or above NAV. The Trust reserves the right to
adjust the prices of shares in the future to maintain convenient trading ranges
for investors. Any adjustments would be accomplished through stock splits or
reverse stock splits, which would have no effect on the net assets of the
applicable Fund.
The
Funds reserve the right to offer creations and redemptions of shares for cash.
In addition, 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 a cash value equal to at least 105% of the market value
of the missing Deposit Securities. In each instance of such cash creations or
redemptions, transaction fees may be imposed and may be higher than the
transaction fees associated with in-kind creations or redemptions. See “Purchase
and Redemption of Shares” below.
1
Shares of
each Fund are listed for trading and trade throughout the day on
NASDAQ.
In
order to provide additional information regarding the indicative value of shares
of the Funds, the Exchange or a market data vendor will
disseminate every 15 seconds through the facilities of the Consolidated Tape
Association or other widely disseminated means an updated “intraday indicative
value” (“IIV”) for the Funds as calculated by an information provider or market
data vendor. The Trust is not involved in or responsible for any aspect of the
calculation or dissemination of the IIV and makes no representation or warranty
as to the accuracy of the IIV.
INVESTMENT
OBJECTIVES, POLICIES, AND LIMITATIONS
Investment
Objectives
Each
Fund’s investment objective is non-fundamental, meaning it may be changed by a
vote of the Trustees without a vote of the holders of
a majority of the Fund’s outstanding voting securities. There can be no
assurance that a Fund will achieve its investment objective.
Investment
Policies and Limitations of the Funds
Unless
a policy of a Fund is expressly deemed to be a fundamental policy, changeable
only by an affirmative vote of the holders of a majority
of that Fund’s outstanding voting securities, the Fund’s policies are
non-fundamental and may be changed without a shareholder vote.
A
Fund may, following notice to its shareholders, employ other investment
practices that presently are not contemplated for use by the Fund or
that currently are not available but that may be developed to the extent such
investment practices are both consistent with the Fund’s investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks that exceed those involved in the activities described in the
Fund’s Prospectus.
A
Fund’s classification and sub-classification is a matter of fundamental policy.
Each Fund is classified as an open-end investment company.
Each Fund is sub-classified as a diversified investment company, which under the
Investment Company Act of 1940, as amended (“1940 Act”) means that, with respect
to 75% of a Fund’s total assets, the Fund may not invest in securities of any
issuer if, immediately after such investment, (i) more than 5% of the total
assets of the Fund (taken at current value) would be invested in the securities
of that issuer or (ii) more than 10% of the outstanding voting securities of the
issuer would be held by the Fund (this limitation does not apply to obligations
of the U.S. government, its agencies or instrumentalities, and securities of
other investment companies). A diversified fund is not subject to this
limitation with respect to the remaining 25% of its total assets. In addition,
each Fund has elected to qualify as a “regulated investment company” under the
United States Internal Revenue Code of 1986, as amended (the “Code”). To qualify
as a regulated investment company, the Funds must meet certain diversification
requirements as determined at the close of each quarter of each taxable year.
The Code’s diversification test is described in “TAXES.”
The
policies and limitations stated in this SAI supplement the Funds’ investment
policies set forth in each Fund’s Prospectus. Unless otherwise
noted, whenever an investment policy or limitation states a maximum percentage
of a Fund’s assets that may be invested in any security or other asset, or sets
forth a policy regarding quality standards, such standard or percentage
limitation will be determined immediately after and as a result of the Fund’s
acquisition of such security or other asset except in the case of borrowing (or
other activities that may be deemed to result in the issuance of a “senior
security” under the 1940 Act). Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining whether
the investment complies with a Fund’s investment policies and limitations. If
the value of a Fund’s holdings of illiquid investments at any time exceeds the
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board will consider what actions, if
any, are appropriate to maintain adequate liquidity.
Fundamental
Investment Policies and Limitations of the Funds
The
following investment policies and limitations are fundamental and may not be
changed without the affirmative vote of the holders of a
majority of the Fund’s outstanding voting securities, as defined under the 1940
Act. Under the 1940 Act, the vote of a majority of the outstanding voting
securities of a Fund means the affirmative vote of the lesser of (a) 67% or more
of the shares of the Fund present at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are represented in person or by proxy,
or (b) more than 50% of the outstanding shares of the Fund. Portions of the
Funds’ fundamental investment restrictions (e.g., references to “except as
permitted under the 1940 Act, and as interpreted or modified from time to time
by regulatory authorities having jurisdiction”) provide the Funds with
flexibility to change limitations in connection with changes in applicable law,
rules, regulations, or exemptive relief. The language used in these restrictions
provides the necessary flexibility to allow the Board to respond efficiently to
these kinds of developments without the delay and expense of a shareholder
meeting.
2
Senior
Securities
For the
Volatility Weighted Index Funds:
Each Fund
may not issue senior securities.
For all
other Funds:
None
of the Funds may issue senior securities, except as permitted under the 1940
Act, and as interpreted or modified from time to time by
regulatory authorities having jurisdiction.
This
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Fund, provided
that the Fund’s engagement in such activities is consistent with or permitted by
the 1940 Act the rules and regulations promulgated thereunder or interpretations
of the Securities and Exchange Commission (“SEC”) or its staff.
Rule
18f-4 under the 1940 Act permits a Fund to enter into Derivatives Transactions
(as defined below) and certain other transactions notwithstanding
the restrictions on the issuance of “senior securities” under Section 18 of the
1940 Act. Section 18 of the 1940 Act, among other things, prohibits open-end
funds, including the Funds, from issuing or selling any “senior security,” other
than borrowing from a bank (subject to a requirement to maintain 300% “asset
coverage”).
Under
Rule 18f-4, “Derivatives Transactions” include the following: (1) any swap,
security-based swap (including a contract for differences),
futures contract, forward contract, option (excluding purchased options), any
combination of the foregoing, or any similar instrument, under which the Fund is
or may be required to make any payment or delivery of cash or other assets
during the life of the instrument or at maturity or early termination, whether
as margin or settlement payment or otherwise; (2) any short sale borrowing; (3)
reverse repurchase agreements and similar financing transactions (e.g., recourse
and non-recourse tender option bonds, and borrowed bonds), if the Fund elects to
treat these transactions as Derivatives Transactions under Rule 18f-4; and (4)
when-issued or forward-settling securities (e.g., firm and standby commitments,
including to-be-announced (“TBA”) commitments, and dollar rolls) and
non-standard settlement cycle securities, unless a Fund intends to physically
settle the transaction and the transaction will settle within 35 days of its
trade date.
Unless
a Fund is relying on the Limited Derivatives User Exception (as defined below),
a Fund must comply with Rule 18f-4 with respect to
its Derivatives Transactions. Rule 18f-4, among other things, requires the Funds
to adopt and implement a comprehensive written derivatives risk management
program (“DRMP”) and comply with a relative or absolute limit on Fund leverage
risk calculated based on value-at-risk (“VaR”). The DRMP is administered by a
“derivatives risk manager,” who is appointed by the Board, including a majority
of Independent Trustees, and periodically reviews the DRMP and reports to the
Board.
Rule
18f-4 provides an exception from the DRMP, VaR limit and certain other
requirements if the Fund’s “derivatives exposure” (as defined in
Rule 18f-4) is limited to 10% of its net assets (as calculated in accordance
with Rule 18f-4) and the Fund adopts and implements written policies and
procedures reasonably designed to manage its derivatives risks (the “Limited
Derivatives User Exception”).
As of the
date of this SAI, each Fund relies on the Limited Derivatives User
Exception.
Borrowing
For the
Volatility Weighted Index Funds:
Each
Fund may not borrow money, except (a) from a bank, provided that immediately
after such borrowing there is an asset coverage
of 300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that such temporary borrowings are in an
amount not exceeding 5% of the Fund’s total assets at the time when the
borrowing is made. This limitation does not preclude the Fund from entering into
reverse repurchase transactions, provided that the Fund has an asset coverage of
300% for all borrowings and repurchase commitments of the Fund pursuant to
reverse repurchase transactions.
For all
other Funds:
None
of the Funds may borrow money, except as permitted under the 1940 Act, or by
order of the SEC and as interpreted or modified from time
to time by regulatory authorities having jurisdiction.
A
Fund’s ability to borrow money is limited by its investment policies and
limitations, by the 1940 Act, and by applicable exemptions,
no action letters, interpretations, and other pronouncements issued from time to
time by regulatory authorities, including the SEC and its staff. Under the 1940
Act, a fund is required to maintain continuous asset coverage (that is, total
assets including the proceeds of borrowings, less liabilities excluding
borrowings) of not less than 300% of the amount borrowed, with an exception for
borrowings not in excess of 5% of the fund’s total assets made for temporary
purposes. Any borrowings for temporary purposes
3
in
excess of 5% are subject to the minimum 300% asset coverage requirement. If the
value of the assets set aside to meet the 300 percent
asset coverage were to decline below 300% due to market fluctuations or other
causes, a Fund may be required to sell some of its portfolio holdings within
three days (excluding Sundays and holidays) to reduce the debt and comply with
the 300% minimum asset coverage requirement, even in circumstances where it is
considered disadvantageous from an investment perspective to sell securities at
that time or at the prices then available.
Underwriting,
Purchasing Securities on Margin, or Participating on a Joint Basis
For the
Volatility Weighted Index Funds:
Each
Fund may not purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or
underwrite securities. This limitation does not preclude the Fund from obtaining
such short-term credit as may be necessary for the clearance of purchases and
sales of its portfolio securities, and except to the extent that the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended (“1933 Act”),
by virtue of disposing of portfolio securities.
For all
other Funds:
None
of the Funds may underwrite securities issued by others, except to the extent
that a Fund may be considered an underwriter within the
meaning of the 1933 Act, in the disposition of restricted
securities.
Real
Estate
For the
Volatility Weighted Index Funds:
Each
Fund may not purchase or sell real estate or interests in real estate. This
limitation is not applicable to investments in marketable
securities that are secured by or represent interests in real estate. This
limitation does not preclude the Fund from investing in mortgage-related
securities or investing in companies engaged in the real estate business or that
have a significant portion of their assets in real estate (including real estate
investment trusts).
For all
other Funds:
None
of the Funds may purchase or sell real estate unless acquired as a result of
direct ownership of securities or other instruments. This
restriction shall not prevent any of these Funds from investing in the
following: (i) securities or other instruments backed by real estate; (ii)
securities of real estate operating companies; or (iii) securities of companies
engaged in the real estate business, including real estate investment trusts.
This restriction does not preclude any of these Funds from buying securities
backed by mortgages on real estate or securities of companies engaged in such
activities.
Concentration
For the
Volatility Weighted Index Funds:
Each
Fund may not invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry or group
of related industries. This limitation does not apply to investments in the
securities of the U.S. government, its agencies or
instrumentalities.
For all
other Funds (with the exception of the Next 50 Fund and U.S. Sector
Fund):
None
of the Funds may concentrate its investments in a particular industry, as the
term “concentration” is used in the 1940 Act, and as
interpreted or modified from time to time by regulatory authorities having
jurisdiction. This restriction shall not prevent any Fund from investing all of
its assets in a “master” fund that has adopted similar investment objectives,
policies, and restrictions.
The Next
50 Fund:
The
Next 50 Fund may concentrate its investments in a particular industry, as the
term “concentration” is used in the 1940 Act, and as
interpreted or modified from time to time by regulatory authorities having
jurisdiction, to the extent its index concentrates in a particular industry or
group of industries.
The U.S.
Sector Fund:
The
U.S. Sector Fund may not concentrate its investments in a particular industry or
group of industries, as the term “concentration” is used in
the 1940 Act, and as interpreted or modified from time to time by regulatory
authorities having jurisdiction. This restriction shall not prevent the Fund
from investing all of its assets in a “master” fund that has adopted similar
investment objectives, policies, and restrictions.
4
For
purposes of compliance with this investment policy, the U.S. Sector Fund will
generally use the industry group classifications provided
by GICS® to
determine the industries and groups of industries into which the U.S. Sector
Fund’s investments fall, except that for purposes of applying the U.S. Sector
Fund’s fundamental investment policy concerning concentration, it is a matter of
non-fundamental investment policy that:
• companies
in the Communication Services GICS® sector
will be classified into the following groups of industries: Media &
Entertainment, Interactive Technology, and Telecommunication Services (i.e., the
Media & Entertainment, Interactive Technology, and Telecommunication
Services will each be considered a separate group of industries);
• companies
in the Energy GICS® sector
will be classified into the following groups of industries: Energy Equipment
& Services, and Oil, Gas & Consumable Fuels (i.e., the Energy Equipment
& Services, and Oil, Gas & Consumable Fuels will each be considered a
separate group of industries);
• companies
in the Materials GICS® sector
will be classified into the following groups of industries: Chemicals,
Construction Materials, Containers & Packaging, Metals & Mining, and
Paper & Forest Products (i.e., the Chemicals, Construction Materials,
Containers & Packaging, Metals & Mining, and Paper & Forest Products
will each be considered a separate group of industries);
• companies
in the Industrials GICS® sector
will be classified into the following groups of industries: Aerospace &
Defense Capital Goods, Other Industrial Capital Goods, Commercial &
Professional Services, and Transportation (i.e., Aerospace & Defense Capital
Goods, Other Industrial Capital Goods, Commercial & Professional Services,
and Transportation will each be considered a separate group of industries);
and
• companies
in the Real Estate GICS® sector
will be classified into the following groups of industries: Equity Real Estate
Investment Trusts (REITs), and Real Estate Management & Development (i.e.,
the Equity Real Estate Investment Trusts (REITs), and Real Estate Management
& Development will each be considered a separate group of
industries);
• companies
in the Utilities GICS® sector
will be classified into the following groups of industries: Electric Utilities
and Non-Electric Utilities (i.e., Electric Utilities and Non-Electric Utilities
will each be considered a separate group of industries).
The
set of groups of industries used by the Adviser with respect to the U.S. Sector
Fund may change over time and without notice to
investors, and in certain cases, may differ from the set of groups of industries
used by the Adviser with respect to other funds managed by the Adviser. The U.S.
Sector Fund will not treat other investment companies as a particular industry
for purposes of its concentration policy. In addition, to the extent the U.S.
Sector Fund invests in securities of other open- or closed-end investment
companies, including ETFs, the U.S. Sector Fund will consider the investments
held in the portfolios of those underlying open- and closed-end investment
companies, to the extent known by the U.S. Sector Fund, in determining whether
the U.S. Sector Fund is concentrated in a particular industry or group of
industries. In the case of unaffiliated underlying open- and closed-end
investment companies, that determination will be based on portfolio information
made publicly available.
Concentration
means investing more than 25% of a Fund’s net assets in a particular industry or
a specified group of industries.
Commodities
For the
Volatility Weighted Index Funds:
Each
Fund may not purchase or sell commodities (unless acquired as a result of
ownership of securities or other investments or through
commodity futures contracts or options), except that the Fund may purchase and
sell futures contracts and options to the full extent permitted under the 1940
Act, sell foreign currency contracts in accordance with any rules of the
Commodity Futures Trading Commission, invest in securities or other instruments
backed by commodities, and invest in companies that are engaged in a commodities
business or have a significant portion of their assets in
commodities.
For all
other Funds:
None
of the Funds may purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments
(but this shall not prevent a Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities).
5
Lending
For the
Volatility Weighted Index Funds:
Each
Fund may not make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives
and policies, (b) to the extent the entry into a repurchase agreement is deemed
to be a loan, and (c) by loaning portfolio securities.
For all
other Funds:
None
of the Funds may make loans, except as permitted under the 1940 Act, and as
interpreted or modified from time to time by regulatory
authorities having jurisdiction. Generally, the 1940 Act prohibits loans if a
fund’s investment policies do not permit loans, and if the loans are made,
directly or indirectly, to persons deemed to control or to be under common
control with the registered investment company.
Non-Fundamental
Investment Policies and Limitations of the Funds
The
following investment policies restrictions are non-fundamental and may be
changed by a vote of a majority of the Trustees.
For all
Funds except the U.S. Sector Fund:
• No Fund
may purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(F) or Section
12(d)(1)(G) of the 1940 Act, which permits operation as a “fund of funds.”
Except as provided in the next paragraph and below in “Securities of Other
Investment Companies,” none of the Funds may: (1) invest more than 5% of its
total assets in the securities of any one investment company; (2) own more than
3% of the securities of any one investment company; or (3) invest more than 10%
of its total assets in the securities of other investment
companies.
For the
U.S. Sector Fund:
• The Fund
may not purchase the securities of other registered investment companies, except
as permitted under the 1940 Act, and as interpreted or modified from time to
time by regulatory authorities having jurisdiction. As a matter of policy,
however, the Fund will not purchase shares of any registered open-end investment
company or registered unit investment trust, in reliance on Section 12(d)(1)(F)
or (G) (the “fund of funds” provisions) of the 1940 Act, at any time the Fund
has knowledge that its shares are purchased by another investment company
investor in reliance on the provisions of subparagraph (G) of Section
12(d)(1).
For all
Funds:
• Each Fund
may purchase and redeem shares issued by a money market fund without limit,
provided that either: (1) the acquiring Fund pays no “sales charge” or “service
fee” (as each of those terms is defined in the FINRA Conduct Rules); or (2) the
Adviser waives its advisory fee in an amount necessary to offset any such sales
charge or service fee. For purposes of this investment restriction, a “money
market fund” is either: (1) an open-end investment company registered under the
1940 Act and regulated as a money market fund in accordance with Rule 2a-7 under
the 1940 Act; or (2) a company that is exempt from registration as in investment
company under Sections 3(c)(1) or 3(c)(7) of the 1940 Act and that: (a) limits
its investments to those permitted under Rule 2a-7 under the 1940 Act; and (b)
undertakes to comply with all the other requirements of Rule 2a-7, except that,
if the company has no board of directors, the company’s investment adviser
performs the duties of the board of directors.
For the
Volatility Weighted Index Funds:
• No Fund
may invest, in the aggregate, more than 15% of its net assets in securities with
legal or contractual restrictions on resale, securities which are not readily
marketable and repurchase agreements with more than seven days to maturity.
However, if more than 15% of Fund net assets are illiquid, the Fund’s investment
adviser(s) will reduce illiquid assets such that they do not represent more than
15% of Fund net assets, subject to timing and other considerations which are in
the best interests of the Fund and its shareholders.
• No Funds
may mortgage, pledge, hypothecate or in any manner transfer, as security for
indebtedness, any assets of the Fund except as may be necessary in connection
with borrowings described in limitation (1) above. Margin deposits, security
interests, liens, and collateral arrangements with respect to transactions
involving options, futures contracts, short sales and other permitted
investments and techniques are not deemed to be a mortgage, pledge, or
hypothecation of assets for purposes of this limitation.
• No Fund
may invest in any issuer for purposes of exercising control or
management.
6
For all
Funds except the Volatility Weighted Index Funds:
• No Fund
may make short sales of securities, other than short sales “against the box,” or
purchase securities on margin except for short-term credits necessary for
clearance of portfolio transactions, provided that this restriction will not be
applied to limit the use of options, futures contracts, and related options, in
the manner otherwise permitted by the investment restrictions, policies, and
investment program of the Fund.
• No Fund
may invest more than 15% of its net assets in illiquid investments. Illiquid
investments are generally any investment that the Fund reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar days or
less without the sale or disposition significantly changing the market value of
the investment. Such investments include, but are not limited to, time deposits
and repurchase agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A, securities offered pursuant to Section
4(a)(2) of the 1933 Act, or securities otherwise subject to restrictions or
limitations on resale under the 1933 Act shall not be deemed illiquid solely by
reason of being unregistered. The Adviser, under oversight of the Board,
determines whether a particular investment is deemed to be liquid based on the
trading markets for the specific security and other factors.
Each
Fund has an investment policy that requires it to invest at least 80% of its
assets in the type of security, or index, suggested by its name.
To the extent required by SEC rules, each such policy may be changed only upon
at least 60 days’ prior written notice to the applicable Fund’s
shareholders.
NASDAQ
VICTORY INDEXES
Index
Provider
The
Nasdaq Victory Indexes (each an “Index”) are currently administered, calculated,
and published by an unaffiliated third party, Nasdaq
Inc. (the “Index Provider”). The Index Provider calculates and disseminates the
Indexes on a daily basis. A description of the Indexes tracked by certain Funds
is provided in the applicable Fund’s Prospectus under “Principal Investment
Strategies,” and additional details about the Indexes are provided
below.
The
Indexes are not sponsored by the Index Provider or its affiliates or its
third-party licensors.
Certain
of the Indexes, referred to herein as the “Nasdaq Victory Volatility Weighted
Indexes,” combine fundamental criteria with individual
security risk control achieved through volatility weighting of individual
securities. The index methodology used for the Nasdaq Victory Volatility
Weighted Indexes was originally developed by the Adviser. The Adviser may
consult with the Index Provider from time to time concerning an Index
methodology, but the Index Provider alone makes all decisions with respect to
any changes to the methodology.
Semi-Annual
Index Reconstitution Dates
Each
Index is reconstituted periodically during the year according to a prescribed
schedule. In conjunction with each reconstitution date, an
Index’s rules are applied to its universe of publicly traded securities in order
to determine which securities are eligible for inclusion in the Index. New
securities are added to the Index only on reconstitution dates and only
securities that comply with the Index methodology are eligible to be included in
an Index. Securities that no longer meet eligibility for an Index on the
reconstitution date are omitted. The Index Provider is solely responsible for
the nature and extent of any reconstitution of any Index.
Index
Maintenance
The
Index Provider maintains each Index throughout the year and includes monitoring
and adjusting an Index for company additions and
deletions, stock splits, corporate restructurings, and other corporate actions.
Corporate actions are generally implemented after the close of trading on the
day prior to the ex-date of such corporate actions. A security also may be
removed from an Index in between rebalancing dates if it no longer represents an
investable asset due to legal constraints or other independent factors. In
response to market conditions that occur between rebalancing dates, an Index’s
country and sector weights may fluctuate above or below a specified cap between
annual Index screening dates.
Changes
to the Index Methodology
Each
Index is governed by a rules-based methodology. To the extent possible, material
changes to the methodology will be publicly disclosed
to shareholders prior to implementation. The Index Provider is solely
responsible for the nature and extent of any changes to any
Index.
7
No
Guarantee or Warranty; Index Errors
Neither
the Index Provider, the Adviser nor the Funds make any representation or
warranty, express or implied, to the Funds’ shareholders
or any member of the public regarding the advisability of investing in
securities generally or in the Funds particularly or the ability of the Indexes
to track general stock market performance. The Index Provider has licensed the
Indexes and certain trademarks and trade names for use by the Funds at no
charge. The Index Provider has no obligation to take the needs of the Funds or
Funds’ shareholders into consideration in determining, composing, or calculating
the Indexes.
Neither
the Index Provider, the Adviser nor the Funds guarantee the accuracy,
completeness, or performance of any Index or the data included
therein and shall have no liability in connection with any Index or Index
calculation, including any errors or omissions in calculating the Indexes.
Errors made by the Index Provider with respect to the quality, accuracy, and
completeness of the data within an Index may occur from time to time and may not
be identified and corrected for a period of time, if at all. Therefore, gains,
losses or costs associated with errors will be borne by a Fund and its
shareholders.
INVESTMENT
PRACTICES, INSTRUMENTS, AND RISKS
In
addition to the principal investment strategies and the principal risks of the
Funds described in each Prospectus, each Fund may, but will not
necessarily, employ other investment practices and may be subject to additional
risks which are described further below. Because the following is a combined
description of investment strategies and risks for all of the Funds, certain
strategies and/or risks described below may not apply to every Fund. Unless a
strategy or policy described below is specifically prohibited with respect to a
particular Fund by the investment restrictions listed in the Prospectus, under
“Investment Objectives Policies and Limitations” in this SAI, or by applicable
law, a Fund may, but will not necessarily, engage in each of the practices
described below.
Certificates
of Deposit and Bankers’ Acceptances
Certificates
of deposit are receipts issued by a depository institution in exchange for the
deposit of funds. The issuer agrees to pay the amount
deposited plus interest to the bearer of the receipt on the date specified on
the certificate. The certificate usually can be traded in the secondary market
prior to maturity.
A
Fund may invest in insured bank obligations. The Federal Deposit Insurance
Corporation (“FDIC”) insures the deposits of federally insured
banks and savings and loan associations (collectively referred to as “banks”) up
to $250,000. A Fund may purchase bank obligations that are fully insured as to
principal by the FDIC. Currently, to remain fully insured as to principal, these
investments must be limited to $250,000 per bank; if the principal amount and
accrued interest together exceed $250,000, the excess principal and accrued
interest will not be insured. Insured bank obligations may have limited
marketability.
Bankers’
acceptances typically arise from short-term credit arrangements designed to
enable businesses to obtain funds to finance commercial
transactions. Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then “accepted” by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date. The acceptance may then be held by the accepting bank as an
earning asset or it may be sold in the secondary market at the going rate of
discount for a specific maturity. Although maturities for acceptances can be as
long as 270 days, most acceptances have maturities of six months or
less.
Commercial
Paper
A
Fund may purchase commercial paper, which consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by
corporations in order to finance their current operations. It may be secured by
letters of credit, a surety bond, or other forms of collateral. Commercial paper
is usually repaid at maturity by the issuer from the proceeds of the issuance of
new commercial paper.
Investments
in commercial paper are subject to the risk the issuer cannot issue enough new
commercial paper to satisfy its outstanding commercial
paper, also known as rollover risk. Commercial paper may become illiquid or may
suffer from reduced liquidity in certain circumstances. Like all fixed income
securities, commercial paper prices are susceptible to fluctuations in interest
rates. If interest rates rise, commercial paper prices will decline. The
short-term nature of a commercial paper investment makes it less susceptible to
interest rate risk than many other fixed income securities because interest rate
risk typically increases as maturity lengths increase.
Commercial
paper tends to yield smaller returns than longer-term corporate debt because
securities with shorter maturities typically have lower
effective yields than those with longer maturities. As with all fixed income
securities, there is a chance that the issuer will default on its commercial
paper obligation.
8
Common
Stock
Common
stock represents an equity (ownership) interest in a company, and usually
possesses voting rights and earns dividends. Dividends
on common stock are not fixed but are declared at the discretion of the issuer.
Common stock generally represents the riskiest investment in a company. In
addition, common stock generally has the greatest appreciation and depreciation
potential because increases and decreases in earnings are usually reflected in a
company’s stock price. A company’s common stock also may decline significantly
in price over a short period of time due to factors specific to that company,
including decisions made by its management or lower demand for the company’s
products or services.
Convertible
Securities
A
Fund may invest in convertible securities with no minimum credit rating.
Convertible securities include fixed income securities that may be
exchanged or converted into a predetermined number of shares of the issuer’s
underlying common stock at the option of the holder during a specified period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of “usable” bonds and warrants
or a combination of the features of several of these securities. Convertible
securities are senior to common stocks in an issuer’s capital structure, but are
usually subordinated to similar non-convertible securities. While providing a
fixed income stream (generally higher in yield than the income derivable from
common stock but lower than that afforded by a similar nonconvertible security),
a convertible security also gives an investor the opportunity, through its
conversion feature, to participate in the capital appreciation of the issuing
company depending upon a market price advance in the convertible security’s
underlying common stock.
Depositary
Receipts
A
Fund may invest in sponsored and unsponsored depositary receipts, such as
American Depositary Receipts (“ADRs”), which are receipts
issued by an American bank or trust company evidencing ownership of underlying
securities issued by a foreign issuer. ADRs, in registered form, are designed
for use in U.S. securities markets. Unsponsored ADRs may be created without the
participation of the foreign issuer. Holders of these ADRs generally bear all
the costs of the ADR facility, whereas foreign issuers typically bear certain
costs in a sponsored ADR. The bank or trust company depositary of an unsponsored
ADR may be under no obligation to distribute shareholder communications received
from the foreign issuer or to pass through voting rights. Many of the risks
described below regarding foreign securities apply to investments in ADRs.
Without limitation, a Fund may also invest in European Depositary Receipts
(“EDRs”) and Global Depositary Receipts (“GDRs”). EDRs are receipts issued in
Europe that evidence a similar ownership arrangement. GDRs are receipts issued
throughout the world that evidence a similar arrangement.
Investments
in depositary receipts may be less liquid and more volatile than the underlying
securities in their primary trading market. If a
depositary receipt is denominated in a different currency than its underlying
securities, a Fund will be subject to the currency risk of both the investment
in the depositary receipt and the underlying security. The values of depositary
receipts may decline for a number of reasons relating to the issuers or sponsors
of the depositary receipts, including, but not limited to, insolvency of the
issuer or sponsor. Holders of depositary receipts may have limited or no rights
to take action with respect to the underlying securities or to compel the issuer
of the receipts to take action. The prices of depositary receipts may differ
from the prices of securities upon which they are based.
A
Fund may invest in unsponsored depositary receipts, which are issued by one or
more depositaries without a formal agreement with the
company that issues the underlying securities. Holders of unsponsored depositary
receipts generally bear all the costs thereof, and the depositaries of
unsponsored depositary receipts frequently are under no obligation to distribute
shareholder communications received from the issuers of the underlying
securities or to pass through voting rights with respect to the underlying
securities. In addition, the issuers of the securities underlying unsponsored
depositary receipts are not obligated to disclose material information to the
market and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the
market value of the depositary receipts.
Derivatives
The
use of derivatives is a highly specialized activity that can involve investment
techniques and risks different from, and in some respects
greater than, those associated with investing in more traditional investments
such as stocks and bonds. Derivatives may have varying degrees of volatility at
different times, or under different market conditions, and may perform in
unanticipated ways. New regulation of derivatives may make them more costly, or
may otherwise adversely affect their liquidity, value, or
performance.
Under
circumstances in which such instruments are expected by the Adviser to aid in
achieving the Fund’s investment objective, the Fund may
buy and sell certain types of derivatives. Derivatives are instruments that
derive their value from the value of one or more underlying assets, reference
rates or indices, and may include futures contracts, options on futures
contracts, swaps, options on currencies, securities, and securities indices.
Derivatives also may possess the characteristics of both futures and securities
(e.g., debt instruments with interest and principal payments determined by
reference to the value of a commodity or a currency at a future time) and
therefore, possess the risks of both futures and securities
investments.
9
Permissible
derivative instruments include “market access products,” which offer synthetic
exposure to an underlying local foreign stock.
They include, for example, equity-linked notes, warrants, zero strike options,
and total return swaps. Market access products are subject to the same risks as
direct investments in securities of foreign issuers. If the underlying stock
decreases in value, the market access product will decrease commensurately. In
addition, market access products are subject to counterparty risk due to the
fact that the security is issued by a broker. If the broker suffers a
significant credit event and cannot perform under the terms of an agreement, a
market access product may lose value regardless of the strength of the
underlying stock.
Derivatives,
such as futures contracts; options on currencies, securities, and securities
indexes; options on futures contracts; and swaps enable the
Fund to take both “short” positions (positions which anticipate a decline in the
market value of a particular asset or index) and “long” positions (positions
which anticipate an increase in the market value of a particular asset or
index). The Fund also may use strategies that involve simultaneous short and
long positions in response to specific market conditions, such as where the
Adviser anticipates unusually high or low market volatility.
The
Adviser may enter into derivative positions for either hedging or non-hedging
purposes. The term “hedging” is applied to defensive strategies
designed to protect the Fund from an expected decline in the market value of an
asset or group of assets that the Fund owns (in the case of a short hedge) or to
protect the Fund from an expected rise in the market value of an asset or group
of assets which it intends to acquire in the future (in the case of a long or
“anticipatory” hedge). Non-hedging strategies include strategies designed to
produce incremental income (such as the option writing strategy described below)
or “speculative” strategies, which are undertaken to equitize the cash or cash-
equivalent portion of the Fund’s portfolio or to profit from (i) an expected
decline in the market value of an asset or group of assets which the Fund does
not own or (ii) expected increases in the market value of an asset which it does
not plan to acquire. Information about specific types of instruments is provided
below.
Rule
18f-4 under the 1940 Act permits the Fund to enter into Derivatives Transactions
(as defined below) and certain other transactions notwithstanding
the restrictions on the issuance of “senior securities” under Section 18 of the
1940 Act. Section 18 of the 1940 Act, among other things, prohibits open-end
funds, including the Fund, from issuing or selling any “senior security,” other
than borrowing from a bank (subject to a requirement to maintain 300% “asset
coverage”).
Under
Rule 18f-4, “Derivatives Transactions” include the following: (1) any swap,
security-based swap (including a contract for differences),
futures contract, forward contract, option (excluding purchased options), any
combination of the foregoing, or any similar instrument, under which the Fund is
or may be required to make any payment or delivery of cash or other assets
during the life of the instrument or at maturity or early termination, whether
as margin or settlement payment or otherwise; (2) any short sale borrowing; (3)
reverse repurchase agreements and similar financing transactions (e.g., recourse
and non-recourse tender option bonds, and borrowed bonds), if the Fund elects to
treat these transactions as Derivatives Transactions under Rule 18f-4; and (4)
when-issued or forward-settling securities (e.g., firm and standby commitments,
including to-be-announced (“TBA”) commitments, and dollar rolls) and
non-standard settlement cycle securities, unless the Fund intends to physically
settle the transaction and the transaction will settle within 35 days of its
trade date (the “Delayed-Settlement Securities Provision”).
Unless
a fund is relying on the Limited Derivatives User Exception (as defined below),
the fund must comply with Rule 18f-4 with respect to
its Derivatives Transactions. Rule 18f-4, among other things, requires funds to
adopt and implement a comprehensive written derivatives risk management program
(“DRMP”) and comply with a relative or absolute limit on fund leverage risk
calculated based on value-at-risk (“VaR”). The DRMP is administered by a
“derivatives risk manager,” who is appointed by the Board, including a majority
of Independent Trustees, and periodically reviews the DRMP and reports to the
Board. Rule 18f-4 also has eliminated the general asset segregation requirement
in connection with certain derivatives transactions, in light of Rule 18f-4’s
requirements for funds to establish and maintain derivatives risk management
programs that comply with certain risk-based limits. For funds that qualify as
limited derivatives users, Rule 18f-4 requires policies and procedures to manage
aggregate derivatives risk. These requirements could have an impact on the Fund,
including a potential increase in cost to enter into derivatives transactions.
The full impact of Rule 18f-4 on the Fund, however, remains
uncertain.
Rule
18f-4 provides an exception from the DRMP, VaR limit and certain other
requirements if the Fund’s “derivatives exposure” (as defined in
Rule 18f-4) is limited to 10% of its net assets (as calculated in accordance
with Rule 18f-4) and the Fund adopts and implements written policies and
procedures reasonably designed to manage its derivatives risks (the “Limited
Derivatives User Exception”). As of the date of this SAI, the U.S. Sector Fund
relies on the Limited Derivatives User Exception.
Exchange-Traded
Funds (“ETFs”)
The
U.S. Sector Fund may invest in ETFs, which are, with a few exceptions, open-end
investment companies that trade throughout the day.
ETFs trade on stock exchanges. Because they trade like a stock, they offer
trading flexibility desired by both individuals and institutions. The value of
the underlying securities held by an ETF is a major factor in determining an
ETF’s price. However, ETFs do not necessarily trade at their NAV. The price of
an ETF also is determined by supply and demand and, as a result, the share price
of an ETF may trade at a premium or discount to its NAV.
10
The
Fund may be exposed to the same risks of the ETFs’ holdings as the ETFs
themselves in direct proportion to the allocation of the Fund’s
assets among those ETFs. Fund shareholders also will indirectly bear fees and
expenses charged by the ETFs in which the Fund may invest in addition to the
Fund’s direct fees and expenses. In addition, the ETFs in which the Fund may
invest are typically “passive investors” that invest in the securities and
sectors contained in the indexes they seek to track without regard for or
analysis of the prospects of such securities or sectors (“Passive ETFs”). A
Passive ETF may invest in all of the securities in such index or in a
representative sample of such securities.
Passive
ETFs generally do not attempt to take defensive positions in volatile or
declining markets or under other conditions. Furthermore,
Passive ETFs usually are not able to duplicate exactly the performance of the
underlying indexes they track. The difference in performance between a Passive
ETF and the index it seeks to track can be due to, among other factors, the
expenses that the Passive ETF pays, regulatory constraints, investment
strategies, techniques undertaken by the Passive ETF and changes to an
underlying index. There also may be a lack of correlation between the securities
in an index and those actually held by a Passive ETF. The performance of a fund
that invests in such an ETF could be adversely impacted. In addition, although
ETFs (both active and passive) are generally listed on securities exchanges,
there can be no assurances that an active trading market for such ETFs will be
maintained. Secondary market trading in the ETFs also may be halted by a
national securities exchange because of market conditions or for other reasons.
There can be no assurances that the requirement necessary to maintain the
listing of the ETFs will continue to be met or will remain
unchanged.
Equity
Securities
Equity
securities in which a Fund invests include common stocks, preferred stocks, and
securities convertible into common stocks, such as
convertible bonds, warrants, rights, and options. The value of equity securities
varies in response to many factors, including the activities and financial
condition of individual companies, the business market in which individual
companies compete and general market and economic conditions. Equity securities
fluctuate in value, often based on factors unrelated to the value of the issuer
of the securities, and such fluctuations can be significant. Equity Securities
generally have greater volatility than debt securities.
Fixed
Income/Debt/Bond Securities
Yields
on fixed income securities are dependent on a variety of factors, including the
general conditions of the money market and other fixed
income securities markets, the size of a particular offering, the maturity of
the obligation and the rating of the issue. An investment in a Fund will be
subjected to risk even if all fixed income securities in the Fund’s portfolio
are paid in full at maturity. All fixed income securities, including U.S.
government securities, can change in value when there is a change in interest
rates or the issuer’s actual or perceived creditworthiness or ability to meet
its obligations.
There
is normally an inverse relationship between the market value of securities
sensitive to prevailing interest rates and actual changes in
interest rates. In other words, an increase in interest rates produces a
decrease in market value. The longer the remaining maturity (and duration) of a
security, the greater will be the effect of interest rate changes on the market
value of that security. Changes in the ability of an issuer to make payments of
interest and principal and in the markets’ perception of an issuer’s
creditworthiness will also affect the market value of the debt securities of
that issuer. Obligations of issuers of fixed income securities (including
municipal securities) are subject to the provisions of bankruptcy, insolvency,
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Reform Act of 1978. In addition, the obligations of municipal
issuers may become subject to laws enacted in the future by Congress, state
legislatures, or referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or
upon the ability of municipalities to levy taxes. Changes in the ability of an
issuer to make payments of interest and principal and in the market’s perception
of an issuer’s creditworthiness will also affect the market value of the debt
securities of that issuer. The possibility exists, therefore, that, the ability
of any issuer to pay, when due, the principal of and interest on its debt
securities may become impaired.
The
corporate debt securities in which a Fund may invest include corporate bonds and
notes and short-term investments such as commercial
paper and variable rate demand notes. Commercial paper (short-term promissory
notes) is issued by companies to finance their or their affiliate’s current
obligations and is frequently unsecured. Variable and floating rate demand notes
are unsecured obligations typically redeemable upon not more than 30 days’
notice. These obligations include master demand notes that permit investment of
fluctuating amounts at varying rates of interest pursuant to a direct
arrangement with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal
amount of the obligations upon a specified number of days’ notice. These
obligations generally are not traded, nor generally is there an established
secondary market for these obligations. To the extent a demand note does not
have a 7-day or shorter demand feature and there is no readily available market
for the obligation, it is treated as an illiquid investment.
A
Fund may invest in debt securities, including non-investment grade debt
securities. The following describes some of the risks associated
with fixed income debt securities:
11
Interest
Rate Risk. Debt
securities have varying levels of sensitivity to changes in interest rates. In
general, the price of a debt security can fall when interest rates rise and can
rise when interest rates fall. Securities with longer maturities and mortgage
securities can be more sensitive to interest rate changes although they usually
offer higher yields to compensate investors for the greater risks. The longer
the maturity of the security, the greater the impact a change in interest rates
could have on the security’s price. In addition, short-term and long-term
interest rates do not necessarily move in the same amount or the same direction.
Short-term securities tend to react to changes in short-term interest rates and
long-term securities tend to react to changes in long-term interest
rates.
Liquidity
Risk. Rising
interest rates may result in periods of volatility and increased redemptions. As
a result of increased redemptions, a Fund may have to liquidate portfolio
securities at disadvantageous prices and times, which could reduce a Fund’s
return. A reduction in dealer market-making capacity in the fixed income markets
that has occurred in recent years has the potential to decrease
liquidity.
Credit
Risk. Fixed
income securities have speculative characteristics and changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
of those issuers to make principal or interest payments, as compared to issuers
of more highly rated securities.
Extension
Risk. A Fund
is subject to the risk that an issuer will exercise its right to pay principal
on an obligation held by the Fund (such as mortgage-backed securities) later
than expected. This may happen when there is a rise in interest rates. These
events may lengthen the duration (i.e. interest rate sensitivity) and
potentially reduce the value of these securities.
Prepayment
Risk. Certain
types of debt securities, such as mortgage-backed securities, have yield and
maturity characteristics corresponding to underlying assets. Unlike traditional
debt securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on certain mortgage-backed
securities may include both interest and a partial payment of principal. Besides
the scheduled repayment of principal, payments of principal may result from the
voluntary prepayment, refinancing, or foreclosure of the underlying mortgage
loans.
Securities
subject to prepayment are less effective than other types of securities as a
means of “locking in” attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the
possibility of significant unscheduled prepayments resulting from declines in
interest rates. These prepayments would have to be reinvested at lower rates. As
a result, these securities may have less potential for capital appreciation
during periods of declining interest rates than other securities of comparable
maturities, although they may have a similar risk of decline in market value
during periods of rising interest rates. Prepayments may also significantly
shorten the effective maturities of these securities, especially during periods
of declining interest rates. Conversely, during periods of rising interest
rates, a reduction in prepayments may increase the effective maturities of these
securities, subjecting them to a greater risk of decline in market value in
response to rising interest rates than traditional debt securities, and,
therefore, potentially increasing the volatility of the Fund.
At
times, some of the mortgage-backed securities in which a Fund may invest will
have higher than market interest rates and therefore will be
purchased at a premium above their par value. Prepayments may cause losses in
securities purchased at a premium, as unscheduled prepayments, which are made at
par, will cause the Fund to experience a loss equal to any unamortized
premium.
Foreign
Securities
General. A Fund
may invest in foreign securities and ETFs and other investment companies that
hold a portfolio of foreign securities. Investing in securities of foreign
companies and countries involves certain considerations and risks that are not
typically associated with investing in U.S. government securities and securities
of domestic companies. There may be less publicly available information about a
foreign issuer than a domestic one, and foreign companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. There may also be less
government supervision and regulation of foreign securities exchanges, brokers
and listed companies than exists in the United States. Interest and dividends
paid by foreign issuers may be subject to withholding and other foreign taxes,
which may decrease the net return on such investments as compared to dividends
and interest paid to a Fund by domestic companies or the U.S. government. There
may be the possibility of expropriations, seizure or nationalization of foreign
deposits, confiscatory taxation, political, economic or social instability or
diplomatic developments that could affect assets of a Fund held in foreign
countries. Finally, the establishment of exchange controls or other foreign
governmental laws or restrictions could adversely affect the payment of
obligations.
To
the extent a Fund’s currency exchange transactions do not fully protect the Fund
against adverse changes in currency exchange rates, decreases
in the value of currencies of the foreign countries in which the Fund will
invest relative to the U.S. dollar will result in a corresponding decrease in
the U.S. dollar value of the Fund’s assets denominated in those currencies (and
possibly a corresponding increase in the amount of securities required to be
liquidated to meet distribution requirements). Conversely, increases in the
value of currencies of the foreign countries in which a Fund invests relative to
the U.S. dollar will result in a corresponding increase in the U.S. dollar value
of the Fund’s assets (and possibly a corresponding decrease in the amount of
securities to be liquidated).
12
Emerging
Markets Securities. A Fund
may purchase securities of emerging market issuers and ETFs and other investment
companies that invest in emerging market securities. Investing in emerging
market securities imposes risks different from, or greater than, risks of
investing in foreign developed countries. These risks, among others, include:
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity; significant price volatility; restrictions on foreign
investment; and possible repatriation of investment income and capital. In
addition, foreign investors may be required to register the proceeds of sales.
Future economic or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and devaluation may
occur subsequent to investments in these currencies by a Fund. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
Additional
risks of emerging markets securities may include: greater social, economic and
political uncertainty and instability; more substantial
governmental involvement in the economy; less governmental supervision and
regulation; unavailability of currency hedging techniques; companies that are
newly organized and small; differences in auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; and less developed legal systems. In addition, emerging securities
markets may have different clearance and settlement procedures, which may be
unable to keep pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions. Settlement problems may cause a
Fund to miss attractive investment opportunities, hold a portion of its assets
in cash pending investment, or be delayed in disposing of a portfolio security.
Such a delay could result in possible liability to a purchaser of the
security.
Investing
through Stock Connect. Certain
of the Funds may invest in developing markets through trading structures or
protocols that subject them to certain risks (such as risks associated with
illiquidity, custody of assets, different settlement and clearance procedures,
asserting legal title under developing legal and regulatory regimes and other
risks) to a greater degree than in developed markets or even other developing
markets. For example, a Fund may invest in certain eligible Chinese securities
(“China A-Shares”) listed and traded on Chinese stock exchanges such as the
Shanghai Stock Exchange (“SSE”) through the Hong Kong—Shanghai Stock Connect
(“Stock Connect”) program. Stock Connect is a securities trading and clearing
program developed by the Hong Kong Stock Exchange (“SEHK”), SSE, Hong Kong
Securities Clearing Company Limited and China Securities Depository and Clearing
Corporation Limited for the establishment of mutual market access between SEHK
and SSE. Stock Connect is subject to regulations promulgated by regulatory
authorities for both SSE and SEHK. Further regulations or restrictions, such as
limitations on redemptions or suspension of trading, may adversely affect Stock
Connect and the value of the China A-Shares held by a Fund. There is no
guarantee that the systems required to operate Stock Connect will function
properly or will continue to be adapted to changes and developments in both
markets or that both exchanges will continue to support Stock Connect in the
future. In the event that the relevant systems do not function properly, trading
through Stock Connect could be disrupted.
Although
trading through Stock Connect is not subject to individual investment quotas,
daily and aggregate investment quotas apply to the
aggregate volume of trading on Stock Connect, which may restrict or preclude a
Fund’s ability to invest in Stock Connect securities or to enter into or exit
trades on a timely basis. In addition, Stock Connect securities generally may
not be sold, purchased or otherwise transferred other than through Stock Connect
pursuant to the program’s rules, which may further subject a Fund to liquidity
risk in respect of China A-Shares. Stock Connect can only operate when both
Chinese and Hong Kong markets are open for trading and when banking services are
available in both markets on the corresponding settlement days. As a result, if
either or both of these markets are closed on a U.S. trading day, a Fund may not
be able to dispose of its China A-Shares in a timely manner, which could
adversely affect the Fund’s performance. Because of the way in which China
A-Shares are held through Stock Connect, a Fund may not be able to exercise the
rights of a shareholder and may be limited in its ability to pursue claims
against the issuer of a security, and may suffer losses in the event the
depository of the SSE becomes insolvent. Only certain China A shares are
eligible to be accessed through Stock Connect. Such securities may lose their
eligibility at any time, in which case they presumably could be sold but could
no longer be purchased through Stock Connect. Investments in China A-shares may
not be covered by the securities investor protection programs of either exchange
and, without the protection of such programs, will be subject to the risk of
default by the broker.
Special
Risk Considerations of Investing in China. Investing
in securities of Chinese issuers involves certain risks and considerations not
typically associated with investing in securities of U.S. issuers, including,
among others, more frequent trading suspensions and government interventions
(including by nationalization of assets), currency exchange rate fluctuations or
blockages, limits on the use of brokers and on foreign ownership, different
financial reporting standards, higher dependence on exports and international
trade, potential for increased trade tariffs, sanctions, embargoes and other
trade limitations, custody risks, and potential adverse tax consequences. U.S.
sanctions or other investment restrictions could preclude a Fund from investing
in certain Chinese issuers or cause a Fund to sell investments at a
disadvantageous time. Significant portions of the Chinese securities markets may
become rapidly illiquid, as Chinese issuers have the ability to suspend the
trading of their equity securities, and have shown a willingness to exercise
that option in response to market volatility and other events.
The
government of China provided new guidance to and placed restrictions on
China-based companies raising capital offshore, including
through associated offshore shell companies. These developments include
government-led cybersecurity reviews of certain companies raising capital
through offshore entities. In a number of sectors in China in which a Fund may
invest, companies are not
13
allowed
to have foreign ownership and cannot directly list on exchanges outside of
China. To raise money on such exchanges, many China-based
operating companies are structured as Variable Interest Entities ("VIEs"). In
such an arrangement, a China-based operating company often establishes an
offshore shell company in another jurisdiction to issue stock to public
shareholders. That shell company enters into service and other contracts with
the China-based operating company, then issues shares on a foreign exchange,
such as the NYSE. While the shell company has no equity ownership in the
China-based operating company, for accounting purposes the shell company is able
to consolidate the operating company into its financial statements. For an
investor such as a Fund, this arrangement creates "exposure" to the China-based
operating company, though only through a series of service contracts and other
contracts.
Uncertainty
about future actions by the government of China could significantly affect the
operating company's financial performance and the
enforceability of the contractual arrangements. The government of China could
determine at any time and without notice that the underlying contractual
arrangements on which control of the VIE is based violate Chinese law. In
addition, if either the China-based company (or its officers, directors, or
Chinese equity owners) breach those contracts with the U.S.-listed shell
company, or Chinese law changes in a way that affects the enforceability of
these arrangements, or those contracts are otherwise not enforceable under
Chinese law, investors, such as a Fund, may suffer significant losses with
little or no recourse available. Moreover, if the parties to these contracts do
not meet their obligations as intended or there are effects on the
enforceability of these arrangements from changes in Chinese law or practice,
the U.S.-listed company may lose control over the China-based company, and
investments in its securities may suffer significant economic losses. Additional
risks, among others, could entail that a breach of the contractual agreements
between the U.S.-listed company and the China-based VIE (or its officers,
directors, or Chinese equity owners) will likely be subject to Chinese law and
jurisdiction, and investments in the U.S.-listed company may be affected by
conflicts of interest and duties between the legal owners of the China-based VIE
and the stockholders of the U.S.-listed company.
Futures
Contracts
A
futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument
(e.g., units of a stock index or reference item such as stock volatility) for a
specified price, date, time and place designated at the time the contract is
made. Brokerage fees are paid when a futures contract is bought or sold and
margin deposits must be maintained. Entering into a contract to buy is commonly
referred to as buying or purchasing a contract or holding a long position.
Entering into a contract to sell is commonly referred to as selling a contract
or holding a short position.
Unlike
when a Fund purchases or sells a security, no price would be paid or received by
the Fund upon the purchase or sale of a futures contract.
Upon entering into a futures contract, and to maintain the Fund’s open positions
in futures contracts, the Fund would be required to deposit with its custodian
or futures broker in a segregated account in the name of the futures broker an
amount of cash, U.S. government securities, suitable money market instruments,
or other liquid securities, known as “initial margin.” The margin required for a
particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased and
sold on margins that may range upward from less than 5% of the value of the
contract being traded.
If
the price of an open futures contract changes (by increase in underlying
instrument or index in the case of a sale or by decrease in the case
of a purchase) so that the loss on the futures contract reaches a point at which
the margin on deposit does not satisfy margin requirements, the broker will
require an increase in the margin. However, if the value of a position increases
because of favorable price changes in the futures contract so that the margin
deposit exceeds the required margin, the broker will pay the excess to a
Fund.
These
subsequent payments, called “variation margin,” to and from the futures broker,
are made on a daily basis as the price of the underlying
assets fluctuate making the long and short positions in the futures contract
more or less valuable, a process known as “marking to the market.” A Fund
expects to earn interest income on its margin deposits.
Although
certain futures contracts, by their terms, require actual future delivery of and
payment for the underlying instruments, in practice
most futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical underlying instrument or index and the same
delivery date. If the offsetting purchase price is less than the original sale
price, a Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100 Index future
is a contract to buy 25 pounds sterling multiplied by the level of the UK
Financial Times 100 Share Index on a given future date. Settlement of a stock
index futures contract may or may not be in the underlying instrument or index.
If not in the underlying instrument or index, then settlement will be made in
cash, equivalent over time to the difference between the contract price and the
actual price of the underlying asset at the time the stock index futures
contract expires.
14
High
Yield Securities
A
Fund may invest in high yield securities. High yield, high risk bonds are
securities that are generally rated below investment grade by the
primary rating agencies (BB+ or lower by S&P and Ba1 or lower by Moody’s).
Other terms used to describe such securities include “lower rated bonds,”
“non-investment grade bonds,” “below investment grade bonds,” and “junk bonds.”
These securities are considered to be high-risk investments. The risks include
the following:
Greater
Risk of Loss. These
securities are regarded as predominately speculative. There is a greater risk
that issuers of lower rated securities will default than issuers of higher rated
securities. Issuers of lower rated securities generally are less creditworthy
and may be highly indebted, financially distressed, or bankrupt. These issuers
are more vulnerable to real or perceived economic changes, political changes, or
adverse industry developments. In addition, high yield securities are frequently
subordinated to the prior payment of senior indebtedness. If an issuer fails to
pay principal or interest, a Fund would experience a decrease in income and a
decline in the market value of its investments.
Sensitivity
to Interest Rate and Economic Changes. The
income and market value of lower-rated securities may fluctuate more than higher
rated securities. Although non-investment grade securities tend to be less
sensitive to interest rate changes than investment grade securities,
non-investment grade securities are more sensitive to short- term corporate,
economic and market developments. During periods of economic uncertainty and
change, the market price of the investments in lower-rated securities may be
volatile. The default rate for high yield bonds tends to be cyclical, with
defaults rising in periods of economic downturn. For example, in 2000, 2001, and
2002, the default rate for high-yield securities was significantly higher than
in the prior or subsequent years.
Valuation
Difficulties. It is
often more difficult to value lower rated securities than higher rated
securities. If an issuer’s financial condition deteriorates, accurate financial
and business information may be limited or unavailable. In addition, the lower
rated investments may be thinly traded and there may be no established secondary
market. Because of the lack of market pricing and current information for
investments in lower rated securities, valuation of such investments is much
more dependent on judgment than is the case with higher rated
securities.
Liquidity. There
may be no established secondary or public market for investments in lower rated
securities. Such securities are frequently traded in markets that may be
relatively less liquid than the market for higher rated securities. In addition,
relatively few institutional purchasers may hold a major portion of an issue of
lower-rated securities at times. As a result, the Fund may be required to sell
investments at substantial losses or retain them indefinitely when an issuer’s
financial condition is deteriorating. A reduction in dealer market-making
capacity in the fixed income markets that has occurred in recent years has the
potential to decrease liquidity.
Credit
Quality. Credit
quality of non-investment grade securities can change suddenly and unexpectedly,
and even recently issued credit ratings may not fully reflect the actual risks
posed by a particular high-yield security.
New
Legislation. Future
legislation may have a possible negative impact on the market for high yield,
high risk bonds. As an example, in the late 1980’s, legislation required
federally insured savings and loan associations to divest their investments in
high yield, high risk bonds. New legislation, if enacted, could have a material
negative effect on a Fund’s investments in lower rated securities.
High
yield, high risk investments may include the following:
Straight
fixed income debt securities. These
include bonds and other debt obligations that bear a fixed or variable rate of
interest payable at regular intervals and have a fixed or resettable maturity
date. The particular terms of such securities vary and may include features such
as call provisions and sinking funds.
Zero-coupon
debt securities. These
bear no interest obligation but are issued at a discount from their value at
maturity. When held to maturity, their entire return equals the difference
between their issue price and their maturity value.
Zero-fixed-coupon
debt securities. These
are zero-coupon debt securities that convert on a specified date to
interest-bearing debt securities.
Pay-in-kind
bonds. These
are bonds which allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. These are bonds
sold without registration under the 1933 Act, usually to a relatively small
number of institutional investors.
Convertible
securities. These
are bonds or preferred stock that may be converted to common stock.
Preferred
stock. These
are stocks that generally pay a dividend at a specified rate and have preference
over common stock in the payment of dividends and in liquidation.
Loan
participations and assignments. These
are participations in, or assignments of all or a portion of loans to
corporations or to governments, including governments of less developed
countries (“LDCs”).
15
Securities
issued in connection with reorganizations and corporate
restructurings. In
connection with reorganizing or restructuring of an issuer, an issuer may issue
common stock or other securities to holders of its debt securities. A Fund may
hold such common stock and other securities even if it does not invest in such
securities.
Ratings
by Ratings Agencies. Ratings
represent a rating agency’s opinion regarding the quality of the security and
are not a guarantee of quality. In addition, rating agencies may fail to make
timely changes to credit ratings in response to subsequent events and a rating
may become stale in that it fails to reflect changes in an issuer’s financial
condition.
Illiquid
Investments and Restricted Securities
A
Fund may invest up to 15% of its net assets in illiquid investments. Rule 22e-4
under the 1940 Act defines an illiquid investment as
investments that the Fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or less without the sale or
disposition significantly changing the market value of the investment. Illiquid
investments include investments subject to contractual or legal restrictions on
resale (e.g., because they have not been registered under the 1933 Act) and
investments that are otherwise not readily marketable (e.g., because trading in
the security is suspended or because market makers do not exist or will not
entertain bids or offers). Investments that have not been registered under the
1933 Act are referred to as private placements or restricted securities and are
purchased directly from the issuer or in the secondary market. Foreign
securities that are freely tradable in their principal markets are not
considered to be illiquid.
Restricted
and other illiquid investments may be subject to the potential for delays on
resale and uncertainty in valuation. A Fund might be unable
to dispose of illiquid investments promptly or at reasonable prices and might
thereby experience difficulty in satisfying redemption requests from
shareholders. A Fund might have to register restricted securities in order to
dispose of them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
A
large institutional market exists for certain securities that are not registered
under the 1933 Act, including foreign securities. The fact that there
are contractual or legal restrictions on resale to the general public or to
certain institutions may not be indicative of the liquidity of such investments.
Rule 144A under the 1933 Act allows such a broader institutional trading market
for securities otherwise subject to restrictions on resale to the general
public.
Rule
144A establishes a “safe harbor” from the registration requirements of the 1933
Act for resale of certain securities to qualified institutional
buyers. Rule 144A has produced enhanced liquidity for many restricted
securities, and market liquidity for such securities may continue to expand as a
result of this regulation and the consequent existence of the PORTAL system,
which is an automated system for the trading, clearance, and settlement of
unregistered securities of domestic and foreign issuers sponsored by the
Financial Industry Regulatory Authority, Inc. (“FINRA”).
Under
guidelines adopted by the Trust’s Board, the Adviser may determine that
particular Rule 144A securities, and commercial paper issued in
reliance on the private placement exemption from registration afforded by
Section 4(a)(2) of the 1933 Act, are liquid even though they are not registered.
A determination of whether such a security is liquid or not is a question of
fact. In making this determination, the Adviser will consider, as it deems
appropriate under the circumstances and among other factors: (1) the frequency
of trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security; (3) the number of other potential purchasers of
the security; (4) dealer undertakings to make a market in the security; (5) the
nature of the security (e.g., debt or equity, date of maturity, terms of
dividend or interest payments, and other material terms) and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer); and (6) the rating of the
security and the financial condition and prospects of the issuer. In the case of
commercial paper, the Adviser will also determine that the paper (1) is not
traded flat or in default as to principal and interest, and (2) is rated in one
of the two highest rating categories by at least two National Statistical Rating
Organizations (“NRSROs”) or, if only one NRSRO rates the security, by that
NRSRO, or, if the security is unrated, the Adviser determines that it is of
equivalent quality. Rule 144A securities and Section 4(a)(2) commercial paper
that have been deemed liquid as described above will continue to be monitored by
the Adviser to determine if the security is no longer liquid as the result of
changed conditions. Investing in Rule 144A securities or Section 4(a)(2)
commercial paper could have the effect of increasing the amount of a Fund’s
assets invested in illiquid investments if institutional buyers are unwilling to
purchase such securities.
Victory
Capital, under oversight of the Board, determines whether a particular
investment is deemed to be liquid based on the trading markets
for the specific security and other factors.
Impact
of Activity by Other Shareholders
A
Fund, like all mutual funds, pool the investments of many investors. Actions by
one shareholder or multiple shareholders may have an impact
on the Fund and, therefore, indirectly on other shareholders. For example,
significant levels of new investments in a Fund by shareholders may cause a Fund
to have more cash than would otherwise be the case, which may have a positive or
negative impact on Fund performance. Similarly, redemption activity might cause
a Fund to sell portfolio securities, which may increase transaction costs that,
in effect, would be borne by all shareholders, not just the redeeming
shareholders. The sale of portfolio securities to cover
16
redemption
requests may accelerate the realization of income and cause a Fund to make
taxable distributions to shareholders earlier than a
Fund otherwise could have. In addition, under certain circumstances,
non-redeeming shareholders may be treated as receiving a disproportionately
large taxable distribution during or with respect to a year in which there are
large redemptions. To the extent a larger shareholder invests in a Fund or the
markets are highly volatile, a Fund may experience large inflows or outflows of
cash from time to time. This activity could magnify these adverse effects on a
Fund.
Income
Trusts
A
Fund may invest in income trusts which are investment trusts that hold assets
that are income producing. The income is passed on to the
“unitholders.” Each income trust has an operating risk based on its underlying
business. The term may also be used to designate a legal entity, capital
structure and ownership vehicle for certain assets or businesses. Shares or
“trust units” are traded on securities exchanges just like stocks. Income is
passed on to the investors, called unitholders, through monthly or quarterly
distributions. Historically, distributions have typically been higher than
dividends on common stocks. The unitholders are the beneficiaries of a trust,
and their units represent their right to participate in the income and capital
of the trust. Income trusts generally invest funds in assets that provide a
return to the trust and its beneficiaries based on the cash flows of an
underlying business. This return is often achieved through the acquisition by
the trust of equity and debt instruments, royalty interests or real properties.
The trust can receive interest, royalty or lease payments from an operating
entity carrying on a business, as well as dividends and a return of
capital.
Each
income trust has an operating risk based on its underlying business; and,
typically, the higher the yield, the higher the risk. They also have
additional risk factors, including, but not limited to, poorer access to debt
markets. Similar to a dividend paying stock, income trusts do not guarantee
minimum distributions or even return of capital. If the business starts to lose
money, the trust can reduce or even eliminate distributions; this is usually
accompanied by sharp losses in a unit’s market value. Since the yield is one of
the main attractions of income trusts, there is the risk that trust units will
decline in value if interest rates offering in competing markets, such as in the
cash/treasury market, increase. Interest rate risk is also present within the
trusts themselves because they hold very long term capital assets (e.g.
pipelines, power plants, etc.), and much of the excess distributable income is
derived from a maturity (or duration) mismatch between the life of the asset,
and the life of the financing associated with it. In an increasing interest rate
environment, not only does the attractiveness of trust distributions decrease,
but quite possibly, the distributions may themselves decrease, leading to a
double whammy of both declining yield and substantial loss of unitholder value.
Because most income is passed on to unitholders, rather than reinvested in the
business, in some cases, a trust can become a wasting asset unless more equity
is issued. Because many income trusts pay out more than their net income, the
unitholder equity (capital) may decline over time. To the extent that the value
of the trust is driven by the deferral or reduction of tax, any change in
government tax regulations to remove the benefit will reduce the value of the
trusts. Generally, income trusts also carry the same risks as dividend paying
stocks that are traded on stock markets.
Initial
Public Offerings (“IPOs”)
The
U.S. Sector Fund may invest in IPOs, which subject the Fund to the risk that the
market value of IPO shares will fluctuate considerably
due to factors such as the absence of a prior public market, unseasoned trading,
a potentially small number of shares available for trading, and limited
information about the issuer. The purchase of IPO shares may involve high
transaction costs. IPO shares are subject to market risk and liquidity risk.
When the Fund’s asset base is small, a significant portion of the Fund’s
performance could be attributable to investments in IPOs, because such
investments would have a magnified impact on the Fund. As the Fund’s assets
grow, the effect of the Fund’s investments in IPOs on the Fund’s performance may
decline, which could reduce the Fund’s performance.
International
and Foreign Debt Securities
International
bonds include Yankee and Euro obligations, which are U.S. dollar-denominated
international bonds for which the primary trading
market is in the United States (“Yankee Bonds”), or for which the primary
trading market is abroad (“Eurodollar Bonds”). International bonds also include
Canadian and supranational agency bonds (e.g., those issued by the International
Monetary Fund). (See “Foreign Debt Securities” for a description of risks
associated with investments in foreign securities.)
Investments
in securities of foreign companies generally involve greater risks than are
present in U.S. investments. Compared to U.S. companies,
there generally is less publicly available information about foreign companies
and there may be less governmental regulation and supervision of foreign stock
exchanges, brokers, and listed companies.
Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards, practices, and requirements
comparable to those prevalent in the U.S. Securities of some foreign companies
are less liquid, and their prices more volatile, than securities of comparable
U.S. companies. Settlement of transactions in some foreign markets may be
delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund’s investment.
In
addition, with respect to some foreign countries, there is the possibility of
nationalization, expropriation, or confiscatory taxation; limitations
on the removal of securities, property, or other assets of a Fund; political or
social instability; increased difficulty in
17
obtaining
legal judgments; or diplomatic developments that could affect U.S. investments
in those countries. The Adviser will take such factors
into consideration in managing a Fund’s investments.
Since
most foreign debt securities are not rated, a Fund will invest in those foreign
debt securities based on the Adviser’s analysis without
relying on published ratings. Achievement of a Fund’s goals, therefore, may
depend more upon the abilities of the Adviser than would otherwise be the case.
The value of the foreign debt securities held by a Fund, and thus the net asset
value of a Fund’s shares, generally will fluctuate with (a) changes in the
perceived creditworthiness of the issuers of those securities, (b) movements in
interest rates, and (c) changes in the relative values of the currencies in
which a Fund’s investments in debt securities are denominated with respect to
the U.S. dollar. The extent of the fluctuation will depend on various factors,
such as the average maturity of a Fund’s investments in foreign debt securities,
and the extent to which a Fund hedges its interest rate, credit, and currency
exchange rate risks. A longer average maturity generally is associated with a
higher level of volatility in the market value of such securities in response to
changes in market conditions. In the event of default, there may be limited or
no legal recourse in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party.
Lending
of Portfolio Securities
A
Fund may, from time to time, lend securities from their portfolios to
broker-dealers, banks, financial institutions, and institutional borrowers
of securities and receive collateral in the form of cash or U.S. government
obligations. Under the Fund’s current practices (which are subject to change), a
Fund must receive initial collateral at least equal to the maintenance
requirements (e.g., 102% for U.S. equity securities and 105% for non-U.S.
securities). This collateral must be valued daily and should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to a Fund sufficient to maintain the value of the collateral equal to at least
100% of the value of the loaned securities. The lending agent receives a
pre-negotiated percentage of the net earnings on the investment of the
collateral. A Fund will not lend portfolio securities to: (a) any “affiliated
person” (as that term is defined in the 1940 Act) of any Fund; (b) any
affiliated person of the Adviser; or (c) any affiliated person of such an
affiliated person. During the time portfolio securities are on loan, the
borrower will pay the Fund any dividends or interest paid on such securities
plus any fee negotiated between the parties to the lending agreement. Loans will
be subject to termination by the Funds or the borrower at any time. While a Fund
will not have the right to vote securities on loan, they intend to terminate
loans and regain the right to vote if that is considered important with respect
to the investment. A Fund will enter into loan arrangements only with
broker-dealers, banks, or other institutions that either the Adviser or the
lending agent has determined are creditworthy under guidelines established by
the Board. Although these loans are fully collateralized, there are risks
associated with securities lending. A Fund’s performance could be hurt if a
borrower defaults or becomes insolvent, or if the Fund wishes to sell a security
before its return can be arranged. The return on invested cash collateral will
result in gains and losses for the Funds. Each Fund will limit its securities
lending to 33-1/3% of its total assets.
Limitations
and Risks of Options and Futures Activity
The
U.S. Sector Fund may engage in both hedging and non-hedging strategies. Although
effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund’s ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in the hedged asset correlate with price
movements of the futures and options.
Non-hedging
strategies typically involve special risks. The profitability of the Fund’s
non-hedging strategies will depend on the ability of the
Adviser to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more volatile
than corresponding securities markets and a relatively small change in the price
of the underlying asset or group of assets can have a magnified effect upon the
price of a related derivative instrument.
Derivatives
markets also are often less liquid than the market for the underlying asset or
group of assets. Some positions in futures and options
may be closed out only on an exchange that provides a secondary market. There
can be no assurance that a liquid secondary market will exist for any particular
futures contract or option at any specific time. Thus, it may not be possible to
close such an option or futures position prior to maturity. The inability to
close options and futures positions also could have an adverse impact on the
Fund’s ability to effectively carry out its derivative strategies and might, in
some cases, require the fund to deposit cash to meet applicable margin
requirements.
Under
certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a
futures contract can vary from the previous day’s settlement price; once that
limit is reached, no trades may be made that day at a price beyond the limit.
Daily price limits do not limit potential losses because prices could move to
the daily limit for several consecutive days with little or no trading, thereby
preventing liquidation of unfavorable positions.
If
the Fund were unable to liquidate a futures contract or an option on a futures
position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund would
continue to be subject to market risk with respect to the position.
18
Historically,
advisers of registered investment companies trading commodity interests (such as
futures contracts, options on futures contracts,
and swaps), such as the Fund, have been excluded from regulation as Commodity
Pool Operators (“CPOs”) pursuant to Commodity Futures Trading Commission
(“CFTC”) Regulation 4.5. In February 2012, the CFTC announced substantial
amendments to the permissible exclusions, and to the conditions for reliance on
the permissible exclusions, from registration as a CPO. To qualify for an
exclusion under these amendments to CFTC Regulation 4.5, if a Fund uses
commodity interests (such as futures contracts, options on futures contracts,
and swaps) other than for bona fide hedging purposes (as defined by the CFTC),
the aggregate initial margin and premiums required to establish these positions,
determined at the time the most recent position was established, may not exceed
5% of the Fund’s NAV (after taking into account unrealized profits and
unrealized losses on any such positions and excluding the amount by which
options that are “in-the-money” at the time of purchase are “in-the-money”) or,
alternatively, the aggregate net notional value of those positions, determined
at the time the most recent position was established, may not exceed 100% of the
Fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). In addition, to qualify for an exclusion, the Fund must
satisfy a marketing test, which requires, among other things, that the Fund not
hold itself out as a vehicle for trading commodity interests. The amendments to
CFTC Regulation 4.5 became effective on April 24, 2012. The regulatory
requirements could change at any time and additional regulations could also be
adopted, which may adversely affect the Fund.
The
Adviser currently claims an exclusion (under CFTC Regulation 4.5) from
registration as a CPO with respect to the Fund and, in its
management of the Fund, intends to comply with one of the two alternative
trading limitations described above and the marketing limitation. Complying with
the trading limitations may restrict the Adviser’s ability to use derivatives as
part of the Fund’s investment strategies. Although the Adviser expects to be
able to execute the Fund’s investment strategies within the limitations, the
Fund’s performance could be adversely affected. In addition, new rules may limit
the availability of certain derivatives, may make the use of derivatives by
portfolios more costly and may otherwise adversely impact the performance and
value of derivatives.
Mortgage
Pass-Through Securities
Interests
in pools of mortgage pass-through securities differ from other forms of debt
securities (which normally provide periodic payments
of interest in fixed amounts and the payment of principal in a lump sum at
maturity or on specified call dates). Instead, mortgage pass-through securities
provide monthly payments consisting of both interest and principal payments. In
effect, these payments are a “pass-through” of the monthly payments made by the
individual borrowers on the underlying residential mortgage loans, net of any
fees paid to the issuer or guarantor of such securities. Unscheduled payments of
principal may be made if the underlying mortgage loans are repaid or refinanced
or the underlying properties are foreclosed, thereby shortening the securities’
weighted average life. Some mortgage pass-through securities (such as securities
guaranteed by GNMA) are described as “modified pass- through securities.” These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, on the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The
principal governmental guarantor of mortgage pass-through securities is GNMA.
GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Treasury, the timely payment of principal and interest on
securities issued by lending institutions approved by GNMA (such as savings and
loan institutions, commercial banks, and mortgage bankers) and backed by pools
of mortgage loans. These mortgage loans are either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A “pool” or
group of such mortgage loans is assembled and after being approved by GNMA, is
offered to investors through securities dealers.
Government-related
guarantors of mortgage pass-through securities (e.g., not backed by the full
faith and credit of the U.S. Treasury) include
FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved sellers/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Mortgage pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA but are not
backed by the full faith and credit of the U.S. Treasury.
FHLMC
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. It is a U.S.
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues PCs, which
represent interests in conventional mortgages from FHLMC’s national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Treasury. The future financial performance of FNMA and FHMLC is heavily
dependent on the performance of the U.S. housing market.
Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers
also create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related pass-through
securities. A Fund does not purchase interests in pools created by such
non-governmental issuers.
19
Resets. The
interest rates paid on the Adjustable Rate Mortgage Securities (“ARMs”) in which
a Fund may invest generally are readjusted or reset at intervals of one year or
less to an increment over some predetermined interest rate index. There are two
main categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure, such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one-year and
five-year constant maturity Treasury Note rates, the three-month Treasury Bill
rate, the 180-day Treasury Bill rate, rates on longer-term Treasury securities,
the National Median Cost of Funds, the one-month or three-month London Interbank
Offered Rate (“LIBOR”), the prime rate of a specific bank, or commercial paper
rates. Some indices, such as the one-year constant maturity Treasury Note rate,
closely mirror changes in market interest rate levels. Others tend to lag
changes in market rate levels and tend to be somewhat less
volatile.
Caps
and Floors. The
underlying mortgages which collateralize the ARMs in which a Fund invests will
frequently have caps and floors which limit the maximum amount by which the loan
rate to the residential borrower may change up or down: (1) per reset or
adjustment interval, and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower’s monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization. The value
of mortgage securities in which a Fund invests may be affected if market
interest rates rise or fall faster and farther than the allowable caps or floors
on the underlying residential mortgage loans. Additionally, even though the
interest rates on the underlying residential mortgages are adjustable,
amortization and prepayments may occur, thereby causing the effective maturities
of the mortgage securities in which the Fund invests to be shorter than the
maturities stated in the underlying mortgages.
Although
a Fund may hold securities that carry U.S. government guarantees, these
guarantees do not extend to shares of the Fund itself and do not
guarantee the market prices of the securities.
Municipal
Government Obligations
In
general, municipal obligations are debt obligations issued by or on behalf of
states, territories, and possessions of the United States (including
the District of Columbia) and their political subdivisions, agencies, and
instrumentalities. Municipal obligations generally include debt obligations
issued to obtain funds for various public purposes. Certain types of municipal
obligations are issued in whole or in part to obtain funding for privately
operated facilities or projects. Municipal obligations include general
obligation bonds, revenue bonds, industrial development bonds, notes and
municipal lease obligations. Municipal obligations also include additional
obligations, the interest on which is exempt from federal income tax that may
become available in the future as long as the Fund’s Board determines that an
investment in any such type of obligation is consistent with the Fund’s
investment objectives. Municipal obligations may be fully or partially backed by
local government, the credit of a private issuer, current or anticipated
revenues from a specific project or specific assets or domestic or foreign
entities providing credit support such as letters of credit, guarantees or
insurance.
Municipal
obligations are generally considered riskier investments than U.S. Treasury
securities. Contrary to historical trends, in recent years, the
market has encountered downgrades, increased rates of default and lower yields
on municipal bonds. This is a product of significant reductions in revenues for
many states and municipalities as well as residual effects of a generally
weakened economy.
Bonds
and Notes. General
obligation bonds are secured by the issuer’s pledge of its full faith, credit,
and taxing power for the payment of interest and principal. Revenue bonds are
payable only from the revenues derived from a project or facility or from the
proceeds of a specified revenue source. Industrial development bonds are
generally revenue bonds secured by payments from and the credit of private
users. Municipal notes are issued to meet the short-term funding requirements of
state, regional and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes,
tax-exempt commercial paper, demand notes and similar instruments.
Municipal
Lease Obligations.
Municipal lease obligations may take the form of a lease, an installment
purchase, or a conditional sales contract. They are issued by state and local
governments and authorities to acquire land, equipment, and facilities, such as
vehicles, telecommunications and computer equipment and other capital assets. A
Fund may purchase these lease obligations directly, or it may purchase
participation interests in such lease obligations (See “Participation Interests”
section). States have different requirements for issuing municipal debt and
issuing municipal leases. Municipal leases are generally subject to greater
risks than general obligation or revenue bonds because they usually contain a
“non-appropriation” clause, which provides that the issuer is not obligated to
make payments on the obligation in future years unless funds have been
appropriated for this purpose each year. Such non-appropriation clauses are
required to avoid the municipal lease obligations from being treated as debt for
state debt restriction purposes. Accordingly, such obligations are subject to
“non-appropriation” risk. Municipal leases may be secured by the underlying
capital asset and it may be difficult to dispose of any such asset in the event
of non-appropriation or other default.
New
or Smaller Funds
Funds
with limited operating history and/or small asset base may involve additional
risk. For example, there can be no assurance that a new or
smaller fund will grow to or maintain an economically viable size. Should the
Fund not grow to or maintain an economically viable size, the Board may
determine to liquidate the Fund. Although the interests of shareholders in the
Fund are the principal concern
20
of
the Board, in the event the Board determines to liquidate the Fund, the timing
of any possible liquidation might not be favorable to certain
individual shareholders.
Options
The
use of derivatives is a highly specialized activity that can involve investment
techniques and risks different from, and in some respects
greater than, those associated with investing in more traditional investments
such as stocks and bonds. Derivatives may have a return that is tied to a
formula based upon an interest rate, index, or other measurement, which may
differ from the return of a simple security of the same maturity. A formula may
have a cap or other limitation on the rate of interest to be paid. Derivatives
may have varying degrees of volatility at different times, or under different
market conditions, and may perform in unanticipated ways. New regulation of
derivatives may make them more costly, or may otherwise adversely affect their
liquidity, value, or performance.
A
Fund may purchase and write (i.e., sell) put and call options. Such options may
relate to particular securities, stock indices, other index,
reference asset or reference item and may or may not be listed on a domestic or
foreign securities exchange and may or may not be issued by the Options Clearing
Corporation. Options trading is a highly specialized activity that entails
greater than ordinary investment risk. Options may be more volatile than the
underlying instruments, and therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying instruments themselves.
A
call option for a particular security gives the purchaser of the option the
right to buy, and the writer (seller) the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligation
under the option contract. A put option for a particular security gives the
purchaser the right to sell the security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security.
Stock
index options are put options and call options on various stock indices. In most
respects, they are identical to listed options on common
stocks. The primary difference between stock options and index options occurs
when index options are exercised. In the case of stock options, the underlying
security, common stock, is delivered. However, upon the exercise of an index
option, settlement does not occur by delivery of the securities comprising the
index. The option holder who exercises the index option receives an amount of
cash if the closing level of the stock index upon which the option is based is
greater than, in the case of a call, or less than, in the case of a put, the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the stock index and the exercise price of the
option expressed in dollars times a specified multiple. A stock index fluctuates
with changes in the market value of the stocks included in the index. For
example, some stock index options are based on a broad market index, such as the
S&P 500® Index or
the Value Line Composite Index or a narrower market index, such as the S&P
100®.
Indices
may also be based on an industry or market segment, such as the AMEX Oil and Gas
Index or the Computer and Business Equipment
Index. Options on stock indices are currently traded on the Chicago Board
Options Exchange, the New York Stock Exchange, the American Stock Exchange, the
Pacific Stock Exchange and the Philadelphia Stock Exchange.
A
Fund’s obligation to sell an instrument subject to a call option written by it,
or to purchase an instrument subject to a put option written by
it, may be terminated prior to the expiration date of the option by the Fund’s
execution of a closing purchase transaction, which is effected by purchasing on
an exchange an option of the same series (i.e., same underlying instrument,
exercise price and expiration date) as the option previously written. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transactions costs may be greater than the
premium received upon the original option, in which event a Fund will have paid
a loss in the transaction. There is no assurance that a liquid secondary market
will exist for any particular option. An option writer unable to effect a
closing purchase transaction will not be able to sell the underlying instrument
or liquidate the assets held in a segregated account, as described below, until
the option expires or the optioned instrument is delivered upon exercise. In
such circumstances, the writer will be subject to the risk of market decline or
appreciation in the instrument during such period.
If
an option purchased by a Fund expires unexercised, the Fund realizes a loss
equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold). If an option written by the Fund is exercised, the proceeds
of the sale will be increased by the net premium originally received and the
Fund will realize a gain or loss.
Certain
Risks Regarding Options. There
are several risks associated with transactions in options. For example, there
are significant differences between the securities and options markets that
could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objectives. In addition, a liquid secondary
market for particular options, whether traded over-the-counter or on an
exchange, may be absent for reasons which include the following: there may be
insufficient trading interest
21
in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Successful
use by a Fund of options on stock indices will be subject to the ability of the
Adviser to correctly predict movements in the
directions of the stock market. This requires different skills and techniques
than predicting changes in the prices of individual securities. In addition, a
fund’s ability to effectively hedge all or a portion of the securities in its
portfolio, in anticipation of or during a market decline, through transactions
in put options on stock indices, depends on the degree to which price movements
in the underlying index correlate with the price movements of the securities
held by the Fund. Inasmuch as a Fund’s securities will not duplicate the
components of an index, the correlation will not be perfect. Consequently, the
Fund bears the risk that the prices of its securities being hedged will not move
in the same amount as the prices of its put options on the stock indices. It is
also possible that there may be a negative correlation between the index and the
Fund’s securities that would result in a loss on both such securities and the
options on stock indices acquired by the Fund.
The
hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
The purchase of stock index options involves the risk that the premium and
transaction costs paid by a Fund in purchasing an option will be lost as a
result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
There
is no assurance that a liquid secondary market on an options exchange will exist
for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist. If a
Fund is unable to close out a call option on securities that it has written
before the option is exercised, the Fund may be required to purchase the
optioned securities in order to satisfy its obligation under the option to
deliver such securities. If a Fund is unable to effect a closing sale
transaction with respect to options on securities that it has purchased, it
would have to exercise the option in order to realize any profit and would incur
transaction costs upon the purchase and sale of the underlying
securities.
Cover
for Options Positions.
Transactions using options (other than options that a Fund has purchased) expose
the Fund to an obligation to another party. The Fund will not enter into any
such transactions unless it owns either (i) an offsetting (“covered”) position
in securities or other options or (ii) cash or liquid securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (i) above.
For more
information about these practices, see the “Derivatives” section.
Options
on Futures Contracts. A Fund
may purchase and sell options on the same types of futures in which it may
invest. Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer’s
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Purchasers of options who fail to exercise their options prior to the
exercise date suffer a loss of the premium paid.
Dealer
Options. A Fund
may engage in transactions involving dealer options as well as exchange-traded
options. Certain additional risks are specific to dealer options. While the Fund
might look to a clearing corporation to exercise exchange-traded options, if the
Fund were to purchase a dealer option it would need to rely on the dealer from
which it purchased the option to perform if the option were exercised. Failure
by the dealer to do so would result in the loss of the premium paid by the Fund
as well as loss of the expected benefit of the transaction.
Exchange-traded
options generally have a continuous liquid market while dealer options may not.
Consequently, the Fund may generally
be able to realize the value of a dealer option it has purchased only by
exercising or reselling the option to the dealer who issued it. Similarly, when
a Fund writes a dealer option, it may generally be able to close out the option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to whom a Fund originally wrote the option. While a Fund will
seek to enter into dealer options only with dealers who will agree to and which
are expected to be capable of entering into closing transactions with
22
the
Fund, there can be no assurance that the Fund will at any time be able to
liquidate a dealer option at a favorable price at any time prior to
expiration. Unless a Fund, as a covered dealer call option writer, is able to
effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the other party, the Fund may be unable
to liquidate a dealer option. With respect to options written by the Fund, the
inability to enter into a closing transaction may result in material losses to
the Fund. For example, because a Fund must maintain a secured position with
respect to any call option on a security it writes, the Fund may not sell the
assets, which it has segregated to secure the position while it is obligated
under the option. This requirement may impair the Fund’s ability to sell
portfolio securities at a time when such sale might be
advantageous.
The
Staff of the SEC has taken the position that purchased dealer options are
illiquid investments. A Fund may treat the cover used for
written dealer options as liquid if the dealer agrees that the Fund may
repurchase the dealer option it has written for a maximum price to be calculated
by a predetermined formula. In such cases, the dealer option would be considered
illiquid only to the extent the maximum purchase price under the formula exceeds
the intrinsic value of the option. Accordingly, a Fund will treat dealer options
as subject to the Fund’s limitation on illiquid investments. If the SEC changes
its position on the liquidity of dealer options, the Fund will change its
treatment of such instruments accordingly.
Spread
Transactions
A
Fund may purchase covered spread options from securities dealers. These covered
spread options are not presently exchange-listed or
exchange-traded. The purchase of a spread option gives the Fund the right to put
securities that it owns at a fixed dollar spread or fixed yield spread in
relationship to another security that the Fund does not own, but which is used
as a benchmark. The risk to a Fund, in addition to the risks of dealer options
described above, is the cost of the premium paid as well as any transaction
costs. The purchase of spread options will be used to protect the Fund against
adverse changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. This protection is provided
only during the life of the spread options.
Options
on Securities and Securities Indexes
The
U.S. Sector Fund may purchase and sell options on securities or securities
indexes to implement its investment strategy. There are two basic
types of options: “puts” and “calls.” Each type of option can be used to
establish either a long or a short position, depending upon whether the Fund is
the purchaser or a writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer of
the option the obligation to sell, the underlying asset at the exercise price
during the option period. Conversely, a put option on a security gives the
purchaser the right to sell, and the writer of the option the obligation to buy,
the underlying asset at the exercise price during the option
period.
Purchased
options have limited risk equal to the amount of the premium paid for the
option. Such options afford the opportunity for gain
corresponding to the increase or decrease in the value of the optioned asset. In
general, a purchased put increases in value as the value of the underlying
security falls and a purchased call increases in value as the value of the
underlying security rises.
The
principal reason to write options is to generate extra income (the premium paid
by the buyer). Written options have varying degrees of risk.
An uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered;
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk; that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The
obligation of the writer of an option continues until the writer effects a
closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and
exchanges.
Among
the options that the Fund may purchase or sell are options on a securities
index. In general, options on an index of securities are
similar to options on the securities themselves, except that delivery
requirements are different. For example, a put option on an index of securities
does not give the holder the right to make actual delivery of a basket of
securities, but instead gives the holder the right to receive an amount of cash
upon exercise of the option if the value of the underlying index has fallen
below the exercise price. The amount of cash received will be equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. As with options on
equity securities, or futures contracts, the Fund may offset its position in
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
23
A
securities index assigns relative values to the securities included in the index
and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Indexed
securities are instruments whose prices are indexed to the prices of other
securities, securities indices, commodities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Inflation-protected securities, for example, can be
indexed to a measure of inflation, such as the Consumer Price Index (“CPI”).
Commodity-indexed securities, for example, can be indexed to a commodities index
such as the Dow Jones-UBS Commodity Index Total Return.
The
performance of indexed securities depends to a great extent on the performance
of the security, currency, commodity, or other instrument
or measure to which they are indexed, and also may be influenced by interest
rate changes in the United States and abroad. Indexed securities may be more
volatile than the underlying instruments or measures. Indexed securities also
are subject to the credit risks associated with the issuer of the security, and
their values may decline substantially if the issuer’s creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, the U.S. Treasury, and certain other U.S. government agencies. In
calculating the Fund’s dividends, if any, index-based adjustments may be
considered income.
Participation
Notes
A
Fund may buy participation notes from a bank or broker-dealer (“issuer”) that
entitle the Fund to a return measured by the change in value
of an identified underlying security or basket of securities (collectively, the
“underlying security”). Participation notes are typically used when a direct
investment in the underlying security is restricted due to country-specific
regulations. Investing in participation notes involves the same risks associated
with a direct investment in the shares of the companies the notes seek to
replicate. However, the performance results of participation notes will not
replicate exactly the performance of the issuers or markets that the notes seek
to replicate due to transaction costs and other expenses. In addition,
participation notes are subject to counterparty risks. Participation notes may
be considered illiquid.
Passive
Investment Strategies
The
Funds pursue a passive or “indexing” strategy. The Funds will not buy or sell
shares of an equity security due to current or projected performance
of a security, industry, or sector, unless that security is added to or removed,
respectively, from the respective index each is designed to track. A Fund’s
return may not match the return of its index for a number of reasons, including:
the Fund incurs operating expenses not applicable to the Index, and incurs costs
in buying and selling securities; the Fund may not be fully invested at times;
differences in the valuation of securities and differences between the Fund’s
portfolio and the index resulting from legal restrictions, cost, or liquidity
constraints.
It
is also possible that a Fund may not replicate the performance of the Index due
to the temporary unavailability of certain Index securities
in the secondary market or due to other extraordinary circumstances. A Fund may
also have to vary its portfolio holdings from the composition of the Index in
order to qualify, and continue to qualify, as a “regulated investment company”
under the Code. See “Taxes” below for additional information on the Fund’s tax
treatment.
Precious
Metals and Other Commodities
Certain
Funds are subject to the risk of sharp price volatility of metals or other
commodities, and of shares of companies principally engaged in
activities related to metals or other commodities. Investments related to metals
or other commodities may fluctuate in price significantly over short periods of
time because of a variety of global economic, financial, and political factors.
These factors include: economic cycles; changes in inflation or expectations
about inflation in various countries; interest rates; currency fluctuations;
metal sales by governments, central banks, or international agencies; investment
speculation; resource availability; commodity prices; fluctuations in industrial
and commercial supply and demand; government regulation of the metals and other
commodities industries; and government prohibitions or restrictions on the
private ownership of certain precious and rare metals.
Preferred
Stock
A
Fund may invest in preferred stock with no minimum credit rating. Preferred
stock is a class of stock having a preference over common
stock as to the payment of dividends and the recovery of investment should a
company be liquidated, although preferred stock is usually subordinate to the
debt securities of the issuer. Preferred stock typically does not possess voting
rights and its market value may change based on changes in interest
rates.
The
fundamental risk of investing in common and preferred stock is the risk that the
value of the stock might decrease. Stock values fluctuate
in response to the activities of an individual company or in response to general
market and/or economic conditions.
24
Historically,
common stocks have provided greater long-term returns and have entailed greater
short-term risks than preferred stocks, fixed
income securities and money market investments. The market value of all
securities, including common and preferred stocks, is based upon the market’s
perception of value and not necessarily the book value of an issuer or other
objective measures of a company’s worth.
Publicly
Traded Partnerships
A
Fund may invest in publicly traded partnerships (“PTPs”). PTPs are limited
partnerships the interests in which (known as “units”) are traded
on public exchanges, just like corporate stock. PTPs are limited partnerships
that provide an investor with a direct interest in a group of assets (generally,
oil and gas properties). Publicly traded partnership units typically trade
publicly, like stock, and thus may provide the investor more liquidity than
ordinary limited partnerships. Publicly traded partnerships are also called
master limited partnerships and public limited partnerships. A limited
partnership has one or more general partners (they may be individuals,
corporations, partnerships, or another entity) which manage the partnership, and
limited partners, which provide capital to the partnership but have no role in
its management. When an investor buys units in a PTP, he or she becomes a
limited partner. PTPs are formed in several ways. A non-traded partnership may
decide to go public. Several non-traded partnerships may “roll up” into a single
PTP. A corporation may spin off a group of assets or part of its business into a
PTP of which it is the general partner, either to realize what it believes to be
the assets’ full value or as an alternative to issuing debt. A corporation may
fully convert to a PTP, although since 1986 the tax consequences have made this
an unappealing option; or a newly formed company may operate as a PTP from its
inception.
There
are different types of risks to investing in PTPs including regulatory risks and
interest rate risks. Currently most partnerships enjoy pass
through taxation of their income to partners, which avoids double taxation of
earnings. If the government were to change PTP business tax structure,
unitholders would not be able to enjoy the relatively high yields in the sector
for long. In addition, PTP’s which charge government-regulated fees for
transportation of oil and gas products through their pipelines are subject to
unfavorable changes in government-approved rates and fees, which would affect a
PTPs revenue stream negatively. PTPs also carry some interest rate risks. During
increases in interest rates, PTPs may not produce decent returns to
shareholders.
Real
Estate Investment Trusts
A
Fund may invest in securities of real estate investment trusts (“REITs”). REITs
are corporations or trusts that specialize in financing or
acquiring, holding, and managing residential, commercial, or industrial real
estate. A REIT is generally not subject to U.S. federal income tax at the entity
level on income distributed to its shareholders or unitholders if it distributes
to shareholders or unitholders at least 90% of its taxable income for each
taxable year and complies with regulatory requirements relating to its
organization, ownership, assets, and income.
REITs
generally can be classified as “Equity REITs”, “Mortgage REITs” and “Hybrid
REITs.” An Equity REIT invests the majority of its
assets directly in real property and derives its income primarily from rents and
from capital gains on real estate appreciation, which are realized through
property sales. A Mortgage REIT invests the majority of its assets in real
estate mortgage loans; the main source of their income is mortgage interest
payments. A Hybrid REIT combines the characteristics of an Equity REIT and a
Mortgage REIT. Although a Fund can invest in all three kinds of REITs, its
emphasis is expected to be on investments in Equity REITs.
Investments
in the real estate industry involve particular risks. The real estate industry
has been subject to substantial fluctuations and declines
on a local, regional, and national basis in the past and may continue to be in
the future. Real property values and income from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
that own and operate real estate directly, companies that lend to such
companies, and companies that service the real estate industry.
Investments
in REITs also involve risks. Equity REITs will be affected by changes in the
values of and income from the properties they own, while
Mortgage REITs may be affected by the credit quality of the mortgage loans they
hold. In addition, REITs are dependent on specialized management skills and on
their ability to generate cash flow for operating purposes and to satisfy
distribution requirements. REITs also may have limited diversification and have
limited financial resources, as well as to the risk of self-liquidation. REITs
may also fail to qualify for the “dividends paid deduction” under the Code,
which allows REITs to reduce their corporate taxable income for dividends paid
to their shareholders, or fail to maintain an exemption from registration under
the 1940 Act. By investing in REITs indirectly through a Fund, a shareholder
bears not only a proportionate share of the expenses of a Fund, but also may
indirectly bear similar expenses of some of the REITs in which it invests. In
addition, as REITs generally pay a higher rate of dividends (on a pre-tax basis)
than operating companies, to the extent application of the Fund’s investment
strategy results in the Fund investing in REIT shares, the percentage of the
Fund’s dividend income received from REIT shares will likely exceed the
percentage of the Fund’s portfolio which is comprised of REIT shares. The real
estate industry has been subject to substantial fluctuations and declines on a
local, regional, and national basis in the past and may continue to be in the
future.
25
Recent
Market Conditions and Events
Global
economies and financial markets are increasingly interconnected, which increases
the possibilities that conditions in one country or region
might adversely affect issuers in another country or region. Geopolitical and
other risks, including war, terrorism, trade disputes, political or economic
dysfunction within some nations, public health crises and related geopolitical
events, as well as environmental disasters such as earthquakes, fires, and
floods, may add to instability in world economies and markets generally. Changes
in trade policies and international trade agreements could affect the economies
of many countries in unpredictable ways. Likewise, systemic market dislocations
of the kind that occurred during the financial crisis that began in 2008, if
repeated, would be highly disruptive to economies and markets, adversely
affecting individual companies and industries, securities markets, interest
rates, credit ratings, inflation, investor sentiment, and other factors
affecting the value of a Fund’s investments.
Political
and diplomatic events within the United States, including a contentious domestic
political environment, changes in political party
control of one or more branches of the U.S. government, the U.S. government's
inability at times to agree on a long-term budget and deficit reduction plan,
the threat of a U.S. government shutdown, and disagreements over, or threats not
to increase, the U.S. government's borrowing limit (or “debt ceiling”), as well
as political and diplomatic events abroad, may affect investor and consumer
confidence and may adversely impact financial markets and the broader economy,
perhaps suddenly and to a significant degree. A downgrade of the ratings of U.S.
government debt obligations, or concerns about the U.S. government's credit
quality in general, could have a substantial negative effect on the U.S. and
global economies. Moreover, although the U.S. government has honored its credit
obligations, there remains a possibility that the United States could default on
its obligations. The consequences of such an unprecedented event are impossible
to predict, but it is likely that a default by the United States would be highly
disruptive to the U.S. and global securities markets and could significantly
impair the value of the Funds’ investments.
Certain
illnesses spread rapidly and have the potential to significantly and adversely
affect the global economy and the value of a Fund’s investments.
Outbreaks of illnesses and diseases, such as severe acute respiratory syndrome
(SARS), influenza of various types and, most recently, COVID-19, or other
similarly infectious diseases, may have material adverse impacts on a Fund and
its performance. Epidemics and/or pandemics, such as COVID-19, have and may
further result in, among other things, border closings and other significant
travel restrictions and disruptions, significant disruptions to business
operations, supply chains and customer activity, significant challenges to
healthcare service preparation and delivery, and quarantines and stay-at-home
orders, as well as general concern and uncertainty that has negatively affected
the economic environment. These impacts have caused significant volatility and
declines in global financial markets, which have caused losses for investors.
The impact of COVID-19, and other epidemics and/or pandemics that may arise in
the future, and may affect the economies of many nations, individual companies
and the global securities and commodities markets, including their liquidity, in
ways that cannot necessarily be foreseen at the present time. Historical
patterns of correlation among asset classes may break down in unanticipated ways
during times of high volatility, disrupting investment programs and potentially
causing losses. The impact of public health crises, including COVID-19, may
continue to last for an extended period of time.
The
U.S. government and certain foreign central banks have taken a variety of
unprecedented actions to stabilize the economy and calm the
financial markets and may continue to do so, but the ultimate impact of these
efforts and interventions is uncertain. In the future, the U.S. government or
other governments may take actions that could affect the overall economy as well
as the securities in which a Fund invests, the markets in which they trade, or
the issuers of such securities, in ways that cannot necessarily be foreseen at
the present time. Governmental and quasi-governmental authorities and regulators
throughout the world, such as the U.S. Federal Reserve (the “Fed”), have in the
past responded to major economic disruptions with a variety of significant
fiscal and monetary policy changes, including but not limited to, direct capital
infusions into companies, new monetary programs, and changes to interest rates.
Certain of those policy changes, for example, were implemented in response to
the COVID-19 pandemic. The Fed has spent hundreds of billions of dollars to keep
credit flowing through short-term money markets since mid-September 2019 when a
shortage of liquidity caused a spike in overnight borrowing rates, and again in
2020 with large stimulus initiatives intended to respond to economic stresses
stemming from the COVID-19 pandemic. The impact of infectious diseases in
developing and emerging market countries, however, may be greater due to less
established health care systems and fewer government resources to bolster their
economies. Public health crises may exacerbate other pre-existing political,
social, and economic risks in certain countries.
Instability
in the global capital markets may result in disruptions in liquidity in the debt
capital markets, significant write-offs in the financial
services sector (including banking), the repricing of credit risk in credit
markets and the failure of domestic and international financial institutions.
Precise interest rate predictions are difficult to make, and interest rates may
change unexpectedly and dramatically in response to extreme changes in market or
economic conditions. As a result, the value of fixed income securities may vary
widely under certain market conditions and may result in heightened market
volatility and a decline in the value of a Fund’s portfolio. Changes in
government policies or central banks could negatively affect the value and
liquidity of a Fund’s investments and cause it to lose money. The markets could
react strongly to expectations for changes in government policies, which could
increase volatility, especially if the market’s expectations are not borne out.
There can be no assurance that the initiatives undertaken by governments and
central banks will be successful.
26
COVID-19,
and future epidemics or pandemics, could also impair the information technology
and other operational systems upon which a
Fund’s service providers rely, and could otherwise disrupt the ability of a
Fund’s service providers to perform essential tasks. These could impair a Fund’s
ability to maintain operational standards (such as with respect to satisfying
redemption requests), disrupt the operations of a Fund’s service providers, and
negatively impact a Fund’s performance. In certain cases, an exchange or market
may close or issue trading halts on either specific securities or even the
entire market, which may result in a Fund being, among other things, unable to
buy or sell certain securities or financial instruments or accurately value its
investments.
Markets
generally and the energy sector specifically, including MLPs and energy
companies in which a Fund may invest, may also be adversely
impacted by reduced demand for oil and other energy commodities as a result of a
slowdown in economic activity and by price competition among key oil producing
countries. In the recent past, global oil prices have declined significantly and
experienced significant volatility, including a period where an oil-price
futures contract fell into negative territory for the first time in history, as
demand for oil has slowed and oil storage facilities reach their storage
capacities. Although the Organization of Petroleum Exporting Countries (OPEC)
and other oil-producing countries responded, oil price volatility may adversely
impact MLPs and energy infrastructure companies. Such companies’ growth
prospects and ability to pay dividends may be negatively impacted, which could
adversely impact a Fund's performance. Additionally, an extended period of
reduced oil prices may significantly lengthen the time the energy sector would
need to recover after a stabilization of prices.
Some
countries, including the United States, are adopting more protectionist trade
policies and are moving away from the tighter financial
industry regulations that followed the 2008 financial crisis. The United States
may also be considering significant new investments in infrastructure and
national defense which, coupled with potentially lower federal taxes, could lead
to sharply increased government borrowing and higher interest rates. The exact
shape of these policies is still being considered through the political process,
but the equity and debt markets may react strongly to expectations, which could
increase volatility, especially if the market’s expectations for changes in
government policies are not borne out.
High
public debt in the United States and other countries creates ongoing systemic
and market risks and policymaking uncertainty. There may
be additional increases in the amount of debt due to the economic effects of the
COVID-19 pandemic. Because there is little precedent for this situation, it is
difficult to predict the impact on various markets. Over the longer term, rising
interest rates may present a greater risk than has historically been the case
due to the recent period of historically low rates, the effect of government
fiscal and monetary policy initiatives, and potential market reactions to those
initiatives.
Some
countries where economic conditions are still recovering from the 2008 crisis
are perceived as still fragile. The crisis caused strains
among countries in the euro-zone that have not been fully resolved, and it is
not yet clear what measures, if any, European Union (“EU”) or individual country
officials may take in response. Withdrawal of government support, failure of
efforts in response to the strains, or investor perception that such efforts are
not succeeding could adversely impact the value and liquidity of certain
securities and currencies.
In
addition, global climate change may have an adverse effect on property and
security values. A rise in sea levels, an increase in powerful
windstorms and/or a storm-driven increase in flooding could cause coastal
properties to lose value or become unmarketable altogether. Large wildfires
driven by high winds and prolonged drought may devastate entire communities and
may be very costly to any business found to be responsible for the fire or
conducting operations in affected areas. These losses could adversely affect
corporate borrowers and mortgage lenders, the value of mortgage-backed
securities, the bonds of municipalities that depend on tax revenues and tourist
dollars generated by such properties, and insurers of the property and/or of
corporate, municipal, or mortgage-backed securities. Since property and security
values are driven largely by buyers’ perceptions, it is difficult to know the
time period over which these effects might unfold. Economists warn that, unlike
previous declines in the real estate market, properties in affected coastal
zones may never recover their value. Regulatory changes and divestment movements
tied to concerns about climate change could adversely affect the value of
certain land and the viability of industries whose activities or products are
seen as accelerative to climate change.
Some
market participants have expressed concern that passively managed index funds
and other indexed products inflate the value of their
component securities. If the component securities in such indices decline in
value for this and other reasons, the value of a Fund’s investments in these
securities will also decline.
Russia’s
invasion of Ukraine, and corresponding events in late February 2022, have had,
and could continue to have, severe adverse effects on
regional and global economic markets for securities and commodities. Following
Russia’s actions, various governments, including the United States, have issued
broad-ranging economic sanctions against Russia, including, among other actions,
a prohibition on doing business with certain Russian companies, large financial
institutions, officials and oligarchs; the removal by certain countries and the
EU of selected Russian banks from the Society for Worldwide Interbank Financial
Telecommunications (SWIFT), the electronic banking network that connects banks
globally; and restrictive measures to prevent the Russian Central Bank from
undermining the impact of the sanctions. The current events, including sanctions
and the potential for future sanctions, including any impacting Russia’s energy
sector, and other actions, and Russia’s retaliatory responses to those sanctions
and actions, may continue to adversely impact the Russian and Ukrainian
economies and may result in the further decline of the value and liquidity of
Russian
27
and
Ukrainian securities, a continued weakening of the ruble and hryvnia and
continued exchange closures, and may have other adverse consequences
on the Russian and Ukrainian economies that could impact the value of these
investments and impair the ability of the Fund to buy, sell, receive or deliver
those securities. Moreover, those events have, and could continue to have, an
adverse effect on global markets performance and liquidity, thereby negatively
affecting the value of a Fund’s investments beyond any direct exposure to
Russian and Ukrainian issuers. The duration of ongoing hostilities and the vast
array of sanctions and related events cannot be predicted. Those events present
material uncertainty and risk with respect to markets globally and the
performance of the Funds and their investments or operations could be negatively
impacted.
Risks
Related to Cybersecurity. The Funds
and their service providers have administrative and technical safeguards in
place with respect to information security. Nevertheless, the Funds and their
service providers are potentially susceptible to operational and information
security risks resulting from a cyber-attack as the Funds are highly dependent
upon the effective operation of their computer systems and those of their
business partners. These risks include, among other things, the theft, misuse,
corruption and destruction of data maintained online or digitally, denial of
service on websites and other operational disruption and unauthorized release of
confidential customer information. Cyber-attacks affecting the Adviser, Victory
Capital Services, Inc. (the “Distributor,”), the Funds, the custodian, the
transfer agent, financial intermediaries and other affiliated or third-party
service providers may adversely affect the Funds and their shareholders. For
instance, cyber-attacks may interfere with the processing of Fund transactions,
including the processing of orders, impact a Fund’s ability to calculate net
asset values, cause the release and possible destruction of confidential
customer or business information, impede trading, subject a Fund and/or its
service providers and intermediaries to regulatory fines and financial losses
and/or cause reputational damage. Cybersecurity risks may also affect the
issuers of securities in which a Fund invests, which may cause a Fund’s
investments to lose value. A Fund may also incur additional costs for
cybersecurity risk management in the future. Although the Funds and their
service providers have adopted security procedures to minimize the risk of a
cyber-attack, there can be no assurance that the Funds or their service
providers will avoid losses affecting the Funds due to cyber-attacks or
information security breaches in the future.
Responsible
Investing Risk. A Fund may
incorporate specific responsible, environmental, social and governance (“ESG”),
impact or sustainability considerations into its investment objectives,
strategies, and/or processes, as described in the applicable Fund's Prospectus.
These considerations will vary depending on a Fund's particular investment
strategy and the investment process followed by the particular investment team
that manages the Fund. A team may include consideration of third-party research
as well as consideration of proprietary research across the ESG risks and
opportunities regarding an issuer. The investment team considers those ESG
characteristics it deems relevant or additive when making investment decisions
for a Fund. The ESG characteristics utilized in a Fund's investment process are
anticipated to evolve over time and one or more characteristics may not be
relevant with respect to all issuers that are eligible for
investment.
ESG
characteristics are not the sole considerations when making investment decisions
for a Fund. Further, investors can differ in their views of
what constitutes positive or negative ESG characteristics. As a result, a Fund
may invest in issuers that do not reflect the beliefs and values with respect to
ESG of any particular investor. ESG considerations may affect a Fund's exposure
to certain companies or industries and a Fund may forego certain investment
opportunities. While the Adviser views ESG considerations as having the
potential to contribute to a Fund's long-term performance, there is no guarantee
that such results will be achieved.
Brexit.
The United
Kingdom (“UK”) ceased to be a member of the EU on January 31, 2020 (“Brexit”).
During a prescribed period (the “Transition Period”), certain transitional
arrangements were in effect, such that the UK continued to be treated, in most
respects, as if it were still a member of the EU, and generally remained subject
to EU law. The Transition Period ended on December 31, 2020. On December 24,
2020, the EU and the UK reached an agreement in principle on the terms of
certain agreements and declarations governing the ongoing relationship between
the EU and the UK, including the EU-UK Trade and Cooperation Agreement (the
“Agreement”). The Agreement entered into force on May 1, 2021. The Agreement is
limited in its scope primarily to the trade of goods, transport, energy links
and fishing, and uncertainties remain relating to certain aspects of the UK’s
future economic, trading, and legal relationships with the EU and with other
countries. The actual or potential consequences of Brexit, and the associated
uncertainty, could adversely affect economic and market conditions in the UK, in
the EU and its member states and elsewhere, and could contribute to instability
in global financial markets.
The
impact of such events on the Funds is difficult to predict but they may
adversely affect the return on the Funds and their investments.
There may be detrimental implications for the value of a Fund’s investments, its
ability to enter into transactions or to value or realize such investments or
otherwise to implement its investment program. It is possible that a Fund’s
investments may need to be restructured to enable a Fund's objectives to be
pursued fully. This may increase costs or make it more difficult for a Fund to
pursue its investment objective.
The
London Interbank Offered Rate (“LIBOR”). LIBOR has
historically been the principal floating rate benchmark in the financial
markets. However, LIBOR was discontinued as a floating rate benchmark after June
30, 2023. Then-existing LIBOR obligations have been transitioned or will
transition to another benchmark, depending on the LIBOR currency and tenor. For
some existing LIBOR-based obligations, the contractual consequences of the
discontinuation of LIBOR may not be clear.
28
Non-LIBOR
floating rate obligations, including obligations based on the Secured Overnight
Financing Rate (“SOFR”), may have returns
and values that fluctuate more than those of floating rate debt obligations that
are based on LIBOR or other rates. Also, because SOFR and some alternative
floating rates are relatively new market indexes, markets for certain non-LIBOR
obligations may never develop or may not be liquid. Market terms for non-LIBOR
floating rate obligations, such as the spread over the index reflected in
interest rate provisions, may evolve over time, and prices of non-LIBOR floating
rate obligations may be different depending on when they are issued and changing
views about correct spread levels.
Various
SOFR-based rates, including SOFR-based term rates, and various non-SOFR-based
rates have developed in response to the discontinuation
of U.S. dollar LIBOR, which may create various risks for the Funds and the
financial markets more generally. There are non- LIBOR forward-looking floating
rates that are not based on SOFR and that may be considered by participants in
the financial markets as LIBOR alternatives. Unlike forward-looking SOFR-based
term rates, such rates are intended reflect a bank credit spread
component.
It
is not clear how replacement rates for LIBOR--including SOFR-based rates and
non-SOFR-based rates--will continue to develop and to what
extent they will be used. There is no assurance that these replacement rates
will be suitable substitutes for LIBOR, and thus the substitution of such rates
for LIBOR could have an adverse effect on the Funds and the financial markets
more generally. Concerns about market depth and stability could affect the
development of non-SOFR-based term rates, and such rates may create various
risks, which may or may not be similar to the risks relating to
SOFR.
Regulation
as a Commodity Pool Operator
The
Funds have filed with the National Futures Association (“NFA”), a notice
claiming an exclusion from the definition of the term “commodity
pool operator” under the Commodity Exchange Act, as amended, and the rules of
the Commodity Futures Trading Commission promulgated thereunder, with respect to
the Funds’ operations. Accordingly, the Funds will not be subject to
registration or regulation as a commodity pool.
Repurchase
Agreements
A
Fund may enter into repurchase agreements. In a repurchase agreement, an
investor (such as the Fund) purchases a security (known as the
“underlying security”) from a securities dealer or bank. Any such dealer or bank
must be deemed creditworthy by the Adviser. At that time, the bank or securities
dealer agrees to repurchase the underlying security at a mutually agreed upon
price on a designated future date. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase prices may be the same, with interest at an agreed upon rate due to
the Fund on repurchase. In either case, the income to the Fund generally will be
unrelated to the interest rate on the underlying securities. Repurchase
agreements must be “fully collateralized,” in that the market value of the
underlying securities (including accrued interest) must at all times be equal to
or greater than the repurchase price. Therefore, a repurchase agreement can be
considered a loan collateralized by the underlying securities.
Repurchase
agreements are generally for a short period of time, often less than a week, and
will generally be used by a Fund to invest excess
cash or as part of a temporary defensive strategy. Repurchase agreements that do
not provide for payment within seven days will be treated as illiquid
investments. In the event of a bankruptcy or other default by the seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying security and losses. These losses could result from: (a) possible
decline in the value of the underlying security while the Fund is seeking to
enforce its rights under the repurchase agreement; (b) possible reduced levels
of income or lack of access to income during this period; and (c) expenses of
enforcing its rights.
Securities
of Other Investment Companies
General. Except
as described in the following paragraphs, each Fund currently intends to limit
its investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (1) not more
than 5% of the value of a Fund’s total assets will be invested in the securities
of any one investment company; (2) not more than 10% of the value of its total
assets will be invested in the aggregate in securities of investment companies
as a group; and (3) not more than 3% of the outstanding voting stock of any one
investment company will be owned by a Fund.
A
Fund may also purchase and redeem shares issued by a money market fund without
limit, provided that either: (1) the Fund pays no "sales
charge" or "service fee" (as each of those terms is defined in the FINRA Conduct
Rules); or (2) the Adviser waives its advisory fee in an amount necessary to
offset any such sales charge or service fee.
Pursuant
to an order issued by the SEC exempting certain exchange-traded funds (“ETFs”)
from Section 12(d)(1) of the 1940 Act (SEC Order and
Rule 12d1-4 under the 1940 Act), in addition to procedures approved by the
Board, each Fund may invest in such ETFs in excess of the 5% and 10% limits
described above, provided that the Fund complies with relevant regulatory
conditions, enters into a participation agreement, and any other applicable
investment limitations.
29
As
a shareholder of an investment company, a Fund indirectly will bear its
proportionate share of any management fees and other expenses
paid by such investment company in addition to the fees and expenses a Fund
bears directly in connection with its own operations. These securities represent
interests in professionally managed portfolios that may invest in various types
of instruments pursuant to a wide range of investment styles. A Fund would also
bear the risk of all of the underlying investments held by the other investment
company. An investment company may not achieve its investment
objective.
ETFs are
investment companies, many of which pursue investment objectives to achieve the
same rate of return as a particular market index or commodity while trading
throughout the day on an exchange. Certain ETFs are actively managed portfolios
rather than being based upon an underlying index. ETF shares are sold initially
in the primary market in units, often consisting of 50,000 or more shares
(“creation units”). A creation unit represents a bundle of securities or
commodities that replicates, or is a representative sample of, a particular
index or commodity and that is deposited with the ETF. Once owned, the
individual shares comprising each creation unit are traded on an exchange in
secondary market transactions for cash. The secondary market for ETF shares
allows them to be readily converted into cash, like commonly traded stocks. The
combination of primary and secondary markets permits ETF shares to be traded
throughout the day close to the value of the ETF’s underlying portfolio
securities. A Fund would purchase and sell individual shares of ETFs in the
secondary market. These secondary market transactions require the payment of
commissions.
Unit
Investment Trusts. (“UITs”)
are investment companies that hold a fixed portfolio of securities until the
fixed maturity date of the UIT. A Fund would generally only purchase UITs in the
secondary market for cash, which would result in the payment of
commissions.
Risk
Factors Associated with Investments in ETFs and UITs. ETF and
UIT shares are subject to the same risk of price fluctuation due to supply and
demand as any other stock traded on an exchange, which means that a Fund could
receive less from the sale of shares of an ETF or UIT it holds than it paid at
the time it purchased those shares. Furthermore, there may be times when the
exchange halts trading, in which case a Fund owning ETF or UIT shares would be
unable to sell them until trading is resumed. There can be no assurance that an
ETF or UIT will continue to meet the listing requirements of the exchange or
that an active secondary market will develop for shares. In addition, because
ETFs and UITs invest in a portfolio of common stocks or other instruments or
commodities, the value of an ETF or UIT could decline if prices of those
instruments or commodities decline. An overall decline of those instruments or
commodities comprising an ETF’s or UIT’s benchmark index could have a greater
impact on the ETF or UIT and investors than might be the case in an investment
company with a more widely diversified portfolio. Losses could also occur if the
ETF or UIT is unable to replicate the performance of the chosen benchmark index.
There may be times when the market price for an ETF or UIT and its NAV vary
significantly and a Fund may pay more than (premium) or less than (discount) NAV
when buying shares on the secondary market. The market price of an ETF’s or
UIT’s shares includes a “bid-ask spread” charged by the exchange specialists,
market makers or other participants that trade the particular security. In times
of severe market disruption, the bid-ask spread often increases significantly.
This means that the shares may trade at a discount to NAV and the discount is
likely to be greatest when the price of shares is falling fastest.
Other
risks associated with ETFs and UITs include the possibility that: (i) an ETF’s
or UIT’s distributions may decline if the issuers of the
ETF’s or UIT’s portfolio securities fail to continue to pay dividends; and (ii)
under certain circumstances, an ETF or UIT could be terminated. Should
termination occur, the ETF or UIT could have to liquidate its portfolio
securities when the prices for those securities are falling. In addition,
inadequate or irregularly provided information about an ETF or UIT or its
investments, because ETFs and UITs are generally passively managed, could expose
investors in ETFs and UITs to unknown risks. Actively managed ETFs are also
subject to the risk of underperformance relative to their chosen
benchmark.
Short
Sales
A
Fund may sell securities short as an outright investment strategy and to offset
potential declines in long positions in similar securities. A short
sale is a transaction in which the Fund sells a security it does not own or have
the right to acquire (or that it owns but does not wish to deliver) in
anticipation that the market price of that security will decline.
When
a Fund makes a short sale, the broker-dealer through which the short sale is
made must borrow the security sold short and deliver it to the
party purchasing the security. The Fund is required to make a margin deposit in
connection with such short sales; the Fund may have to pay a fee to borrow
particular securities and will often be obligated to pay over any dividends and
accrued interest on borrowed securities.
If
the price of the security sold short increases between the time of the short
sale and the time a Fund covers its short position, the Fund will incur
a loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. The successful use of short selling may be adversely affected
by imperfect correlation between movements in the price of the security sold
short and the securities being hedged.
To
the extent a Fund sells securities short, it will provide collateral to the
broker-dealer and (except in the case of short sales “against the box”)
will maintain additional asset coverage in the form of cash, U.S. government
securities or other liquid securities with its custodian in a segregated account
in an amount at least equal to the difference between the current market value
of the securities sold
30
short
and any amounts required to be deposited as collateral with the selling broker
(not including the proceeds of the short sale). A Fund does
not intend to enter into short sales (other than short sales “against the box”)
if immediately after such sales the aggregate of the value of all collateral
plus the amount in such segregated account exceeds 30% of the value of the
Fund’s net assets. This percentage may be varied by action of the Board. A short
sale is “against the box” to the extent the Fund contemporaneously owns, or has
the right to obtain at no added cost, securities identical to those sold
short.
Swap
Agreements
A
Fund may enter into swap agreements for purposes of attempting to gain exposure
to equity, debt, commodities, or other asset markets
without actually purchasing those assets, or to hedge a position. A Fund does
not invest more than 25% of its assets in swap contracts with any one
counterparty. Security investments are made without restriction as to the
issuer’s country. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a day to more than one year.
In a standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,” i.e.,
the return on or increase in value of a particular dollar amount invested in a
“basket” of securities representing a particular index.
Most
swap agreements entered into by a Fund calculate the obligations of the parties
to the agreement on a “net basis.” Consequently, the Fund’s
current obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the “net
amount”). Payments may be made at the conclusion of a swap agreement or
periodically during its term.
Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, if a swap is entered into on a net basis, if
the other party to a swap agreement defaults, a Fund’s risk of loss consists of
the net amount of payments that the Fund is contractually entitled to receive,
if any.
The
net amount of the excess, if any, of a Fund’s obligations over its entitlements
with respect to a swap agreement entered into on a net
basis will be accrued daily and an amount of cash or liquid asset having an
aggregate net asset value at least equal to the accrued excess will be
maintained in an account with the Custodian. A Fund will also establish and
maintain such accounts with respect to its total obligations under any swaps
that are not entered into on a net basis. Obligations under swap agreements so
covered will not be construed to be “senior securities” for purposes of the
Fund’s investment restriction concerning senior securities.
Because
they are two-party contracts and because they may have terms of greater than
seven days, swap agreements may be considered to be
illiquid for a Fund’s illiquid investment limitations. A Fund will not enter
into any swap agreement unless the Adviser believes that the other party to the
transaction is creditworthy. A Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counter-party.
A
Fund may enter into a swap agreement in circumstances where the Adviser believes
that it may be more cost effective or practical than
buying the securities represented by such index or a futures contract or an
option on such index. The counter-party to any swap agreement will typically be
a bank, investment banking firm or broker/dealer. The counter-party will
generally agree to pay the Fund the amount, if any, by which the notional amount
of the swap agreement would have increased in value had it been invested in the
particular stocks represented in the index, plus the dividends that would have
been received on those stocks. A Fund will agree to pay to the counter-party a
floating rate of interest on the notional amount of the swap agreement plus the
amount, if any, by which the notional amount would have decreased in value had
it been invested in such stocks. Therefore, the return to a Fund on any swap
agreement should be the gain or loss on the notional amount plus dividends on
the stocks less the interest paid by the Fund on the notional
amount.
The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with the markets for other
similar instruments that are traded in the OTC market.
Temporary
Defensive Strategies
At
times, the Adviser may judge that market conditions make pursuing the Fund’s
basic investment strategy inconsistent with the best interests
of its shareholders. At such times, the Adviser may (but will not necessarily),
without notice, temporarily use alternative strategies, primarily designed to
reduce fluctuations in the values of the Fund’s assets. In implementing these
“defensive strategies,” the Fund may hold assets in cash and cash equivalents
and in other investments an Adviser believes to be consistent with the Fund’s
best interests. If any such a temporary defensive strategy is implemented, the
Fund may not achieve its investment objective.
31
Time
Deposits and Variable Rate Notes
A
Fund may invest in fixed time deposits, whether or not subject to withdrawal
penalties. The commercial paper obligations, which the Fund
may buy are unsecured and may include variable rate notes. The nature and terms
of a variable rate note (i.e., a “Master Note”) permit the Fund to invest
fluctuating amounts at varying rates of interest pursuant to a direct
arrangement between the Fund as Lender, and the issuer, as borrower. It permits
daily changes in the amounts borrowed. A Fund has the right at any time to
increase, up to the full amount stated in the note agreement, or to decrease the
amount outstanding under the note. The issuer may prepay at any time and without
penalty any part of or the full amount of the note. The note may or may not be
backed by one or more bank letters of credit. Because these notes are direct
lending arrangements between the Fund and the issuer, it is not generally
contemplated that they will be traded; moreover, there is currently no secondary
market for them. Except as specifically provided in the Prospectus, there is no
limitation on the type of issuer from whom these notes may be purchased;
however, in connection with such purchase and on an ongoing basis, the Adviser
will consider the earning power, cash flow and other liquidity ratios of the
issuer, and its ability to pay principal and interest on demand, including a
situation in which all holders of such notes made demand simultaneously.
Variable rate notes are subject to the Fund’s investment restriction on illiquid
investments unless such notes can be put back to the issuer on demand within
seven days.
U.S.
Government Obligations
These
consist of various types of marketable securities issued by the U.S. Treasury
e.g., bills, notes and bonds. Such securities are direct obligations
of the U.S. government and differ mainly in the length of their maturity.
Treasury bills, the most frequently issued marketable government security, have
a maturity of up to one year and are issued on a discount basis. A Fund may also
invest in Treasury Inflation-Protected Securities (“TIPS”). TIPS are special
types of treasury bonds that were created in order to offer bond investors
protection from inflation. The values of the TIPS are automatically adjusted to
the inflation rate as measured by the Consumer Price Index (“CPI”). If the CPI
goes up by half a percent, the value of the bond (the TIPS) would also go up by
half a percent. If the CPI falls, the value of the bond does not fall because
the government guarantees that the original investment will stay the same. TIPS
decline in value when real interest rates rise. However, in certain interest
rate environments, such as when real interest rates are rising faster than
nominal interest rates, TIPS may experience greater losses than other fixed
income securities with similar duration.
Obligations
of U.S. government agencies and instrumentalities are not necessarily backed by
the full faith and credit of the U.S.
Treasury, but rather of the government agency or instrumentality itself (see
“U.S. Government Agency Obligations,” below.) Although a Fund may hold
securities that carry U.S. government guarantees, these guarantees do not extend
to shares of the Fund itself and do not guarantee the market prices of the
securities. In recent periods, the values of U.S. government securities have
been affected substantially by increased demand for them in the global markets.
Increases or decreases in the demand for U.S. government securities may occur at
any time and may result in increased volatility in the values of those
securities.
U.S.
Government Agency Obligations
These
consist of debt securities issued by agencies and instrumentalities of the
United States government, including the various types of
instruments currently outstanding or which may be offered in the future.
Agencies include, among others, the Federal Housing Administration, Government
National Mortgage Association (“GNMA”), Farmer’s Home Administration,
Export-Import Bank of the United States, Maritime Administration, and General
Services Administration. Instrumentalities include, for example, each of the
Federal Home Loan Banks, the National Bank for Cooperatives, the Federal Home
Loan Mortgage Corporation (“FHLMC”), the Farm Credit Banks, the Federal National
Mortgage Association (“FNMA”), and the United States Postal Service. These
securities are either: (i) backed by the full faith and credit of the U.S.
government e.g., U.S. Treasury Bills); (ii) guaranteed by the United States
Treasury (e.g., GNMA mortgage-backed securities); (iii) supported by the issuing
agency’s or instrumentality’s right to borrow from the United States Treasury
(e.g., FNMA Discount Notes); or (iv) supported only by the issuing agency’s or
instrumentality’s own credit (e.g., Tennessee Valley Association). On September
7, 2008, the U.S. Treasury Department and the Federal Housing Finance Authority
(the “FHFA”) announced that FNMA and FHLMC was placed into conservatorship, a
statutory process designed to stabilize a troubled institution with the
objective of returning the entity to normal business operations. The U.S.
Treasury Department and the FHFA at the same time established a secured lending
facility and a Secured Stock Purchase Agreement with both FNMA and FHLMC to
ensure that each entity had the ability to fulfill its financial obligations.
Although the U.S. government has provided support for U.S. government agency
obligations in the past, there can be no assurance that it will do so in the
future. The U.S. government has also made available additional guarantees for
limited periods to stabilize or restore a market in the wake of an economic,
political, or natural crisis.
Although
a Fund may hold securities that carry U.S. government guarantees, these
guarantees do not extend to shares of the Fund itself and do not
guarantee the market prices of the securities.
Warrants
A
Fund may invest in warrants. Warrants are options to purchase common stock at a
specific price (usually at a premium above the market
value of the optioned common stock at issuance) valid for a specific period of
time. Warrants may have a life ranging from less
32
than
one year to twenty years, or they may be perpetual. However, most warrants have
expiration dates after which they are worthless. In
addition, a warrant is worthless if the market price of the common stock does
not exceed the warrant’s exercise price during the life of the warrant. Warrants
have no voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. The percentage increase or decrease in
the market price of the warrant may tend to be greater than the percentage
increase or decrease in the market price of the optioned common stock. Warrants
can provide a greater potential for profit or loss than an equivalent investment
in the underlying security. Prices of warrants do not necessarily move in tandem
with the prices of the underlying securities and therefore are highly volatile
and speculative investments. If a warrant held by a Fund is not exercised by the
date of its expiration, the Fund would lose the entire purchase price of the
warrant.
When-Issued,
Forward Commitments and Delayed Settlements
A
Fund may purchase and sell securities on a when-issued, forward commitment or
delayed settlement basis; that is, delivery, of and payment
for, the securities take place after the date of the commitment to purchase,
normally within 35 days. The payment obligation and the interest rate that will
be received on the securities are each fixed at the time the buyer enters into
the commitment. A Fund may sell these securities before the settlement date if
it is deemed advisable.
A
Fund does not intend to engage in these transactions for speculative purposes
but only in furtherance of its investment objectives. Because
the Fund will segregate liquid assets to satisfy its purchase commitments in the
manner described, the Fund’s liquidity and the ability of the Adviser to manage
them may be affected in the event the Fund’s forward commitments, commitments to
purchase when-issued securities and delayed settlements ever exceeded 15% of the
value of its net assets.
A
Fund will purchase securities on a when-issued, forward commitment or delayed
settlement basis only with the intention of completing
the transaction. If deemed advisable as a matter of investment strategy,
however, the Fund may dispose of or renegotiate a commitment after it is entered
into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases, the
Fund may realize a taxable capital gain or loss. When a Fund engages in
when-issued, forward commitment and delayed settlement transactions, it relies
on the other party to consummate the trade. Failure of such party to do so may
result in the Fund incurring a loss or missing an opportunity to obtain a price
credited to be advantageous.
The
market value of the securities underlying a when-issued purchase, forward
commitment to purchase securities, or a delayed settlement
and any subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. A Fund does not earn interest on the securities it has
committed to purchase until it has paid for and delivered on the settlement
date.
INVESTMENTS
IN THE FUNDS BY OTHER REGISTERED INVESTMENT COMPANIES
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies in the securities of other investment companies,
including shares of a Fund. Other registered investment companies (typically
structured as a “fund of funds”) are not permitted to invest in a Fund beyond
the limits set forth in Section 12(d)(1) except as permitted by any rules and
regulations adopted under applicable law, including that such investment
companies enter into an agreement with the Trust on behalf of the
Fund.
DETERMINING
NET ASSET VALUE (“NAV”) AND VALUING PORTFOLIO SECURITIES
Each
Fund’s NAV is determined, and the shares of each Fund are priced normally as of
the valuation time(s) indicated in the Prospectus on each
Business Day. A “Business Day” is a day on which the NYSE is open. The NYSE
generally is closed in observance of the following holidays: New Year’s Day, Dr.
Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day,
Juneteenth, Independence Day, Labor Day, Thanksgiving, and Christmas Day. In
addition to closing in observance of the same holidays as the NYSE, the Federal
Reserve Bank of Cleveland is also closed on Columbus Day and Veterans
Day.
In
the event of an emergency or other disruption in trading on the NYSE, a Fund’s
share price normally will be determined based upon the close
of the NYSE.
The
Funds generally value their investments based upon their last reported sale
prices, market quotations, or estimates of value provided by an
independent pricing service as of the time as of which the Fund’s share price is
calculated. The Board has designated the Adviser as the “valuation designee” in
accordance with Rule 2a-5 under the 1940 Act.
Investment
Company Securities
Shares
of another open-end investment company (mutual fund) held by a Fund are valued
at the latest closing NAV of such mutual fund.
Shares of any ETFs held by a Fund are valued in the manner described below under
“Equity Securities.”
33
Fixed
Income Securities
Fixed
income securities held by a Fund are valued on the basis of security valuations
provided by an independent pricing service, approved
by the Board, that determines value by using, among other things, information
with respect to transactions of a security, quotations from dealers, market
transactions in comparable securities and various relationships between
securities. Specific investment securities that are not priced by the approved
pricing service will be valued according to quotations obtained from dealers who
are market makers in those securities. Investment securities with less than 60
days to maturity when purchased are valued at amortized cost that approximates
market value. Investment securities not having readily available market
quotations will be priced at fair value using a methodology approved in good
faith by the Board or its designee in accordance with applicable Rules under the
1940 Act subject to Board oversight.
Convertible
Fixed Income Securities
Convertible
fixed income securities are valued in the same manner as any fixed income
security. Non-convertible fixed income securities
are valued on the basis of prices provided by independent pricing services.
Prices provided by the pricing service may be determined without exclusive
reliance on quoted prices and may reflect appropriate factors such as
institution-sized trading in similar groups of securities, developments related
to special securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics, and other market data. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Trust’s officers in
a manner specially authorized by the Board or its designee in accordance with
applicable Rules under the 1940 Act, subject to Board oversight. Short-term
obligations having 60 days or less to maturity are valued on the basis of
amortized cost, except for convertible fixed income securities.
Equity
Securities
Each
equity security (including ETFs) held by a Fund is valued at the closing price
on the exchange where the security is principally traded.
Each security traded in the over-the-counter market (but not including
securities the trading activity of which is reported on Nasdaq’s Automated
Confirmation Transaction (“ACT”) System) is valued at the bid based upon quotes
furnished by market makers for such securities. Each security the trading
activity of which is reported on Nasdaq’s ACT System is valued at the Nasdaq
Official Closing Price.
Futures
and Options Contracts
For
purposes of determining NAV, futures and options contracts generally will be
valued 15 minutes after the close of trading of the NYSE.
Funds
that Invest a Significant Amount of their Assets in Foreign
Securities
Time
zone arbitrage. Funds that
invest a significant amount of their assets in foreign securities, may be
exposed to attempts by investors to engage in “time-zone arbitrage.” Using this
technique, investors seek to take advantage of differences in the values of
foreign securities that might result from events that occur after the close of
the foreign securities market on which a security is traded and before the close
of the NYSE that day, when the Funds calculate their NAV.
If
successful, time zone arbitrage might dilute the interests of other
shareholders. These Funds use “fair value pricing” under certain circumstances,
to adjust the closing market prices of foreign securities to reflect what the
Board or its designee in accordance with applicable Rules under the 1940 Act
subject to Board oversight considers to be their fair value. Fair value pricing
may also help to deter time zone arbitrage.
Fair
Value Pricing
If
market quotations are not readily available, or (in the Adviser’s judgment) do
not accurately reflect the fair value of a security, or if after
the close of the principal market on which a security held by a Fund is traded
and before the time as of which the Funds’ net asset value is calculated that
day, an event occurs that the Adviser learns of and believes in the exercise of
its judgment will cause a material change in the value of that security from the
closing price of the security on the principal market on which it is traded,
that security may be valued by another method that the Board or its designee in
accordance with applicable Rules under the 1940 Act subject to Board oversight
believes would more accurately reflect the security’s fair value.
The
Funds’ use of fair value pricing procedures involves subjective judgments and it
is possible that the fair value determined for a security
may be materially different from the value that could be realized upon the sale
of that security. Accordingly, there can be no assurance that a Fund will obtain
the fair value assigned to a security if it were to sell the security at
approximately the same time at which the Fund determines its NAV per
share.
34
Other
Valuation Information
Under
the 1940 Act, the Funds are required to act in good faith in determining the
fair value of portfolio securities. The SEC has recognized
that a security’s valuation may differ depending on the method used for
determining value. The fair value ascertained for a security is an estimate and
there is no assurance, given the limited information available at the time of
fair valuation, that a security’s fair value will be the same as or close to the
subsequent opening market price for that security.
The
Board has adopted valuation procedures for the Funds and has delegated the
day-to-day responsibility for fair valuation determinations
to the Adviser and the Adviser’s Pricing Committee. Those determinations may
include consideration of recent transactions in comparable securities,
information relating to a specific security, developments in and performance of
foreign securities markets, current valuations of foreign or U.S. indices, and
adjustment co-efficients based on fair value models developed by independent
service providers. The Adviser may, for example, adjust the value of portfolio
securities based on fair value models supplied by the service provider when the
Adviser believes that the adjustments better reflect actual prices as of the
close of the NYSE.
Generally,
trading in foreign securities, corporate bonds, U.S. government securities and
money market instruments is substantially completed
each day at various times prior to the close of the NYSE. The values of such
securities used in computing the NAV of each Fund’s shares generally are
determined at such times. Foreign currency exchange rates are also generally
determined prior the close of the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between the times at
which such values are determined and the close of the NYSE. If events affecting
the value of securities occur during such a period, and a Fund’s NAV is
materially affected by such changes in the value of the securities, then these
securities will be valued at their fair value as determined in good faith by the
Adviser in accordance with applicable law. Other securities and assets for which
market quotations are not readily available or for which valuation cannot be
provided are valued as determined in good faith of the Adviser in accordance
with applicable law.
When
the NYSE is closed, or when trading is restricted for any reason other than its
customary weekend or holiday closings, or under emergency
circumstances as determined by the SEC to warrant such action, the Funds may not
be able to accept purchase or redemption requests. A Fund’s NAV may be affected
to the extent that its securities are traded on days that are not Business Days.
Each Fund reserves the right to reject any purchase order in whole or in
part.
PURCHASE
AND REDEMPTION OF SHARES
Creation
Units
Each
Fund issues and redeems Shares in Creation Units on a continuous basis through
the Distributor (as defined below), without a sales
load, at the NAV next determined after receipt of an order in proper form on any
Business Day. A “Business Day” is any day on which the NYSE is open for
business.
Currently,
a Creation Unit is an aggregation of 50,000 shares and Creation Units of 25,000
shares in the case of the Next 50 Fund and Creation
Units of 10,000 shares in the case of the U.S. Sector Fund. In its discretion,
the Trust reserves the right to increase or decrease the number of the Fund’s
shares that constitute a Creation Unit. The Board reserves the right to declare
a split or a consolidation in the number of shares outstanding of the Fund, and
to make changes in the number of shares constituting a Creation Unit, including
in the event that the per share price in the secondary market rises (or
declines) to an amount that falls outside the range deemed desirable by the
Board.
Authorized
Participants
To
purchase or redeem any Creation Units, you must be, or transact through, an
Authorized Participant. In order to be an Authorized Participant,
you must be either a broker-dealer or other participant (“Participating Party”)
in the Continuous Net Settlement System (“Clearing Process”) of the National
Securities Clearing Corporation (“NSCC”) or a participant in DTC with access to
the DTC system (“DTC Participant”), and you must execute an agreement
(“Participant Agreement”) with the Distributor that governs transactions in each
Fund’s Creation Units.
Investors
who are not Authorized Participants but want to transact in Creation Units may
contact the Distributor for the names of Authorized
Participants. An Authorized Participant may require investors to enter into a
separate agreement to transact through it for Creation Units and may require
orders for purchases of shares placed with it to be in a particular form.
Investors transacting through a broker that is not itself an Authorized
Participant and, therefore, must still transact through an Authorized
Participant, may incur additional charges. There are expected to be a limited
number of Authorized Participants at any one time.
Investors
who are not Authorized Participants may purchase and sell shares of the Fund
through an Authorized Participant or on the secondary
market.
35
Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor. Market
disruptions and telephone or other communication failures may impede the
transmission of orders.
Transaction
Fees
A
fixed fee payable to the Custodian (as defined below) is imposed on each
creation and redemption transaction regardless of the number of
Creation Units involved in the transaction (“Fixed Fee”). Purchases and
redemptions of Creation Units for cash or involving cash-in-lieu (as defined
below) are required to pay an additional variable charge to compensate each Fund
and its ongoing shareholders for brokerage and market impact expenses relating
to Creation Unit transactions (“Variable Charge,” and together with the Fixed
Fee, the “Transaction Fees”). With the approval of the Board, the Adviser may
waive or adjust the Transaction Fees, including the Fixed Fee and/or Variable
Charge (shown in the table below), from time to time. In such cases, the
Authorized Participant will reimburse each Fund for, among other things, any
difference between the market value at which the securities and/or financial
instruments were purchased by each Fund and the cash-in-lieu amount, applicable
registration fees, brokerage commissions and certain taxes and other costs and
expenses related to the execution of trades resulting from such transaction (up
to the maximum amount shown below). In addition, purchasers of Creation Units
are responsible for the costs of transferring the Deposit Securities to the
account of each Fund (as defined below). Investors who use the services of a
broker, or other such intermediary, may be charged a fee for such
services.
The
following table sets forth each Fund’s standard Transaction Fees and maximum
additional charge (as described above):
|
|
Fee
for In-Kind and
Cash
Purchases and
Redemptions |
Maximum
Additional
Variable
Charge
for Cash
Purchases
and
Redemptions* |
|
VictoryShares
US 500 Volatility Wtd ETF |
$750 |
2.00% |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$750 |
2.00% |
|
VictoryShares
International Volatility Wtd ETF |
$6,000 |
2.00% |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$250 |
2.00% |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$250 |
2.00% |
|
VictoryShares
International High Div Volatility Wtd ETF |
$1,500 |
2.00% |
|
VictoryShares
Dividend Accelerator ETF |
$250 |
2.00% |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$250 |
2.00% |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$750 |
2.00% |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$250 |
2.00% |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$750 |
2.00% |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$4,500 |
2.00% |
|
VictoryShares
Nasdaq Next 50 ETF |
$250 |
2.00% |
|
VictoryShares
WestEnd U.S. Sector ETF |
$100 |
2.00% |
*
As a
percentage of the amount invested.
The
Clearing Process
Transactions
by an Authorized Participant that is a Participating Party using the NSCC system
are referred to as transactions “through the
Clearing Process.” Transactions by an Authorized Participant that is a DTC
Participant using the DTC system are referred to as transactions “outside the
Clearing Process.” The Clearing Process is an enhanced clearing process that is
available only for certain securities and only to DTC participants that are also
participants in the Continuous Net Settlement System of the NSCC. In-kind
(portions of) purchase orders not subject to the Clearing Process will go
through a manual clearing process run by DTC. Portfolio Deposits that include
government securities must be delivered through the Federal Reserve Bank wire
transfer system (“Federal Reserve System”). Fund Deposits that include cash may
be delivered through the Clearing Process or the Federal Reserve System. In-kind
deposits of securities for orders outside the Clearing Process must be delivered
through the Federal Reserve System (for government securities) or through DTC
(for corporate securities).
Foreign
Securities
Because
the portfolio securities of each Fund may trade on days that the Exchange is
closed or are otherwise not Business Days for each Fund,
shareholders may not be able to redeem their shares of each Fund, or to purchase
or sell shares of each Fund on the Exchange, on days when the NAV of each Fund
could be significantly affected by events in the relevant foreign
markets.
36
Purchasing
Creation Units
Portfolio
Deposits
The
consideration for a Creation Unit generally consists of the in-kind deposit of
designated securities (“Deposit Securities”) and an amount of
cash in U.S. dollars (“Cash Component”). Together, the Deposit Securities and
the Cash Component constitute the “Portfolio Deposit.” The Cash Component serves
the function of compensating for any differences between the net asset value per
Creation Unit and the Deposit Securities. Thus, the Cash Component is equal to
the difference between (x) the net asset value per Creation Unit of each Fund
and (y) the market value of the Deposit Securities. If (x) is more than (y), the
Authorized Participant will pay the Cash Component to each Fund. If (x) is less
than (y), the Authorized Participant will receive the Cash Component from each
Fund.
On
each Business Day, prior to the opening of business on the Exchange (currently
9:30 a.m., Eastern Time), the Adviser through the Custodian
makes available through NSCC the name and amount of each Deposit Security in the
current Portfolio Deposit (based on information at the end of the previous
Business Day) for each Fund and the (estimated) Cash Component, effective
through and including the previous Business Day, per Creation Unit. The Deposit
Securities announced are applicable, subject to any adjustments as described
below, to purchases of Creation Units until the next announcement of Deposit
Securities.
The
Deposit Securities may change, for example, as rebalancing adjustments and
corporate action events of the Index are reflected from time to
time by the Adviser in each Fund’s portfolio. The Deposit Securities may also
change in response to the rebalancing and/or reconstitution of the Index.These
adjustments will reflect changes known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Portfolio
Deposit.
Payment
of any stamp duty or the like shall be the sole responsibility of the Authorized
Participant purchasing a Creation Unit. The Authorized
Participant must ensure that all Deposit Securities properly denote change in
beneficial ownership.
Custom
Orders and Cash-in-lieu
Each
Fund may, in its sole discretion, permit or require the substitution of an
amount of cash (“cash-in-lieu”) to be added to the Cash Component
to replace any Deposit Security. Each Fund may permit or require cash-in-lieu
when, for example, a Deposit Security may not be available in sufficient
quantity for delivery or may not be eligible for transfer through the systems of
DTC or the Clearing Process. Similarly, each Fund may permit or require cash in
lieu of Deposit Securities when, for example, the Authorized Participant or its
underlying investor is restricted under U.S. or local securities laws or
policies from transacting in one or more Deposit Securities. Each Fund will
comply with the federal securities laws in accepting Deposit Securities
including that the Deposit Securities are sold in transactions that would be
exempt from registration under the 1933 Act. All orders involving cash-in-lieu
are considered to be “Custom Orders.”
Purchase
Orders
To order a
Creation Unit, an Authorized Participant must submit an irrevocable purchase
order to the Distributor.
Timing
of Submission of Purchase Orders — Non-International Funds
All
orders to purchase shares directly from any Fund (other than an International
Fund) directly from a Fund must be placed for one or more
Creation Units and in the manner and by 4:00 p.m. Eastern time or such earlier
time that the Exchange or bond market closes (the “Cut-off Time”) in order to
receive the NAV calculated on the Transmittal Date. The “Transmittal Date” is
the date on which such an order to purchase Creation Units (or an order to
redeem Creation Units, as set forth below).
Timing
of Submission of Purchase Orders — International Funds
All
orders to purchase shares directly from an International Fund on the next
Business Day must be submitted as a “Future Dated Trade” for one or
more Creation Units between 4:00 p.m. Eastern time and 5:00 p.m. Eastern time on
the prior Business Day in order to receive the NAV calculated on the Transmittal
Date. For purposes of the International Funds, the “Transmittal Date” is 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).
Intermediary
Deadlines
Persons
placing or effectuating custom orders and/or orders involving cash should be
mindful of time deadlines imposed by intermediaries,
such as DTC and/or the Federal Reserve Bank wire system, which may impact the
successful processing of such orders to ensure that cash and securities are
transferred by the “Settlement Date,” which is generally the Business Day
immediately following the Transmittal Date (“T+1”) for cash and the second
Business Day following the Transmittal Date for domestic securities
(“T+2”).
Orders
Using the Clearing Process
37
If
available, (portions of) orders may be settled through the Clearing Process. In
connection with such orders, the Distributor or its agent transmits,
on behalf of the Authorized Participant, such trade instructions as are
necessary to effect the creation order. Pursuant to such trade instructions, the
Authorized Participant agrees to deliver the requisite Portfolio Deposit to each
Fund, together with such additional information as may be required by the
Distributor. Cash Components will be delivered using either the Clearing Process
or the Federal Reserve System.
Orders
Outside the Clearing Process
If
the Clearing Process is not available for (portions of) an order, Portfolio
Deposits will be made outside the Clearing Process. Orders outside
the Clearing Process must state that the DTC Participant is not using the
Clearing Process and that the creation of Creation Units will be effected
through DTC. The Portfolio Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of Deposit Securities (whether standard or custom) through DTC to each
Fund account by 11:00 a.m., Eastern time, on T+1. The Cash Component, along with
any cash-in-lieu and Transaction Fee, must be transferred directly to the
Custodian through the Federal Reserve System in a timely manner so as to be
received by the Custodian no later than 12:00 p.m., Eastern Time, on T+1. If the
Custodian does not receive both the Deposit Securities and the cash by the
appointed time, the order may be canceled. A canceled order may be resubmitted
the following Business Day but must conform to that Business Day’s Portfolio
Deposit. Authorized Participants that submit a canceled order will be liable to
each Fund for any losses incurred by each Fund in connection
therewith.
Orders
involving foreign Deposit Securities are expected to be settled outside the
Clearing Process. Thus, upon receipt of an irrevocable purchase
order, the Distributor will notify the Adviser and the Custodian of such order.
The Custodian, who will have caused the appropriate local sub-custodian(s) of
each Fund to maintain an account into which an Authorized Participant may
deliver Deposit Securities (or cash -in-lieu), with adjustments determined by
each Fund, will then provide information of the order to such local
sub-custodian(s). The ordering Authorized Participant will then deliver the
Deposit Securities (and any cash-in-lieu) to each Fund’s account at the
applicable local sub-custodian. The Authorized Participant must also make
available on or before the contractual settlement date, by means satisfactory to
each Fund, immediately available or same day funds in U.S. dollars estimated by
each Fund to be sufficient to pay the Cash Component and Transaction Fee. When a
relevant local market is closed due to local market holidays, the local market
settlement process will not commence until the end of the local holiday period.
Settlement must occur by 2:00 p.m., Eastern Time, on the contractual settlement
date.
Acceptance
of Purchase Order
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 each Fund. Each
Fund’s determination shall be final and binding.
Each
Fund reserves the right to reject or revoke acceptance of a purchase order
transmitted to it by the Distributor, provided that such action
does not result in a suspension of sales of Creation Units in contravention of
Rule 6c-11 under the 1940 Act and the SEC's positions thereunder. For example, a
Fund may reject or revoke acceptance of a creation order including, but not
limited to, when (a) the order is not in proper form; (b) the investor(s), upon
obtaining the shares ordered, would own 80% or more of the currently outstanding
shares of each Fund; (c) the Deposit Securities delivered do not conform to the
Deposit Securities for the applicable date; (d) the acceptance of the Portfolio
Deposit would, in the opinion of counsel, be unlawful; or (e) in the event that
circumstances outside the control of the Trust, the Distributor and the Adviser
make it for all practical purposes impossible to process purchase orders.
Examples of such circumstances include acts of God; public service or utility
problems resulting in telephone, telecopy, or computer failures; fires, floods,
or extreme weather conditions; market conditions or activities causing trading
halts; systems failures involving computer or other informational systems
affecting the Trust, the Distributor, DTC, NSCC, the Adviser, each Fund’s
Custodian, a sub-custodian, or any other participant in the creation process;
and similar extraordinary events. The Distributor shall notify an Authorized
Participant of its rejection of the order. Each Fund, 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 Portfolio
Deposits, and they shall not incur any liability for the failure to give any
such notification.
Issuance
of a Creation Unit
Once
a Fund has accepted an order, upon next determination of the Fund’s NAV, the
Fund will confirm the issuance of a Creation Unit against
receipt of payment, at such NAV. The Distributor will transmit a confirmation of
acceptance to the Authorized Participant that placed the order.
Except
as provided below, a Creation Unit will not be issued until a Fund obtains good
title to the Deposit Securities, along with any cash-in-lieu
and Transaction Fee. The delivery of Creation Units generally will occur no
later than T+2.
In
certain cases, Authorized Participants will create and redeem Creation Units on
the same trade date. In these instances, the Trust reserves
the right to settle these transactions on a net basis.
38
With
respect to orders involving foreign Deposit Securities, when a local
sub-custodian has confirmed to the Custodian that the Deposit Securities
(or cash-in-lieu) have been delivered to a Fund’s account with the
sub-custodian, the Fund will issue and deliver the Creation Unit. As stated
above, Creation Units are generally delivered on T+2. However, a Fund may settle
Creation Unit transactions on a basis other than T+2 in order to accommodate
foreign market holiday schedules, to account for different treatment among
foreign and U.S. markets of dividend record dates and ex-dividend dates (that is
the last day the holder of a security can sell the security and still receive
dividends payable on the security), and in certain other
circumstances.
A
Fund may issue a Creation Unit prior to receiving good title to the Deposit
Securities under the following circumstances if, pursuant to the
applicable Participant Agreement, the relevant Authorized Participant provides
an undertaking to deliver the missing Deposit Securities as soon as possible,
which undertaking is secured by such Authorized Participant’s delivery of cash
in U.S. Dollars to the Custodian having a value equal to at least 105% of the
value of the missing Deposit Securities (“Collateral”) as adjusted by time to
time by the Adviser. The Collateral will have a value greater than the NAV of
the Creation Unit on the date the order is placed and must be delivered no later
than 2:00 p.m., Eastern Time, on T+1. The value of the missing Deposit
Securities is marked to market daily and the amount of Collateral is adjusted to
make sure the Collateral value is at least 105% of the marked value. At any
time, a Fund may use the Collateral to purchase the missing Deposit Securities,
and the Authorized Participant will be liable to the Fund for any costs incurred
thereby or losses resulting therefrom, whether or not they exceed the amount of
the Collateral, including any Transaction Fee, any amount by which the purchase
price of the missing Deposit Securities exceeds the market value of such
securities on the Transmittal Date, brokerage, and other transaction costs. The
Trust will return any unused Collateral once all of the missing Deposit
Securities have been received by a Fund. More information regarding a Fund’s
current procedures for collateralization is available from the
Funds.
Cash
Purchase Method
When
cash purchases of Creation Units are available or specified for a Fund, they
will be effected in essentially the same manner as in-kind
purchases. In the case of a cash purchase, the investor must pay the cash
equivalent of the Portfolio Deposit. In addition, cash purchases will be subject
to Transaction Fees, as described above.
The
Funds reserve the right to offer purchases of Creation Units solely in cash if,
on a given Business Day, a Fund announces before the open
of trading that all purchases on that day will be made entirely in cash. A Fund
may also, on a given Business Day, require all Authorized Participants
purchasing Creation Units on that day to deposit cash in lieu of some or all of
the Deposit Securities because: (i) such securities are not eligible for
transfer either through the NSCC or DTC or (ii) in the case of Foreign Funds
holding non-U.S. investments, such securities are not eligible for trading due
to local trading restrictions, local restrictions on securities transfers or
other similar circumstances.
A
Fund also may permit an Authorized Participant to deposit cash in lieu of some
or all of the Deposit Securities because: (i) such securities
are not available in sufficient quantity or (ii) such securities are not
eligible for trading by an Authorized Participant or the investor on whose
behalf the Authorized Participant is acting.
Redeeming
a Creation Unit
Shares
of a Fund may be redeemed only in Creation Units at their NAV next determined
after receipt of a redemption request made in proper
form by the Distributor on any Business Day. A Fund will not redeem shares in
amounts less than Creation Units.
Redemption
Basket
The
consideration received in connection with the redemption of a Creation Unit
generally consists of an in-kind basket of designated securities
(“Redemption Securities”) and an amount of cash in U.S. dollars (“Cash
Component”). Together, the Redemption Securities and the Cash Component
constitute the “Redemption Basket.”
There
can be no assurance that there will be sufficient liquidity in shares in the
secondary market to permit assembly of a Creation Unit. In
addition, investors may incur brokerage and other costs in connection with
assembling a Creation Unit.
The
Cash Component serves the function of compensating for any differences between
the net asset value per Creation Unit and the Redemption
Securities. Thus, the Cash Component is equal to the difference between (x) the
net asset value per Creation Unit of the Fund and (y) the market value of the
Redemption Securities. If (x) is more than (y), the Authorized Participant will
receive the Cash Component from the Fund. If (x) is less than (y), the
Authorized Participant will pay the Cash Component to the Fund.
If
the Redemption Securities on a Business Day are different from the Deposit
Securities, prior to the opening of business on the Exchange
(currently 9:30 a.m., Eastern Time), the Adviser through the Custodian makes
available through NSCC the name and amount of each Redemption Security in the
current Redemption Basket (based on information at the end of the previous
Business Day) for a Fund and the (estimated) Cash Component, effective through
and including the previous Business Day, per Creation Unit. If the
39
Redemption
Securities on a Business Day are different from the Deposit Securities, all
redemption requests that day will be processed outside
the Clearing Process.
The
Redemption Securities may change as rebalancing adjustments and corporate action
events are reflected from time to time by the Adviser in
the Fund’s portfolio. These adjustments will reflect changes known to the
Adviser on the date of announcement to be in effect by the time of delivery of
the Redemption Basket.
The
right of redemption may be suspended or the date of payment postponed: (i) for
any period during which the NYSE is closed (other than
customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the shares or
determination of the ETF’s NAV is not reasonably practicable; or (iv) in such
other circumstances as permitted by the SEC, including as described
below.
Custom
Redemptions and Cash-in-lieu
A
Fund may, in its sole discretion, permit or require the substitution of an
amount of cash (“cash-in-lieu”) to be added to the Cash Component
to replace any Redemption Security. The Fund may permit or require cash-in-lieu
when, for example, a Redemption Security may not be available in sufficient
quantity for delivery or may not be eligible for transfer through the systems of
DTC or the Clearing Process. Similarly, a Fund may permit or require
cash-in-lieu of Redemption Securities when, for example, the Authorized
Participant or its underlying investor is restricted under U.S. or local
securities law or policies from transacting in one or more Redemption
Securities. Each Fund will comply with the federal securities laws in satisfying
redemptions with Redemption Securities, including that the Redemption Securities
are sold in transactions that would be exempt from registration under the 1933
Act. All redemption requests involving cash-in-lieu are considered to be “Custom
Redemptions.”
Redemption
Requests
To
redeem a Creation Unit, an Authorized Participant must submit an irrevocable
redemption request to the Distributor. An Authorized Participant
will represent to the Fund that it will not attempt to place a redemption order
for the purpose of redeeming any Creation Units, unless it first ascertains or
has reasonable grounds to believe that as of the time of the settlement date:
(i) it, or its customer, as the case may be, will own outright (or have full
legal authority and legal beneficial right to tender) the requisite number of
Fund shares for redemption, and (ii) all of the shares that are in the Creation
Unit to be redeemed have not been loaned or pledged to another party and are not
the subject of a repurchase agreement, securities lending agreement or such
other arrangement that would preclude the delivery of such shares to a Fund on
the settlement date. Each Fund reserves the absolute right, in its sole
discretion, to verify these representations, but will typically require
verification in connection with higher levels of redemption activity and /or
short interest in a Fund. If the Authorized Participant, upon receipt of a
verification request, does not provide sufficient verification of the requested
representations, the redemption request will not be considered to be in proper
form and may be rejected by a Fund.
Timing
of Submission of Redemption Requests – Non-International Funds
All
orders to redeem shares directly from any Fund (other than an International
Fund) directly from a Fund must be placed for one or more
Creation Units by the Cut-off Time in order to receive the NAV calculated on the
Transmittal Date.
Timing
of Submission of Redemption Requests – International Funds
All
orders to redeem shares directly from an International Fund that invests a
significant amount of its assets in foreign securities directly
from the Funds 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 in order to receive the NAV
calculated on the Transmittal Date. The Transmittal Date is the Business Day
following the day on which such an order is submitted to redeem Creation
Units.
Intermediary
Deadlines
A
redemption request is deemed received if (i) such order is received by the
Distributor by the Cut-off Time on such day and (ii) all other
procedures set forth in the Participant Agreement are properly followed. Persons
placing or effectuating Custom Redemptions and/or orders involving cash should
be mindful of time deadlines imposed by intermediaries, such as DTC and/or the
Federal Reserve System, which may impact the successful processing of such
orders to ensure that cash and securities are transferred by the Settlement
Date, as defined above.
Requests
Using the Clearing Process
If
available, (portions of) redemption requests may be settled through the Clearing
Process. In connection with such orders, the Distributor
transmits on behalf of the Authorized Participant, such trade instructions as
are necessary to effect the redemption. Pursuant to such trade instructions, the
Authorized Participant agrees to deliver the requisite Creation Unit(s) to a
Fund, together with such
40
additional
information as may be required by the Distributor. Cash Components will be
delivered using either the Clearing Process or the
Federal Reserve System, as described above.
Requests
Outside the Clearing Process
If
the Clearing Process is not available for (portions of) an order, Redemption
Baskets will be delivered outside the Clearing Process. Orders
outside the Clearing Process must state that the DTC Participant is not using
the Clearing Process and that the redemption will be effected through DTC. The
Authorized Participant must transfer or cause to be transferred the Creation
Unit(s) of shares being redeemed through the book-entry system of DTC so as to
be delivered through DTC to the Custodian by 10:00 a.m., Eastern Time, on
received T+1. In addition, the Cash Component must be received by the Custodian
by 12:00 p.m., Eastern Time, on T+1. If the Custodian does not receive the
Creation Unit(s) and Cash Component by the appointed times on T+1, the
redemption will be rejected, except in the circumstances described below. A
rejected redemption request may be resubmitted the following Business
Day.
Orders
involving foreign Redemption Securities are expected to be settled outside the
Clearing Process. Thus, upon receipt of an irrevocable
redemption request, the Distributor will notify the Adviser and the Custodian.
The Custodian will then provide information of the redemption to the Fund’s
local sub-custodian(s). The redeeming Authorized Participant, or the investor on
whose behalf is acting, will have established appropriate arrangements with a
broker-dealer, bank or other custody provider in each jurisdiction in which the
Redemption Securities are customarily traded and to which such Redemption
Securities (and any cash-in-lieu) can be delivered from the Fund’s accounts at
the applicable local sub-custodian(s).
Acceptance
of Redemption Requests
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. The
Trust’s determination shall be final and binding.
The
Funds reserve the right to reject a redemption order if the order is not in
proper form. In addition, the right of redemption may be
suspended or the date of payment postponed with respect to the Fund (i) for any
period during which the NYSE is closed (other than customary weekend and holiday
closings), (ii) for any period during which trading on the NYSE is suspended or
restricted, (iii) for any period during which an emergency exists as a result of
which disposal of the shares of a Fund's portfolio securities or determination
of its NAV is not reasonably practicable; or (iv) in such other circumstance as
is permitted by the SEC. The Funds or Distributor will notify the Authorized
Participant of such rejection, but the Funds, Custodian, sub-custodian, and
Distributor shall not be liable for any failure to give such
notification.
Delivery
of Redemption Basket
Once
a Fund has accepted a redemption request, upon next determination of the Fund’s
NAV, the Fund will confirm the issuance of a
Redemption Basket, against receipt of the Creation Unit(s) at such NAV, any
cash-in-lieu and Transaction Fee. A Creation Unit tendered for redemption and
the payment of the Cash Component, any cash-in-lieu and Transaction Fee will be
effected through DTC. The Authorized Participant, or the investor on whose
behalf it is acting, will be recorded on the book-entry system of
DTC.
The
Redemption Basket generally will be delivered to the redeeming Authorized
Participant within T+2. Except under the circumstances
described below; however, a Redemption Basket generally will not be issued until
the Creation Unit(s) are delivered to a Fund, along with the Cash Component, any
cash-in-lieu and Transaction Fee.
In
certain cases, Authorized Participants will create and redeem Creation Units on
the same trade date. In these instances, the Trust reserves
the right to settle these transactions on a net basis.
With
respect to orders involving foreign Redemption Securities, a Fund may settle
Creation Unit transactions on a basis other than T+2 in order
to accommodate foreign market holiday schedules, to account for different
treatment among foreign and U.S. markets of dividend record dates and
ex-dividend dates (that is the last day the holder of a security can sell the
security and still receive dividends payable on the security), and in certain
other circumstances. When a relevant local market is closed due to local market
holidays, the local market settlement process will not commence until the end of
the local holiday period.
Cash
Redemption Method. The Funds
reserve the right to redeem Creation Units solely in cash if, on a given
Business Day, a Fund announces before the open of trading that all redemptions
on that day will be made entirely in cash. A Fund also may, on a given Business
Day, require all Authorized Participants redeeming Creation Units on that day to
receive cash in lieu of some or all of the Deposit Securities because: (i) such
securities are not eligible for transfer either through the NSCC or DTC or (ii)
in the case of International Funds holding non-U.S. investments, such securities
are not eligible for trading due to local trading restrictions, local
restrictions on securities transfers or other similar circumstances. The Funds
also may permit an Authorized Participant to receive cash in lieu of some or all
of the Deposit Securities because: (i) such securities are not available in
sufficient quantity, (ii) such securities are not eligible for trading by an
Authorized Participant or the investor on whose behalf the Authorized
Participant is acting, or (iii) a holder of shares of a Fund holding non-U.S.
investments would be subject to unfavorable income tax treatment if the holder
receives
41
redemption
proceeds in kind. When cash redemptions of Creation Units are available or
specified for a Fund, they will be effected in essentially
the same manner as in-kind redemptions. In the case of a cash redemption, the
investor will receive the cash equivalent of the Redemption Basket minus any
Transaction Fees, as described above.
MANAGEMENT
OF THE TRUST
Board
Leadership Structure
The
Trust is governed by the Board, which is comprised of nine Trustees, eight of
whom are not “interested persons” of the Trust within the
meaning of that term under the 1940 Act (the “Independent Trustees”). The Chair
of the Board is an Independent Trustee, who functions as the lead Trustee. The
Chair serves as liaison between the Board and its Committees, the Adviser and
other service providers. The Chair is actively involved in setting the Board
meeting agenda, and participates on certain Board Committees.
Board
Role in Risk Oversight
In
considering risks related to the Funds, the Board consults and receives reports
from officers of the Funds and personnel of the Adviser,
who are charged with the day-to-day risk oversight function. Matters regularly
reported to the Board or a designated committee include certain risks involving,
among other things, the Funds’ investment portfolios, trading practices,
operational matters, financial and accounting controls, and legal and regulatory
compliance. The Board has delegated to each of the Compliance Committee and
Audit and Risk Oversight Committee certain responsibilities for reviewing
reports relating to compliance and enterprise risk, including operational risk,
liquidity, and personnel. The Board relies on the Investment Committee to review
reports relating to investment risks, that is, risks to the Funds resulting from
pursuing the Funds’ investment strategies (e.g., credit risk and market
risk).
Trustees,
Advisory Trustee, and Officers
The
following tables list the Trustees, the Advisory Trustee, and Officers, their
dates of birth, position with the Trust, length of time served,
principal occupations during the past five years and, where applicable, any
directorships of other investment companies or companies whose securities are
registered under the Securities Exchange Act of 1934, as amended (“1934 Act”),
or who file reports under the 1934 Act. There is no defined term of office and
each Trustee and Advisory Trustee serves until the earlier of his or her
resignation, retirement, removal, death, or the election of a qualified
successor. Each Trustee’s, Advisory Trustee’s, and Officer’s address is c/o
Victory Funds, 4900 Tiedeman Road, 4th Floor, Brooklyn, Ohio 44144.
Independent
Trustees
|
Name
and
Date
of Birth |
Position
Held
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee |
Other
Directorships
Held
During
the
Past
5 Years |
|
David
Brooks
Adcock,
Born
October
1951 |
Trustee |
May
2015 |
Consultant
(since 2006) |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
None |
42
|
Name
and
Date
of Birth |
Position
Held
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee |
Other
Directorships
Held
During
the
Past
5 Years |
|
Nigel
D.T.
Andrews,
Born
April 1947 |
Trustee |
May
2015 |
Retired |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
Director,
Carlyle
Secured
Lending,
Inc.
(formerly
TCG
BDC
I, Inc.)
(since
2012);
Director,
Carlyle
Credit
Solutions,
Inc.
(formerly
TCG
BDC
II, Inc.)
(since
2017);
Trustee,
Carlyle
Secured
Lending
III
(since
2021) |
|
E.
Lee Beard*,
Born
August
1951 |
Trustee |
May
2015 |
Retired |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
None |
|
Dennis
M.
Bushe,
Born
January
1944 |
Trustee |
July
2016 |
Retired |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
None |
|
John
L. Kelly,
Born
April 1953 |
Chair
and
Trustee |
May
2015 |
Managing
Partner,
Active
Capital
Partners
LLC, a
strategic
consultant
(since
October 2017) |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
Director,
Caledonia
Mining
Corporation
(since
May
2012) |
|
David
L. Meyer,
Born
April 1957 |
Trustee |
May
2015 |
Retired |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
None |
|
Gloria
S.
Nelund,
Born
May 1961 |
Trustee |
July
2016 |
Chair,
CEO, and
Co-Founder
of TriLinc
Global,
LLC, an
investment
firm |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
TriLinc
Global
Impact
Fund,
LLC
(since
2012) |
43
|
Name
and
Date
of Birth |
Position
Held
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee |
Other
Directorships
Held
During
the
Past
5 Years |
|
Leigh
A. Wilson,
Born
December
1944 |
Trustee |
May
2015 |
Private
Investor |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
Chair
(since
2013),
Caledonia
Mining
Corporation |
Advisory
Trustee
|
Name
and
Date
of Birth |
Position
Held
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee |
Other
Directorships
Held
During
the
Past
5 Years |
|
Timothy
Pettee,
Born
April 1958 |
Advisory
Trustee |
January
2023 |
Chief
Investment
Officer,
Hoya Capital
Real
Estate LLC (since
February
2022); Chief
Investment
Officer, Sun
America
Asset
Management
Corp.
(January
2003-July
2021) |
69
portfolios comprised
of
26 portfolios in the
Trust,
37 portfolios in
Victory
Portfolios, and 6
portfolios
in Victory
Variable
Insurance
Funds |
None |
Interested
Trustee
|
Name
and
Date
of Birth |
Position
Held
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
Number
of Portfolios
in
Fund Complex
Overseen
by Trustee |
Other
Directorships
Held
During
the
Past
5 Years |
|
David
C.
Brown**,
Born
May 1972 |
Trustee |
May
2015 |
Chief
Executive Officer
and
Chairman
(2013-present),
Victory
Capital
Management
Inc.; Chief
Executive
Officer and
Chairman
(2013-present),
Victory
Capital
Holdings, Inc.;
Director,
Victory Capital
Services,
Inc. (2013-
present);
Director,
Victory
Capital Transfer
Agency,
Inc. (2019-
present) |
114
portfolios
comprised
of 26
portfolios
in the Trust,
37
portfolios in Victory
Portfolios,
6 portfolios
in
Victory Variable
Insurance
Funds, and 45
portfolios
in Victory
Portfolios
III. |
Trustee,
Victory
Portfolios
III;
Board
Member,
Victory
Capital
Services,
Inc. |
*
The Board
has designated Ms. Beard as its Audit Committee Financial
Expert.
**
Mr. Brown
is an “Interested Person” by reason of his relationship with the
Adviser.
44
Trustee
and Advisory Trustee Qualifications
The
following summarizes the experience and qualifications of the Trustees and
Advisory Trustee.
• David
Brooks Adcock. Mr.
Adcock served for many years as general counsel to Duke University and Duke
University Health System, where he provided oversight to complex business
transactions such as mergers and acquisitions and dispositions. He has served
for more than 20 years as a public interest arbitrator for, among others, the
New York Stock Exchange, the American Stock Exchange, the National Futures
Association, FINRA, and the American Arbitration Association. The Board believes
that Mr. Adcock’s knowledge of complex business transactions and the securities
industry combined with his previous service on the boards of other mutual funds
qualifies him to serve on the Board.
• Nigel
D.T. Andrews. Mr.
Andrews served for many years as a management consultant for a nationally
recognized consulting company and as a senior executive at GE, including Vice
President of Corporate Business Development, reporting to the Chairman, and as
Executive Vice President of GE Capital. He also served as a Director and member
of the Audit and Risk Committee of Old Mutual plc, a large publicly traded
company whose shares are traded on the London Stock Exchange. Mr. Andrews also
formerly served as the non-executive chairman of Old Mutual’s U.S. asset
management business, where he also served on the audit and risk committee. Mr.
Andrews also served as a Governor of the London Business School. He serves as a
director of Carlyle Secured Lending, Inc. (formerly TCG BDC I, Inc.) and Carlyle
Credit Solutions, Inc., (formerly TCG BDC II, Inc.), and as a Trustee for
Carlyle Secured Lending III, each a business development company. The Board
believes that his experience in these positions, particularly with respect to
oversight of risk and the audit function of public companies, as well as his
previous service on the boards of other mutual funds qualifies him to serve as a
Trustee.
• E.
Lee Beard. Ms.
Beard, a certified public accountant, has served as the president, chief
executive officer and director, and as a chief financial officer, of public,
federally insured depository institutions. As such, Ms. Beard is familiar with
issues relating to audits of financial institutions. The Board believes that Ms.
Beard’s experience as the chief executive officer of a depository institution,
her service on the boards of other mutual funds and her knowledge of audit and
accounting matters qualifies her to serve as a Trustee.
• David
C. Brown. Mr. Brown
serves as the Chairman and Chief Executive Officer (since 2013) of the Adviser
and, as such, is an “interested person” of the Trust. Previously, he served as
Co-Chief Executive Officer (2011 - 2013), and President — Investments and
Operations (2010 - 2011) and Chief Operating Officer (2004 - 2011) of the
Adviser. The Board believes that his position and experience with the Adviser
and his previous experience in the investment management business qualifies him
to serve as a Trustee.
• Dennis
M. Bushe. Mr.
Bushe has experience in fixed income investment management and research. He is a
former chief investment risk officer of a large investment management firm. Mr.
Bushe previously served as a Trustee of the boards of the RS Investment Trust
and RS Variable Products Trust. The Board believes that Mr. Bushe’s experience
qualifies him to serve as a Trustee.
• John
L. Kelly. Mr. Kelly
has more than 35 years of experience and leadership roles in the financial
services industry including institutional electronic trading, capital markets,
corporate and investment banking, retail brokerage, private equity, asset/wealth
management, institutional services, mutual funds, and related technology enabled
services. He previously served as an Independent Trustee of Victory Portfolios,
Victory Institutional Funds, and Victory Variable Insurance Funds from 2008 to
2011. The Board believes that this experience qualifies him to serve as a
Trustee.
• David
L. Meyer. For six
years, Mr. Meyer served as chief operating officer, Investment Wealth Management
Division, of Mercantile Bankshares Corp (now PNC Financial Services Corp.) and
has served as an officer or on the boards of other mutual funds for many years.
The Board believes that his experience, particularly as it related to the
operation of registered investment companies, qualifies him to serve as a
Trustee.
• Gloria
S. Nelund. Ms.
Nelund has executive and investment management industry experience, including
service as chief executive officer of two investment advisory firms. Ms. Nelund
also has experience as a co-founder and chief executive officer of an investment
firm. Ms. Nelund previously served as the Chairman and Trustee of the boards of
the RS Investment Trust and RS Variable Products Trust. The Board believes that
this experience qualifies her to serve as a Trustee.
• Timothy
Pettee. Mr.
Pettee served for many years as Chief Investment Officer and Lead Portfolio
Manager (Rules Based Funds) of SunAmerica Asset Management Corp., where he was
responsible for investment oversight, portfolio management, and securities
selection. At SunAmerica, Mr. Pettee also was Chair of the Portfolio Policy and
Brokerage and Soft Dollar Committees, and a member of the Proxy and Executive
Committees. The Board believes that Mr. Pettee's experience with other mutual
funds and his knowledge qualifies him to serve as an Advisory
Trustee.
45
• Leigh
A. Wilson. Mr.
Wilson was Chair of the Victory Funds through 2021. He served for many years as
Chief Executive Officer of Paribas North America and as such has extensive
experience in the financial sector. He serves as an Independent Non-Executive
Director and Chairman of the Board of Caledonia Mining Corporation, a Canadian
mining company listed on the Toronto Stock Exchange. As a former director of the
Mutual Fund Directors Forum (“MFDF”), he is familiar with the operation and
regulation of registered investment companies. He served on a MFDF steering
committee created at the request of then-SEC Chairman William Donaldson to
recommend best practices to independent mutual fund directors. He received the
Small Fund Trustee of the Year award from Institutional Investor Magazine in
2006. The Board believes that this experience and his previous service on the
boards of other mutual funds qualifies him to serve as a Trustee.
Committees
of the Board
The
following standing Committees of the Board are currently in operation: Audit and
Risk Oversight, Compliance, Continuing Education,
Investment, Service Provider, Board Governance and Nominating, and Agenda. In
addition to these standing Committees, the Board may form temporary Sub- or
Special Committees to address particular areas of concern. A Committee may form
a Sub-Committee to address particular areas of concern to that
Committee.
• The
members of the Audit and Risk Oversight Committee, all of whom are Independent
Trustees, are Ms. Beard (Chair), Mr. Andrews, Mr. Kelly, Ms. Nelund, and Mr.
Wilson. The primary purpose of this Committee is to oversee the Trust’s
accounting and financial reporting policies, practices, and internal controls,
as required by the statutes and regulations administered by the SEC, including
the 1940 Act. The Committee also has overall responsibility for reviewing
periodic reports with respect to compliance and enterprise risk, including
operational risk and personnel. The Board has designated Mr. Meyer and Ms. Beard
as its Audit Committee Financial Experts.
• The
members of the Compliance Committee are Mr. Adcock (Chair), Mr. Andrews, Ms.
Beard, Mr. Kelly, Ms. Nelund, and Mr. Wilson. The Compliance Committee oversees
matters related to the Funds’ compliance program and compliance with applicable
laws, rules and regulations and meets regularly with the Trust’s Chief
Compliance Officer.
• The
members of the Continuing Education Committee are Mr. Meyer (Chair), Mr. Adcock,
Mr. Andrews, Ms. Beard, Mr. Bushe, Mr. Kelly, and Ms. Nelund. The function of
this Committee is to develop programs to educate the Trustees to enhance their
effectiveness as a Board and individually.
• The
members of the Investment Committee are Mr. Bushe (Chair), Mr. Adcock, Mr.
Kelly, and Mr. Meyer. The function of this Committee is to oversee the Fund’s
compliance with investment objectives, policies, and restrictions, including
those imposed by law or regulation, and assist the Board in its annual review of
the Funds’ investment advisory agreements.
• The
members of the Service Provider Committee are Ms. Nelund (Chair), Mr. Andrews,
Ms. Beard, Mr. Kelly, and Mr. Wilson. This Committee oversees the negotiation of
the terms of the written agreements with the Funds’ service providers, evaluates
the quality of periodic reports from the service providers (including reports
submitted by sub-service providers) and assists the Board in its review of each
Fund’s service providers, other than the investment adviser and independent
auditors.
• The Board
Governance and Nominating Committee consists of all of the Independent Trustees.
Mr. Andrews currently serves as the Chair of this Committee. The functions of
this Committee are: to oversee Fund governance, including the nomination and
selection of Trustees; to evaluate and recommend to the Board the compensation
and expense reimbursement policies applicable to Trustees; and periodically, to
coordinate and facilitate an evaluation of the performance of the
Board.
• The Board
Governance and Nominating Committee will consider nominee recommendations from
Fund shareholders, in accordance with procedures established by the Committee. A
Fund shareholder should submit a nominee recommendation in writing to the
attention of the Chair of the Trust, 4900 Tiedeman Road, Brooklyn, Ohio 44144.
The Committee (or a designated sub-committee) will screen shareholder
recommendations in the same manner as it screens nominations received from other
sources, such as current Trustees, management of the Fund or other individuals,
including professional recruiters. The Committee need not consider any
recommendations when no vacancy on the Board exists, but the Committee will
consider any such recommendation if a vacancy occurs within six months after
receipt of the recommendation. In administering the shareholder recommendation
process, the Chair, in the Chair’s sole discretion, may retain the services of
counsel to the Trust or to the Independent Trustees, management of the Fund or
any third party. The Committee will communicate the results of the evaluation of
any shareholder recommendation to the shareholder who made the
recommendation.
• The
Agenda Committee consists of the Chair of the Board and the Chair of each other
Committee.
During
the fiscal year ended June 30, 2023, the Board held eight meetings. The Audit
and Risk Oversight Committee held four meetings;
the Compliance Committee held four meetings; the Investment Committee held four
meetings; the Service Provider Committee held four meetings; and the Board
Governance and Nominating Committee held four meetings. The Continuing Education
Committee met informally during the fiscal year.
46
Officers
of the Trust
The
officers of the Trust are elected by the Board to actively supervise the Trust’s
day-to-day operations. The officers of the Trust, their dates of
birth, the length of time served, and their principal occupations during the
past five years, are detailed in the following table. Each individual holds the
same position with the other registered investment companies in the Victory Fund
Complex, and each officer serves until the earlier of his or her resignation,
removal, retirement, death, or the election of a successor. The mailing address
of each officer of the Trust is 4900 Tiedeman Road, Brooklyn, Ohio 44144. The
officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices.
|
Name
and
Date
of Birth |
Position
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
|
James
K. De Vries
Born
April 1969 |
President |
May
2023 |
Head
of Fund Administration (5/1/23-present);Vice
President,
Victory Capital Transfer Agency, Inc.
(4/20/23-present);
Executive Director, the Adviser
(7/1/19-4/30/23
present); Executive Director, Investment
and
Financial Administration, USAA (2012-6/30/19);
Treasurer,
USAA Mutual Funds Trust (2018-4/30/23).
Mr.
De Vries also serves as the Principal Executive
Officer
for the Funds, Victory Portfolios, Victory
Portfolios
III, and Victory Variable Insurance Funds. |
|
Scott
A. Stahorsky,
Born
July 1969 |
Vice
President |
May
2015 |
Director,
Third-Party Dealer Services & Reg
Administration,
Fund Administration, the Adviser
(5/1/2023-present);
Vice President, Victory Capital
Transfer
Agency, Inc. (4/20/23-present); Manager, Fund
Administration,
the Adviser (4/30/23- 2015). Mr.
Stahorsky
also serves as Vice President of Victory
Portfolios,
Victory Portfolios III, and Victory Variable
Insurance
Funds. |
|
Thomas
Dusenberry,
Born
July 1977 |
Secretary |
May
2022 |
Director,
Fund Administration, the Adviser; Treasurer
and
Principal Financial Officer (May 2023-present);
Manager,
Fund Administration, the Adviser; Treasurer
and
Principal Financial Officer (2020-2022), Assistant
Treasurer
(2019), Salient MF Trust, Salient Midstream,
MLP
Fund and Forward Funds; Principal Financial
Officer
(2018-2021) and Treasurer (2020-2021), Salient
Private
Access Funds and Endowment PMF Funds;
Senior
Vice President of Fund Accounting and
Operations,
Salient Partners (2020-2022); Director of
Fund
Operations, Salient Partners (2016-2019). Mr.
Dusenberry
also serves as Secretary of Victory
Portfolios,
Victory Portfolios III, and Victory Variable
Insurance
Funds. |
|
Allan
Shaer,
Born
March 1965 |
Treasurer |
December
2017 |
Senior
Vice President, Financial Administration, Citi
Fund
Services Ohio, Inc. (since 2016); Vice President,
Mutual
Fund Administration, JP Morgan Chase
(2011-2016).
Mr. Shaer also serves as Treasurer of
Victory
Portfolios, Victory Portfolios III, and Victory
Variable
Insurance Funds. |
|
Christopher
Ponte,
Born
March 1984 |
Assistant
Treasurer |
May
2015* |
Director,
Fund and Broker Dealer Finance, Fund
Administration,
(5/1/23-present); Victory Capital
Transfer
Agency, Inc. (May 2023-present); Manager,
Fund
Administration, the Adviser (2017-2023); Chief
Financial
Officer, Victory Capital Services, Inc. (since
2018).
Mr. Ponte also serves as Assistant Treasurer of
Victory
Portfolios, Victory Portfolios III, and Victory
Variable
Insurance Funds. |
47
|
Name
and
Date
of Birth |
Position
with
the
Trust |
Date
Commenced
Service |
Principal
Occupation
During
Past 5 Years |
|
Carol
D. Trevino
Born
October 1965 |
Assistant
Treasurer |
February
2023 |
Director,
Financial Reporting, Fund Administration
(5/1/23-present);
Director, Accounting and Finance, the
Adviser
(7/1/19-4/30/23); Accounting/ Financial
Director,
USAA (12/13-6/30/19). Ms. Trevino also
serves
as Assistant Treasurer of Victory Portfolios,
Victory
Portfolios III, and Victory Variable Insurance
Funds. |
|
Sean
Fox,
Born
September
1976 |
Chief
Compliance
Officer |
June
2022 |
Sr.
Compliance Officer, the Adviser (2019-Present);
Compliance
Officer, the Adviser (2015-2019). Mr. Fox
also
serves as Chief Compliance Officer for Victory
Portfolios,
Victory Portfolios III, and Victory Variable
Insurance
Funds. |
|
Michael
Bryan,
Born
December
1962 |
Anti-Money
Laundering
Compliance
Officer
and
Identity
Theft
Officer |
May
2023 |
Vice
President, CCO Compliance Support Services, Citi
Fund
Services Ohio, Inc. (2008-present). Mr. Bryan
also
serves as the Anti-Money Laundering Compliance
Officer
and Identity Theft Officer for Victory
Portfolios,
Victory Portfolios III, and Victory Variable
Insurance
Funds. |
|
Jay
G. Baris,
Born
January 1954 |
Assistant
Secretary |
May
2015 |
Partner,
Sidley Austin LLP (since 2020); Partner,
Shearman
& Sterling LLP
(2018-2020). |
*On
December 5, 2017, Mr. Ponte resigned as Treasurer and accepted the position of
Assistant Treasurer of the Trust.
Fund
Ownership
The
following tables show the dollar ranges of Fund shares (and of shares of all
series of the Victory Fund Complex) beneficially owned by each
Trustee and Advisory Trustee as of December 31, 2022. No Independent Trustee or
Advisory Trustee (or any immediate family member) owns beneficially or of record
an interest in the Adviser or the Distributor or in any person directly or
indirectly controlling, controlled by, or under common control with the Adviser
or the Distributor (other than Funds in the Victory Funds Complex). As of
December 31, 2022, the Trustees, Advisory Trustee, and officers as a group owned
beneficially less than 1% of each class of outstanding shares of those series of
the Trust. No information is provided for the Advisory Trustee, Timothy Pettee,
because he was not appointed an Advisory Trustee until January 1,
2023.
Independent
Trustees
|
Trustee |
Dollar
Range of Beneficial
Ownership
of Fund Shares |
Aggregate
Dollar
Range
of Ownership
of
Shares of
All
Series of the
Victory
Fund Complex |
|
Mr.
Adcock |
VictoryShares
US 500 Enhanced Volatility Wtd ETF: Over $100,000 |
Over
$100,000 |
|
Mr.
Andrews |
VictoryShares
US 500 Enhanced Volatility Wtd ETF: Over $100,000 |
Over
$100,000 |
|
Ms.
Beard |
None |
Over
$100,000 |
|
Mr.
Bushe |
None |
Over
$100,000 |
|
Mr.
Kelly |
VictoryShares
Dividend Accelerator ETF: Over $100,000 |
Over
$100,000 |
|
Mr.
Meyer |
VictoryShares
US 500 Volatility Wtd ETF: $50,001 - $100,000
VictoryShares
Developed Enhanced Volatility Wtd ETF: $10,001 - $50,000
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF: $50,001 -
$100,000 |
Over
$100,000 |
|
Ms.
Nelund |
None |
Over
$100,000 |
|
Mr.
Wilson |
None |
None |
48
Advisory
Trustee
|
Trustee |
Dollar
Range of Beneficial
Ownership
of Fund Shares |
Aggregate
Dollar
Range
of Ownership
of
Shares of
All
Series of the
Victory
Fund Complex |
|
Mr.
Pettee |
None |
None |
Interested
Trustee
|
Trustee |
Dollar
Range of Beneficial
Ownership
of Fund Shares |
Aggregate
Dollar
Range
of Ownership
of
Shares of
All
Series of the
Victory
Fund Complex |
|
Mr.
Brown* |
VictoryShares
Dividend Accelerator ETF: Over $100,000
VictoryShares
US Small Cap High Div Volatility Wtd ETF:Over
$100,000 |
Over
$100,000 |
* Mr. Brown
is an “Interested Person” by reason of his relationship with the
Adviser.
Compensation
The
Victory Fund Complex pays each Independent Trustee and Advisory Trustee $344,000
per year for his or her services to the Complex.
The Board Chair is paid an additional retainer of $150,000 per year. While the
Board reserves the right to award reasonable compensation to any Interested
Trustee, as of the date of this SAI no Interested Trustee receives compensation
for services as a Trustee.
The
following tables indicate the compensation received by each Trustee and Advisory
Trustee from the Funds covered in this SAI and from the
Victory Fund Complex for the fiscal year ended June 30, 2023. As of June 30,
2023, there were 69 funds in the Victory Fund Complex for which the Trustees or
Advisory Trustee listed below were compensated. The Trust does not maintain a
retirement plan for its Trustees or Advisory Trustee.
Independent
Trustees
|
Trustee |
Aggregate
Compensation
from
the Funds |
Total
Compensation from the
Victory
Fund Complex |
|
Mr.
Adcock |
$33,292 |
$344,000 |
|
Mr.
Andrews* |
$33,292 |
$344,000 |
|
Ms.
Beard |
$33,292 |
$344,000 |
|
Mr.
Bushe |
$33,292 |
$344,000 |
|
Mr.
Kelly |
$47,809 |
$494,000 |
|
Mr.
Meyer |
$33,292 |
$344,000 |
|
Ms.
Nelund |
$33,292 |
$344,000 |
|
Mr.
Wilson |
$33,292 |
$344,000 |
* Mr.
Andrews no longer elects to receive a portion of his compensation as deferred
compensation. As of June 30, 2023, the value of Mr. Andrews' deferred
compensation account was $575,153.02.
Advisory
Trustee
|
Trustee |
Aggregate
Compensation
from
the Funds |
Total
Compensation from the
Victory
Fund Complex |
|
Mr.
Pettee* |
$17,283 |
$172,000 |
* Appointed
effective January 2023.
49
Interested
Trustee
|
Trustee |
Aggregate
Compensation
from
the Funds |
Total
Compensation from the
Victory
Fund Complex |
|
Mr.
Brown* |
None |
None |
*
Mr. Brown
is an “Interested Person” by reason of his relationship with the
Adviser.
Deferred
Compensation
Each
Trustee may elect to defer a portion of his or her compensation from the Victory
Fund Complex in accordance with a Deferred Compensation
Plan adopted by the Board (the “Plan”). Such amounts are invested in one or more
Funds in the Victory Fund Complex offered under the Plan or a money market fund,
as selected by the Trustee.
As
of the most recent fiscal year ended June 30, 2023, the following current
Trustees have elected to defer a portion of his or her compensation
from the Victory Fund Complex.
|
Trustee |
Aggregate
Compensation
from
the Funds |
Total
Compensation from the
Victory
Fund Complex |
|
Mr.
Adcock* |
$4,994 |
$51,600 |
|
Ms.
Beard** |
$4,514 |
$46,440 |
|
Mr.
Bushe*** |
$16,646 |
$172,000 |
* As
of June 30, 2023, the value of Mr. Adcock's deferred compensation account
was $259,115.
** As of June 30, 2023, the value of Ms. Beard’s deferred compensation account was $65,015.
*** As of June 30, 2023, the value of Mr. Busche's deferred compensation account was $1,583,968.
** As of June 30, 2023, the value of Ms. Beard’s deferred compensation account was $65,015.
*** As of June 30, 2023, the value of Mr. Busche's deferred compensation account was $1,583,968.
.
CONTROL
PERSONS AND PRINCIPAL SHAREHOLDERS
As
of September 30, 2023, the following shareholders owned 5% or more of the
indicated Funds. Each shareholder that beneficially owns more
than 25% of the voting securities of a class of a Fund may be deemed a control
person of the Fund’s outstanding shares and, thereby, may influence the outcome
of matters on which shareholders are entitled to vote. Since the economic
benefit of investing in a Fund and related voting authority is passed through to
the underlying investors of the record owners, it is expected that these record
owners generally will not be considered the beneficial owners of the Fund’s
shares or control persons of the Fund.
The
names and addresses of the record holders and the percentage of the outstanding
shares held by such holders are set forth in the following
table.
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
VictoryShares
Developed Enhanced Volatility Wtd
ETF |
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
20.50% |
|
|
AMERIPRISE
FINANCIAL SERVICES, LLC
50033
Ameriprise Financial Center
Minneapolis
MN 55474 |
10.08% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
9.77% |
|
|
RBC
CAPITAL MARKETS, LLC
9785
Towne Center Drive
San
Diego CA 92121 |
9.35% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
7.78% |
50
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
|
THE
GOLDMAN SACHS TRUST COMPANY,
NATIONAL
ASSOCIATION
499
Washington Blvd
Jersey
City NJ 07310 |
5.74% |
|
VictoryShares
Dividend Accelerator ETF |
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
38.60% |
|
|
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
14.94% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
13.66% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
5.46% |
|
VictoryShares
International High Div Volatility
Wtd
ETF |
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
38.96% |
|
|
UBS
FINANCIAL SERVICES INC.
1000
Harbor Blvd 5th Floor
Weehawken
NJ 07086 |
14.87% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
12.48% |
|
|
J.P.
MORGAN SECURITIES LLC
383
Madison Avenue
New
York NY 10179 |
9.31% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
7.29% |
|
VictoryShares
International Volatility Wtd ETF |
CITIBANK,
NATIONAL ASSOCIATION
399
Park Avenue
New
York NY 10022 |
80.24% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
7.56% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
6.73% |
|
VictoryShares
Nasdaq Next 50 ETF |
CITIBANK,
NATIONAL ASSOCIATION
399
Park Avenue
New
York NY 10022 |
78.28% |
|
VictoryShares
US 500 Enhanced Volatility Wtd
ETF |
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
13.78% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
13.44% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
11.83% |
51
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
9.71% |
|
|
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
9.40% |
|
|
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
8.02% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
6.48% |
|
|
RBC
CAPITAL MARKETS, LLC
3
World Financial Center
300
Vesey Street
New
York NY 10281 |
6.44% |
|
VictoryShares
US 500 Volatility Wtd ETF |
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
15.23% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
14.20% |
|
|
EDWARD
JONES
12555
Manchester Road
Saint
Louis MO 63131 |
10.29% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
10.07% |
|
|
AMERIPRISE
FINANCIAL SERVICES, LLC
50033
Ameriprise Financial Center
Minneapolis
MN 55474 |
6.27% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
6.25% |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
5.86% |
|
|
WELLS
FARGO CLEARING SERVICES, LLC
3
World Financial Center
300
Vesey Street
New
York NY 10281 |
5.28% |
|
VictoryShares
US Discovery Enhanced Volatility
Wtd
ETF |
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
16.77% |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
15.40% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
12.80% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
10.89% |
52
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
10.76% |
|
|
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
10.69% |
|
|
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
7.34% |
|
|
AMERIPRISE
FINANCIAL SERVICES, LLC
50033
Ameriprise Financial Center
Minneapolis
MN 55474 |
6.88% |
|
VictoryShares
US EQ Income Enhanced Volatility
Wtd
ETF |
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
14.12% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
13.73% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
12.73% |
|
|
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
10.45% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
9.99% |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
9.82% |
|
|
AMERIPRISE
FINANCIAL SERVICES, LLC
50033
Ameriprise Financial Center
Minneapolis
MN 55474 |
6.98% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
6.36% |
|
VictoryShares
US Large Cap High Div Volatility
Wtd
ETF |
EDWARD
JONES
12555
Manchester Road
Saint
Louis MO 63131 |
18.56% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
13.19% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
10.60% |
|
|
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
10.38% |
|
|
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
9.80% |
53
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
9.71% |
|
|
AMERIPRISE
FINANCIAL SERVICES, LLC
50033
Ameriprise Financial Center
Minneapolis
MN 55474 |
8.23% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
7.60% |
|
VictoryShares
US Multi-Factor Minimum Volatility
ETF |
CITIBANK,
NATIONAL ASSOCIATION
399
Park Avenue
New
York NY 10022 |
40.64% |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
15.43% |
|
|
MORGAN
STANLEY
2000
Westchester Avenue
Purchase
NY 10577 |
9.63% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
6.74% |
|
|
RBC
CAPITAL MARKETS, LLC
3
World Financial Center
300
Vesey Street
New
York NY 10281 |
6.51% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101
Jersey
City NY 07399 |
5.98% |
|
VictoryShares
US Small Cap High Div Volatility
Wtd
ETF |
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
59.74% |
|
|
NATIONAL
FINANCIAL SERVICES LLC
499
Washington Blvd
Jersey
City NJ 07310 |
12.13% |
|
|
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
5.43% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
5.01% |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
LPL
FINANCIAL LLC
9785
Towne Center Drive
San
Diego CA 92121 |
25.76% |
|
|
MERRILL
LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
4800
E Deer Lake Drive
Jacksonville
FL 32246 |
23.13% |
|
|
CHARLES
SCHWAB & CO., INC.
101
Montgomery Street
San
Franciso CA 94101 |
23.27% |
|
|
COMERICA
BANK
411
W. Lafayette
Detroit
MI 48226 |
11.64% |
54
|
Fund
- Class |
Name
and Address of Owner |
Percentage
Owned
of
Record |
|
VictoryShares
WestEnd U.S. Sector ETF |
CITIBANK,
NATIONAL ASSOCIATION
399
Park Avenue
New
York NY 10022 |
79.40% |
|
|
PERSHING
LLC
One
Pershing Plaza
14th
Floor
Jersey
City NY 07399 |
7.38% |
|
|
RAYMOND
JAMES & ASSOCIATES, INC.
880
Carillon Pkwy
St.
Petersburg FL 33716 |
5.35% |
INVESTMENT
ADVISER AND OTHER SERVICE PROVIDERS
Investment
Adviser
Victory
Capital, a New York corporation registered as an investment adviser with the
SEC, serves as investment adviser to the Funds. Victory
Capital’s principal business address is 15935 La Cantera Parkway, San Antonio,
TX 78256. Subject to the authority of the Board, the Adviser is responsible for
the overall management and administration of the Funds’ business affairs. Each
of the Adviser’s multiple investment teams, referred to separately as investment
franchises utilizes its own independent approach to investing. The Adviser is
responsible for selecting each Fund’s investments according to its investment
objective, policies, and restrictions. The Adviser is an indirect wholly owned
subsidiary of Victory Capital Holdings, Inc. (“VCH”), a publicly traded Delaware
corporation. As of September 30, 2023, the Adviser managed assets totaling in
excess of $153.5 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
The
Adviser is a diversified global asset manager comprised of multiple investment
teams, referred to as investment franchises, each of which
utilizes an independent approach to investing.
The
Advisory Agreement
The
Adviser serves as the Funds’ investment adviser pursuant to an advisory
agreement dated as of May 1, 2015 (the “Advisory Agreement”).
Unless sooner terminated, the Advisory Agreement between the Adviser and the
Trust, on behalf of the Funds, provides that it will continue in effect as to
the Funds for two years and for consecutive one-year terms thereafter, provided
that such renewal is approved at least annually by the Trustees or by vote of
the majority of the outstanding shares of each such Fund (as defined under
“Miscellaneous” below) and, in either case, by a majority of the Trustees who
are not parties to the Advisory Agreement or “interested persons” (as defined in
the 1940 Act) of any party to the Advisory Agreement, by votes cast in person at
a meeting called for such purpose. The Advisory Agreement is terminable as to
any particular Fund at any time on 60 days’ written notice without penalty by a
vote of the majority of the outstanding shares of a Fund, by vote of the
Trustees, or as to all applicable Funds by the Adviser. The Advisory Agreement
also terminates automatically in the event of any assignment, as defined by the
1940 Act.
The
Advisory Agreement provides that the Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered
by the Funds in connection with the performance of the services pursuant
thereto, except a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, gross negligence on the part of the Adviser in the
performance of its duties, or from reckless disregard by the Adviser of its
duties and obligations thereunder.
Under
the Advisory Agreement, the Adviser may delegate a portion of its
responsibilities to a sub-adviser. In addition, the agreements provide
that the Adviser may render services through its own employees or the employees
of one or more affiliated companies that are qualified to act as an investment
adviser of the Fund provided all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the
Adviser.
The
following schedule lists the advisory fees for each Fund, as an annual
percentage of its average daily net assets.
|
Fund |
Advisory
Fee |
|
VictoryShares
US 500 Volatility Wtd ETF |
0.30% |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
0.30% |
|
VictoryShares
International Volatility Wtd ETF |
0.40% |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
0.30% |
55
|
Fund |
Advisory
Fee |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
0.30% |
|
VictoryShares
International High Div Volatility Wtd ETF |
0.40% |
|
VictoryShares
Dividend Accelerator ETF |
0.30% |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
0.30% |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
0.30% |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
0.30% |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
0.30% |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
0.40% |
|
VictoryShares
Nasdaq Next 50 ETF |
0.15% |
|
VictoryShares
WestEnd U.S. Sector ETF |
0.45% |
Advisory
fees paid by the Funds to the Adviser for the last three fiscal years ended June
30, are shown in the table below. The VictoryShares
WestEnd U.S. Sector ETF commenced operations October 10, 2022.
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US 500 Volatility Wtd ETF |
$1,693,477 |
$1,976,520 |
$2,025,415 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$74,627 |
$77,382 |
$64,683 |
|
VictoryShares
International Volatility Wtd ETF |
$350,717 |
$445,426 |
$412,719 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$1,044,387 |
$754,805 |
$589,587 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$1,065,809 |
$778,451 |
$393,407 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$64,869 |
$76,795 |
$153,347 |
|
VictoryShares
Dividend Accelerator ETF |
$716,307 |
$988,444 |
$920,160 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$366,590 |
$485,351 |
$459,365 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$2,456,227 |
$2,986,132 |
$2,281,481 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$5,903,571 |
$3,745,447 |
$2,109,770 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$248,980 |
$214,633 |
$150,781 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$175,716 |
$158,950 |
$174,430 |
|
VictoryShares
Nasdaq Next 50 ETF |
$146,596 |
$203,595 |
$138,833 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$416,947 |
- |
- |
Management
Fee Waiver/Expense Reimbursement
The
Adviser has contractually agreed to waive its management fee and/or reimburse
Fund expenses so that the total annual operating expenses
(excluding any acquired fund fees and expenses and certain other items such as
interest, taxes, dividend and interest expenses on short sales and brokerage
commissions) of a Fund (by share class) do not exceed a certain percentage for a
predetermined amount of time. In these instances, the fee and expense table in
the Fund’s Prospectus provides more details about this arrangement and shows the
impact it will have on the Fund’s total annual fund operating expenses. Under
its contractual agreement with the Funds, the Adviser is permitted to recoup
advisory fees waived and expenses reimbursed for up to three years after the
date of the waiver or reimbursement, subject to the lesser of any operating
expense limits in effect at the time of: (a) the original waiver or expense
reimbursement; or (b) the recoupment, after giving effect to the recoupment
amount. This agreement may only be terminated by the Board. From time to time,
the Adviser may also voluntarily waive its management fee and/or reimburse
expenses for a Fund. These voluntary reductions are not reflected in the fee and
expense table in the Fund’s Prospectus.
From
time to time, the Manager may, without prior notice to shareholders, waive all
or any portion of fees or agree to reimburse expenses
incurred by a Fund. As a result of the Funds’ expense limitation agreement, for
the last three fiscal years ended June 30, Victory Capital waived its management
fee and/or reimbursed the Funds the amount listed in the table below. The
VictoryShares WestEnd U.S. Sector ETF commenced operations October 10,
2022.
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US 500 Volatility Wtd ETF |
$227,898 |
$224,189 |
$302,947 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$57,396 |
$57,981 |
$42,901 |
|
VictoryShares
International Volatility Wtd ETF |
$162,465 |
$147,230 |
$186,619 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$159,716 |
$125,256 |
$115,722 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$167,111 |
$133,750 |
$92,551 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$80,504 |
$76,507 |
$79,421 |
|
VictoryShares
Dividend Accelerator ETF |
$125,928 |
$130,427 |
$153,181 |
56
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$84,781 |
$91,940 |
$93,897 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$297,004 |
$319,183 |
$341,488 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$671,840 |
$475,603 |
$333,815 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$78,054 |
$72,992 |
$56,006 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$200,487 |
$142,542 |
$187,876 |
|
VictoryShares
Nasdaq Next 50 ETF |
$103,429 |
$175,496 |
$107,539 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$265,434 |
$- |
$- |
Compliance
Services
The
Trust and the Adviser are parties to the Agreement to Provide Compliance
Services (the “Compliance Agreement”) pursuant to which the
Adviser furnishes its compliance personnel, including the services of the CCO,
and other resources reasonably necessary to provide the Trust with compliance
oversight services related to the design, administration, and oversight of a
compliance program for the Trust in accordance with Rule 38a-1 under 1940 Act.
The funds in the Victory Fund Complex, in the aggregate, compensate the Adviser
for these services.
For
the last three fiscal years ended June 30, the Funds paid the Adviser the
following fees under the terms of the Compliance Agreement.
The VictoryShares WestEnd U.S. Sector ETF commenced operations October 10,
2022.
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US 500 Volatility Wtd ETF |
$5,107 |
$4,752 |
$5,679 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$223 |
$184 |
$172 |
|
VictoryShares
International Volatility Wtd ETF |
$796 |
$801 |
$831 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$3,085 |
$1,749 |
$1,634 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$3,129 |
$1,818 |
$943 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$146 |
$140 |
$367 |
|
VictoryShares
Dividend Accelerator ETF |
$2,183 |
$2,373 |
$2,462 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$1,117 |
$1,158 |
$1,288 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$7,552 |
$7,043 |
$6,105 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$17,800 |
$8,367 |
$5,609 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$746 |
$500 |
$400 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$388 |
$285 |
$374 |
|
VictoryShares
Nasdaq Next 50 ETF |
$891 |
$975 |
$669 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$834 |
- |
- |
Administrator
and Fund Accountant
Victory
Capital serves as the administrator and fund accountant to the Trust pursuant to
an agreement dated July 1, 2006, as amended (the
“Administration and Fund Accounting Agreement”). Citi Fund Services Ohio, Inc.
(“Citi”) serves as sub-administrator and sub-fund accountant to the Trust
pursuant to an agreement with Victory Capital dated October 1, 2015, as amended
(the “Sub-Administration and Sub-Fund Accounting Agreement”). As administrator,
Victory Capital supervises the Trust’s operations, including the services that
Citi provides to the Funds as sub-administrator and sub-fund accountant, but
excluding those that Victory Capital supervises as investment adviser, subject
to the supervision of the Board.
Under
the Administration and Fund Accounting Agreement, for the administration and
fund accounting services that Victory Capital renders to
the Funds, the Trust, Victory Portfolios ("VP"), and Victory Variable Insurance
Funds (“VVIF”) pay Victory Capital an annual fee, accrued daily and paid
monthly, at the following annual rates based on the aggregate average daily net
assets of the Trust, VP, and VVIF: 0.08% of the first $15 billion in aggregate
Trust, VP, and VVIF net assets, plus 0.05% of aggregate Trust, VP, and VVIF net
assets in excess of $15 billion to $30 billion, plus 0.04% of aggregate Trust,
VP, and VVIF net assets in excess of $30 billion. Victory Capital may
periodically waive all or a portion of the amount of its fee that is allocated
to any Fund in order to increase the Fund’s net income available for
distribution to shareholders. In addition, the Trust, VP, and VVIF reimburse
Victory Capital for all of its reasonable out-of-pocket expenses incurred as a
result of providing the services under the Administration and Fund Accounting
Agreement, including costs associated with implementing new reports required by
the new RIC Modernization rules adopted by the SEC under the 1940
Act.
Except
as otherwise provided in the Administration and Fund Accounting Agreement,
Victory Capital pays all expenses that it incurs in
performing its services and duties as administrator. Unless sooner terminated,
the Administration and Fund Accounting Agreement continues in effect for a
period of three years and for consecutive one-year terms thereafter, provided
that such continuance is approved
57
by
the Board or by vote of a majority of the outstanding shares of each Fund and,
in either case, by a majority of the Independent Trustees.
The Administration and Fund Accounting Agreement provides that Victory Capital
shall not be liable for any error of judgment or mistake of law or any loss
suffered by the Trust in connection with the matters to which the Agreement
relates, except a loss resulting from bad faith, willful misfeasance, negligence
or reckless disregard of its obligations and duties under the
Agreement.
Under
the Administration and Fund Accounting Agreement, Victory Capital, among other
things, coordinates the preparation, filing and distribution
of amendments to the Trust’s registration statement on Form N-1A, supplements to
prospectuses and SAIs, and proxy materials in connection with shareholder
meetings; drafts shareholder communications, including annual and semi-annual
reports; administers the Trust’s other service provider contracts; monitors
compliance with investment restrictions imposed by the 1940 Act, each Fund’s
investment objective, defined investment policies, and restrictions, tax
diversification, and distribution and income requirements; coordinates the
Funds’ service arrangements with financial institutions that make the Funds’
shares available to their customers; assists with regulatory compliance;
supplies individuals to serve as Trust officers; prepares Board meeting
materials; and annually determines whether the services that it provides (or the
services that Citi provides as sub-administrator) are adequate and
complete.
Victory
Capital also performs fund accounting services for each Fund, excluding those
services that Citi performs as sub-fund accountant.
The fund accountant calculates each Fund’s NAV, its dividend and capital gain
distribution, if any, and its yield. The fund accountant also provides a current
security position report, a summary report of transactions and pending
maturities, a current cash position report, and maintains the general ledger
accounting records for the Funds. The fees that Citi receives for
sub-administration and sub-fund accounting services are described in the SAI
section entitled “Sub-Administrator and Sub-Fund Accountant.”
For
the last three fiscal years ended June 30, the Funds accrued the following
amounts in administrative, fund accountant fees. The VictoryShares
WestEnd U.S. Sector ETF commenced operations October 10, 2022.
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US 500 Volatility Wtd ETF |
$310,857 |
$356,980 |
$393,250 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$13,700 |
$13,974 |
$12,474 |
|
VictoryShares
International Volatility Wtd ETF |
$48,283 |
$60,335 |
$59,872 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$191,735 |
$136,274 |
$114,235 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$195,691 |
$140,567 |
$74,812 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$8,931 |
$10,404 |
$22,754 |
|
VictoryShares
Dividend Accelerator ETF |
$131,434 |
$178,505 |
$177,921 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$67,294 |
$87,659 |
$89,237 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$450,793 |
$539,204 |
$440,672 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$1,083,482 |
$676,086 |
$407,031 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$45,709 |
$38,752 |
$29,094 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$24,197 |
$21,531 |
$25,456 |
|
VictoryShares
Nasdaq Next 50 ETF |
$53,816 |
$73,542 |
$52,728 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$57,524 |
$- |
$- |
Sub-Administrator
and Sub-Fund Accountant
Citi
serves as sub-administrator and sub-fund accountant to the Funds pursuant to the
Sub-Administration and Sub-Fund Accounting Agreement
dated October 1, 2015, as amended, by and between Victory Capital and Citi (the
"Sub-Administration and Sub-Fund Accounting Agreement.”) Citi assists in
supervising all operations of the Funds (other than those performed by Victory
Capital either as investment adviser or administrator), subject to the
supervision of the Board.
Unless
sooner terminated, the Sub-Administration and Sub-Fund Accounting Agreement
continues in effect as to each Fund for a period of three
years and for consecutive one-year terms thereafter. The Sub-Administration and
Sub-Fund Accounting Agreement provides that Citi shall not be liable for any
error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Agreement relates, except a loss
resulting from bad faith, willful misfeasance, negligence, or reckless disregard
of its obligations and duties under the Agreement.
Under
the Sub-Administration and Sub-Fund Accounting Agreement, Citi calculates Trust
expenses and make disbursements; calculates
capital gain and distribution information; registers the Funds’ shares with the
states; prepares shareholder reports and reports to the SEC on Forms N-CEN and
N-PORT; coordinates dividend payments; calculates the Funds’ performance
information; files the Trust’s tax returns; supplies individuals to serve as
Trust officers; monitors the Funds’ status as regulated investment companies
under the Code; assists in developing portfolio compliance procedures; reports
to the Board amounts paid under shareholder service agreements; assists with
regulatory compliance; obtains, maintains and files fidelity bonds and trustees’
and officers’/errors and
58
omissions
insurance policies for the Trust; assists with liquidity and derivatives risk
management services; and assists in the annual audit of
the Funds, among other services.
Transfer
Agent
Citibank,
N.A. (“Citibank” or the “Custodian”), 388 Greenwich St., New York, New York
10013, serves as transfer agent for the Funds pursuant
to a Transfer Agency Services Agreement. Under its agreement with the Funds,
Citibank has agreed, among other things, to (1) perform and facilitate the
performance of purchases and redemptions of Creation Units by Authorized
Participants; (2) record and calculate the number of outstanding Fund shares;
(3) maintain shareholder accounts; (4) perform duties relating to anti-money
laundering and identity theft prevention; and (5) make periodic reports to the
Board and regulators regarding its operations.
Custodian
General. Citibank,
388 Greenwich St., New York, New York 10013, ("Citibank" or the "Custodian")
serves as the custodian of the assets of each Fund pursuant to the Global
Custodial Services Agreement dated August 5, 2008, as amended (the “Custody
Agreement”). The Custodian’s responsibilities include safeguarding and
controlling each Fund’s cash and securities, handling the receipt and delivery
of securities, and collecting interest and dividends on the Fund’s investments.
Pursuant to the Custody Agreement, the Custodian also maintains original entry
documents and books of record and general ledgers; posts cash receipts and
disbursements; and records purchases and sales based upon communications from
the Adviser. The Custodian may, with the approval of a Fund and at its own
expense, open and maintain a sub-custody account or accounts on behalf of a
Fund, provided that it shall remain liable for the performance of all of its
duties under the Custody Agreement.
Foreign
Custody. Rule
17f-5 under the 1940 Act, which governs the custody of investment company assets
outside the United States, allows a mutual fund’s board of directors to delegate
to a “Foreign Custody Manager” the selection and monitoring of foreign
sub-custodian arrangements for the Trust’s assets. Accordingly, the Board
delegated these responsibilities to the Custodian pursuant to the Custody
Agreement. As Foreign Custody Manager, the Custodian must (a) determine that the
assets of the Funds held by a foreign sub-custodian will be subject to
reasonable care, based on the standards applicable to custodians in the relevant
market; (b) determine that the Trust’s foreign custody arrangements are governed
by written contracts in compliance with Rule 17f-5 (or, in the case of a
compulsory depository, by such a contract and/or established practices or
procedures); and (c) monitor the appropriateness of these arrangements and any
material change in the relevant contract, practices or procedures. In
determining appropriateness, the Custodian will not evaluate a particular
country’s investment risks, such as (a) the use of compulsory depositories, (b)
such country’s financial infrastructure, (c) such country’s prevailing custody
and settlement practices, (d) nationalization, expropriation or other
governmental actions, (e) regulation of the banking or securities industry, (f)
currency controls, restrictions, devaluations or fluctuations, and (g) market
conditions that affect the orderly execution of securities transactions or
affect the value of securities. The Custodian will provide to the Board
quarterly written reports regarding the Trust’s foreign custody
arrangements.
Line
of Credit. Each
Fund, along with other funds managed by the Adviser, participates in a 364-day
committed credit facility and a 364-day uncommitted, demand credit facility with
Citibank. Each such credit facility may be renewed if so agreed by the parties.
Under the current agreement with Citibank, the Funds may borrow up to $600
million, of which $300 million is committed and $300 million is uncommitted. Of
this amount, $40 million of the committed line of credit and $60 million of the
uncommitted line of credit are reserved for use by the Victory Floating Rate
Fund (a series of Victory Portfolios), with that Fund paying the related
commitment fees for that amount. The purpose of each agreement is to meet
temporary or emergency cash needs. For the committed credit facility, Citibank
received an annual commitment fee of 0.15%. Each Fund pays a pro-rata portion
(adjusted for the amount of credit reserved for the Victory Floating Rate Fund)
of these fees and pays the interest on any amount that it borrows. Each Fund
paid a pro-rata portion of the renewal fee.
Securities
Lending
The
Funds, through a Securities Lending Agreement with Citibank, N.A. (“Citibank”),
may lend its securities to qualified financial institutions,
such as certain broker-dealers and banks, to earn additional income, net of
income retained by Citibank. Borrowers are required to initially secure their
loans for collateral in the amount of at least 102% of the value of U.S.
securities loaned or at least 105% of the value of non-U.S. securities loaned,
marked-to-market daily. Any collateral shortfalls associated with increases in
the valuation of the securities loaned generally are cured the next business
day. The collateral can be received in the form of cash collateral and/or
non-cash collateral. Non-cash collateral can include U.S. government securities
and other securities as permitted by SEC guidelines. The cash collateral is
invested in short-term instruments or cash equivalents, primarily open-end
investment companies. The Funds effectively do not have control of the non-cash
collateral. Collateral requirements are determined daily based on the value of a
Fund’s securities on loan as of the end of the prior business day. During the
time portfolio securities are on loan, the borrower will pay the Fund any
dividends or interest paid on such securities plus any fee negotiated between
the parties to the lending agreement. A Fund also earns a return from the
collateral. A Fund pays Citibank various fees in connection with the investment
of cash collateral and fees based on the investment income received from
securities lending activities. Loans are terminable upon demand and the borrower
must
59
return
the loaned securities within the lesser of one standard settlement period or
five business days. Although risk is mitigated by the collateral,
a Fund could experience a delay in recovering its securities and possible loss
of income or value if the borrower fails to return them. In addition, there is a
risk that the value of the short-term investments will be less than the amount
of cash collateral required to be returned to the borrower.
The
Funds’ agreement with Citibank does not include master netting provisions.
Non-cash collateral received by a Fund may not be sold or
repledged, except to satisfy borrower default.
The
following reflects the dollar amounts of income and fees/compensation related to
the Funds’ securities lending activities during the Funds’
last completed fiscal year ended June 30. The VictoryShares WestEnd U.S. Sector
ETF did not participate in Securities Lending during the fiscal year ended June
30.
|
Fund |
Gross
Income
from
securities
lending
activities |
Fees
paid to
securities
lending
agent
from a
revenue
split |
Rebate
(paid
to
borrower) |
Aggregate
fees/compensation
for
securities
lending
activities |
Net
income
from
securities
lending
activities |
|
VictoryShares
US 500
Volatility
Wtd ETF |
$242,152 |
$13,355 |
$108,325 |
$121,680 |
$120,472 |
|
VictoryShares
US
Small
Cap Volatility
Wtd
ETF |
$11,195 |
$813 |
$3,061 |
$3,874 |
$7,321 |
|
VictoryShares
International
Volatility
Wtd
ETF |
$110,938 |
$3,001 |
$81,093 |
$84,094 |
$26,844 |
|
VictoryShares
US
Large
Cap High Div
Volatility
Wtd ETF |
$29,279 |
$1,099 |
$18,288 |
$19,387 |
$9,892 |
|
VictoryShares
US
Small
Cap High Div
Volatility
Wtd ETF |
$367,603 |
$18,844 |
$179,245 |
$198,089 |
$169,514 |
|
VictoryShares
International
High Div
Volatility
Wtd ETF |
$32,092 |
$1,069 |
$21,424 |
$22,493 |
$9,599 |
|
VictoryShares
Dividend
Accelerator
ETF |
$25,687 |
$2,344 |
$2,242 |
$4,586 |
$21,101 |
|
VictoryShares
US
Multi-Factor
Minimum
Volatility
ETF |
$921 |
$45 |
$470 |
$515 |
$406 |
|
VictoryShares
US 500
Enhanced
Volatility
Wtd
ETF |
$111,198 |
$6,340 |
$47,663 |
$54,003 |
$57,195 |
|
VictoryShares
US EQ
Income
Enhanced
Volatility
Wtd ETF |
$371,127 |
$6,172 |
$309,387 |
$315,559 |
$55,568 |
|
VictoryShares
US
Discovery
Enhanced
Volatility
Wtd ETF |
$4,584 |
$366 |
$932 |
$1,298 |
$3,286 |
|
VictoryShares
Developed
Enhanced
Volatility
Wtd ETF |
$10,548 |
$278 |
$7,778 |
$8,056 |
$2,492 |
|
VictoryShares
Nasdaq
Next
50 ETF |
$58,565 |
$4,197 |
$16,565 |
$20,762 |
$37,803 |
Distributor
Foreside
Fund Services, LLC serves as the distributor of Creation Units (the
“Distributor”) for the Funds on an agency basis. Under the ETF
Distribution Agreement most recently entered into as of December 6, 2022, as may
be amended (“Distribution Agreement”), the Distributor receives orders from
Authorized Participants to create and redeem shares in Creation Unit
aggregations and transmits such orders to the Trust's Custodian and transfer
agent. The Distributor’s principal address is Three Canal Plaza, Portland, Maine
60
04101.
The Distributor is a broker-dealer registered under the 1934 Act and a member of
the Financial Industry Regulatory Authority, Inc.
(“FINRA”). Shares will be continuously offered for sale only in Creation Units.
Shares in less than a Creation Unit are not distributed by the Distributor. The
Distributor has no role in determining the investment policies of the Funds or
which securities are to be purchased or sold by the Funds. No compensation is
payable by the Trust to the Distributor for such distribution services. However,
the Adviser has entered into an agreement with the Distributor under which it
makes payments to the Distributor in consideration for its services under the
Distribution Agreement. The payments made by the Adviser to the Distributor do
not represent an additional expense to the Trust or its
shareholders.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will
solicit orders for the purchase of shares, provided that any
subscriptions and orders will not be binding on the Trust until accepted by the
Trust. The Distributor will deliver Prospectuses and, upon request, SAIs to
persons purchasing Creation Units. The Distributor is a broker-dealer registered
under the Exchange 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 Creation 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 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 Trustees who are not “interested persons” of the Trust and 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.
PORTFOLIO
MANAGERS
This
section includes information about the Funds’ portfolio managers, including
information concerning other accounts managed, the dollar
range of Fund shares owned, and compensation.
Other
Accounts
The
following table lists the number and types of accounts managed by the portfolio
managers and assets under management in those accounts
as of the end of the last completed fiscal year:
|
|
Registered
Investment
Company
Accounts |
Pooled
Investment
Vehicle
Accounts |
Other
Accounts | |||
|
Assets
Managed
(In
Millions |
Number
of
Accounts |
Assets
Managed
(In
Millions) |
Number
of
Accounts |
Assets
Managed
(In
Millions) |
Number
of
Accounts | |
|
VictoryShares
Solutions
|
|
|
|
|
| |
|
Mr.
Dhillon |
$
53,191.94 |
58 |
$61.85 |
4 |
$4,524.27 |
19 |
|
WestEnd |
$181.4 |
1 |
$—
|
0 |
$
19,005.54 |
99 |
|
Mr.
Porter |
$181.4 |
1 |
$— |
0 |
$
19,005.54 |
99 |
|
Mr.
Durden |
$181.4 |
1 |
$— |
0 |
$
19,005.54 |
99 |
|
Mr.
Peebles |
$181.4 |
1 |
$— |
0 |
$
19,005.54 |
99 |
The
following table sets forth performance-based accounts for which the Funds’
portfolio managers were primarily responsible for the day-to-day
portfolio management as of the last completed fiscal year:
61
|
|
Registered
Investment
Company
Accounts |
Pooled
Investment
Vehicle
Accounts |
Other
Accounts | |||
|
Assets
Managed
(In
Millions) |
Number
of
Accounts |
Assets
Managed
(In
Millions) |
Number
of
Accounts |
Assets
Managed
(In
Millions) |
Number
of
Accounts | |
|
VictoryShares
Solutions
|
|
|
|
|
| |
|
Mr.
Dhillon |
$
18,496.51 |
16 |
$— |
0 |
$— |
0 |
|
WestEnd |
|
|
|
|
|
|
|
Mr.
Porter |
$— |
— |
$— |
0 |
$— |
0 |
|
Mr.
Durden |
$— |
— |
$— |
0 |
$— |
0 |
|
Mr.
Peebles |
$— |
— |
$— |
0 |
$— |
0 |
Fund
Ownership
As
of the most recent fiscal year end, the dollar range of shares beneficially
owned by the portfolio managers of the Funds are set forth below:
Mannik
Dhillon
|
Fund |
Dollar
Range of shares
Beneficially
Owned as of
June
30, 2023 |
|
VictoryShares
US 500 Volatility Wtd ETF |
None |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
None |
|
VictoryShares
International Volatility Wtd ETF |
$1-10,000 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
None |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$1-10,000 |
|
VictoryShares
International High Div Volatility Wtd ETF |
None |
|
VictoryShares
Dividend Accelerator ETF |
$1-10,000 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$1-10,000 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
None |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
None |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
None |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
None |
|
VictoryShares
Nasdaq Next 50 ETF |
None |
Fritz
Porter
|
Fund |
Dollar
Range of shares
Beneficially
Owned as of
June
30, 2023 |
|
VictoryShares
WestEnd U.S. Sector ETF |
None |
Ned
Durden
|
Fund |
Dollar
Range of shares
Beneficially
Owned as of
June
30, 2023 |
|
VictoryShares
WestEnd U.S. Sector ETF |
None |
Ty
Peebles
|
Fund |
Dollar
Range of shares
Beneficially
Owned as of
June
30, 2023 |
|
VictoryShares
WestEnd U.S. Sector ETF |
None |
62
Portfolio
Manager Compensation
The
Adviser has designed the structure of its portfolio managers’ compensation to
(1) align portfolio managers’ interests with those of the
Adviser’s clients with an emphasis on long-term, risk-adjusted investment
performance, (2) help the Adviser attract and retain high-quality investment
professionals, and (3) contribute to the Adviser’s overall financial success.
Each of the portfolio managers receives a base salary plus an annual incentive
bonus for managing a Fund, separate accounts, other investment companies, other
pooled investment vehicles and other accounts (including any accounts for which
the Adviser receives a performance fee) (together, “Accounts”). A portfolio
manager’s base salary is dependent on the manager’s level of experience and
expertise. The Adviser monitors each manager’s base salary relative to salaries
paid for similar positions with peer firms by reviewing data provided by various
independent third-party consultants that specialize in competitive salary
information. Such data, however, is not considered to be a definitive
benchmark.
Each
of the Adviser’s investment franchises may earn incentive compensation based on
a percentage of the Adviser’s revenue attributable
to fees paid by Accounts managed by the team. The chief investment officer or a
senior member of each team, in coordination with the Adviser, determines the
allocation of the incentive compensation earned by the team among the team’s
portfolio managers by establishing a “target” incentive for each portfolio
manager based on the manager’s level of experience and expertise in the
manager’s investment style. Individual performance is based on objectives
established annually using performance metrics such as portfolio structure and
positioning, research, stock selection, asset growth, client retention,
presentation skills, marketing to prospective clients and contribution to the
Adviser’s philosophy and values, such as leadership, risk management and
teamwork. The annual incentive bonus also factors in individual investment
performance of each portfolio manager’s portfolio or Fund relative to a selected
peer group(s). The overall performance results for a manager are based on the
composite performance of all Accounts managed by that manager on a combination
of one-, three-, and five-year rolling performance periods as compared to the
performance information of a peer group of similarly managed
competitors.
The
Adviser’s portfolio managers may participate in the equity ownership plan of the
Adviser’s parent company. There is an ongoing annual
equity pool granted to certain employees based on their contribution to the
firm. Eligibility for participation in these incentive programs depends on the
manager’s performance and seniority.
Conflicts
of Interest
The
Adviser’s portfolio managers are often responsible for managing one or more
Funds as well as other accounts, such as separate accounts,
and other pooled investment vehicles, such as collective trust funds or
unregistered hedge funds. A portfolio manager may manage other accounts which
have materially higher fee arrangements than a Fund and may, in the future,
manage other accounts which have a performance-based fee. A portfolio manager
also may make personal investments in accounts he or she manages or supports.
The side-by-side management of the Funds along with other accounts may raise
potential conflicts of interest by incenting a portfolio manager to direct a
disproportionate amount of: (1) their attention; (2) limited investment
opportunities, such as less-liquid securities or initial public offering; and/or
(3) desirable trade allocations, to such other accounts. In addition, certain
trading practices, such as cross-trading between Funds or between a Fund and
another account, raise conflict of interest issues. The Adviser has adopted
numerous compliance policies and procedures, including a Code of Ethics, and
brokerage and trade allocation policies and procedures, which seek to address
the conflicts associated with managing multiple accounts for multiple clients.
In addition, the Adviser has a designated Chief Compliance Officer (selected in
accordance with the federal securities laws) and compliance staff whose
activities are focused on monitoring the activities of the Adviser’s investment
franchises and employees in order to detect and address potential and actual
conflicts of interest. However, there can be no assurance that the Adviser’s
compliance program will achieve its intended result.
DISTRIBUTION
AND SERVICE PLAN
The
Trust has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940 Act
(“Rule 12b-1 Plan” or “Plan”). In accordance with its
Plan, the Funds are authorized to pay an amount up to 0.25% of its average daily
net assets each year for certain distribution-related activities. In addition,
if the payment of management fees by the Fund is deemed to be indirect financing
by the Funds of the distribution of its shares, such payment is authorized by
the Rule 12b-1 Plan. The Plan specifically recognizes that the Adviser and other
persons may use management fee revenue, as well as past profits or other
resources, to pay for expenses incurred in connection with providing services
intended to result in the sale of shares. The Adviser and such other persons, as
well as their affiliates, may pay amounts to third parties for distribution or
marketing services on behalf of the Funds. The making of the types of payments
described in this paragraph could create a conflict of interest for the party
receiving such payments.
The
Rule 12b-1 Plan was adopted in order to permit the implementation of the Funds’
method of distribution. No fees are currently paid by
the Funds under the Plan, and there are no current plans to impose such fees. In
the event such fees were to be charged, over time they would increase the cost
of an investment in the Funds.
63
The
Distributor is required to provide a written report, at least quarterly to the
Board, specifying in reasonable detail the amounts (if any)
expended pursuant to the Rule 12b-1 Plan and the purposes for which such
expenditures were made. Further, the Distributor will inform the Board of any
Rule 12b-1 fees to be paid by the Distributor to Recipients. From time to time,
the Adviser, at its expense, may provide additional compensation to dealers that
sell or arrange for the sale of shares of a Fund. Such compensation provided by
the Adviser may include financial assistance to dealers that enable the Adviser
to participate in and/or present at conferences or seminars, sales or training
programs for invited registered representatives and other employees, client and
investor events and other dealer-sponsored events. Other compensation may be
offered to the extent not prohibited by state laws or any self-regulatory
agency, such as FINRA. The Adviser may make payments for events it deems
appropriate, subject to applicable law. These payments may vary depending upon
the nature of the event.
The
Rule 12b-1 Plan may not be amended to increase materially the amount of the
Distributor’s compensation to be paid by the Fund, unless
such amendment is approved by the vote of a majority of the outstanding voting
securities of the affected Fund (as defined in the 1940 Act). All material
amendments must be approved by a majority of the Board and a majority of the
Rule 12b-1 Trustees by votes cast in person at a meeting called for the purpose
of voting on a Rule 12b-1 Plan. During the term of the Rule 12b-1 Plan, the
selection and nomination of non-interested Trustees of the Trust will be
committed to the discretion of current non-interested Trustees. The Distributor
will preserve copies of the Rule 12b-1 Plan, any related agreements, and all
reports, for a period of not less than six years from the date of such document
and for at least the first two years in an easily accessible place.
Any
agreement related to the Rule 12b-1 Plan will be in writing and provide that:
(a) it may be terminated by the Trust or the applicable Fund at
any time upon sixty days’ written notice, without the payment of any penalty, by
vote of a majority of the respective Rule 12b-1 Trustees, or by vote of a
majority of the outstanding voting securities of the Trust or the Fund; (b) it
will automatically terminate in the event of its assignment (as defined in the
1940 Act); and (c) it will continue in effect for a period of more than one year
from the date of its execution or adoption only so long as such continuance is
specifically approved at least annually by a majority of the Board and a
majority of the Rule 12b-1 Trustees by votes cast in person at a meeting called
for the purpose of voting on such agreements.
CODE
OF ETHICS
The
Trust and the Adviser each have adopted a Code of Ethics in accordance with Rule
17j-1 under the 1940 Act. The Adviser’s Code of Ethics
applies to all of the Adviser’s directors and officers and employees with
investment advisory duties (“Access Personnel”) and all of the Adviser’s
directors, officers and employees (“Supervised Personnel”). Each Code of Ethics
provides that Access Personnel must refrain from certain trading practices. Each
Code also requires all Access Personnel (and, in the Adviser Code, all
Supervised Personnel) to report certain personal investment activities,
including, but not limited to, purchases or sales of securities that may be
purchased or held by a Fund. Violations of any Code of Ethics can result in
penalties, suspension, or termination of employment.
PROXY
VOTING POLICIES AND PROCEDURES
In
accordance with the 1940 Act, the Trust has adopted policies and procedures for
voting proxies related to equity securities held by the Funds
(the “Proxy Voting Policy”). The Trust’s Proxy Voting Policy is designed to: (i)
ensure that proxies are voted in the best interests of shareholders of the Funds
with a view toward maximizing the value of their investments; (ii) address
conflicts of interests between these shareholders, on the one hand, and
affiliates of the Fund, the Adviser or the Distributor, on the other, that may
arise regarding the voting of proxies; and (iii) provide for the disclosure of
the Funds’ proxy voting records and the Proxy Voting Policy.
The
Proxy Voting Policy delegates to the Adviser the obligation to vote the Funds’
proxies in the best interests of the Funds and their shareholders,
subject to oversight by the Board.
To
assist the Adviser in making proxy-voting decisions, the Adviser has adopted a
Proxy Voting Policy (“Policy”) that establishes voting
guidelines (“Proxy Voting Guidelines”) with respect to certain recurring issues.
The Policy is reviewed on an annual basis by the Adviser’s Proxy Committee
(“Proxy Committee”) and revised when the Committee determines that a change is
appropriate. The Board annually reviews the Trust’s Proxy Voting Policy and the
Adviser’s Policy and determines whether amendments are necessary or advisable.
Voting under the Adviser’s Policy may be executed through administrative
screening per established guidelines with oversight by the Proxy Committee or
upon vote by a quorum of the Proxy Committee. The Adviser delegates to
Institutional Shareholder Services (“ISS”), an independent service provider, the
non-discretionary administration of proxy voting for the Trust, subject to
oversight by the Adviser’s Proxy Committee. In no circumstances shall ISS have
the authority to vote proxies except in accordance with standing or specific
instructions given to it by the Adviser.
The
Adviser votes proxies in the best interests of the Funds and their shareholders.
This entails voting client proxies with the objective of
increasing the long-term economic value of Fund assets. The Adviser’s Proxy
Committee determines how proxies are voted by following established guidelines,
which are intended to assist in voting proxies and are not considered to be
rigid rules. The Proxy Committee is directed to apply the guidelines as
appropriate. On occasion, however, a contrary vote may be warranted when such
action
64
is
in the best interests of the Funds or if required by the Board or the Funds’
Proxy Voting Policy. In such cases, the Adviser may consider,
among other things:
• the
effect of the proposal on the underlying value of the securities
• the
effect on marketability of the securities
• the
effect of the proposal on future prospects of the issuer
• the
composition and effectiveness of the issuer’s board of directors
• the
issuer’s corporate governance practices
• the
quality of communications from the issuer to its shareholders
The
Adviser may also take into account independent third-party, general industry
guidance or other corporate governance review sources
when making decisions. It may additionally seek guidance from other senior
internal sources with special expertise on a given topic where it is
appropriate. The Adviser generally votes on a case-by-case basis, taking into
consideration whether implementation of an Environmental, Social, and Governance
(“ESG”)-related proposal is likely to enhance or protect shareholder value. The
investment team’s opinion concerning the management and prospects of the issuer
may be taken into account in determining whether a vote for or against a
proposal is in a Fund’s best interests. Insufficient information, onerous
requests or vague, ambiguous wording may indicate that a vote against a proposal
is appropriate, even when the general principal appears to be
reasonable.
The
following examples illustrate the Adviser’s policy with respect to some common
proxy votes. This summary is not an exhaustive list of
all the issues that may arise or of all matters addressed in the Guidelines, and
whether the Adviser supports or opposes a proposal will depend upon the specific
facts and circumstances described in the proxy statement and other available
information.
Directors
• The
Adviser generally supports the election of directors in uncontested elections,
except when there are issues of accountability, responsiveness, composition,
and/or independence.
• The
Adviser generally supports proposals for an independent chair taking into
account factors such as the current board leadership structure, the company’s
governance practices, and company performance.
• The
Adviser generally supports proxy access proposals that are in line with the
market standards regarding the ownership threshold, ownership duration,
aggregation provisions, cap on nominees, and do not contain any other
unreasonably restrictive guidelines.
• The
Adviser reviews contested elections on a case-by-case basis taking into account
such factors as the company performance, particularly the long-term performance
relative to the industry; the management track record; the nominee
qualifications and compensatory arrangements; the strategic plan of the
dissident and its critique of the current management; the likelihood that the
proposed goals and objectives can be achieved; the ownership stakes of the
relevant parties; and any other context that is particular to the company and
the nature of the election.
Capitalization
& Restructuring
• The
Adviser generally supports capitalization proposals that facilitate a corporate
transaction that is also being supported and for general corporate purposes so
long as the increase is not excessive and there are no issues of superior voting
rights, company performance, previous abuses of capital, or insufficient
justification for the need for additional capital.
Mergers
and Acquisitions
• The
Adviser reviews mergers and acquisitions on a case-by-case basis to balance the
merits and drawbacks of the transaction and factors such as valuation, strategic
rationale, negotiations and process, conflicts of interest, and the governance
profile of the company post-transaction.
Compensation
• The
Adviser reviews all compensation proposals for pay-for-performance alignment,
with emphasis on long-term shareholder value; arrangements that risk pay for
failure; independence in the setting of compensation; inappropriate pay to
non-executive directors, and the quality and rationale of the compensation
disclosure.
65
• The
Adviser will generally vote FOR advisory votes on executive compensation (“say
on pay”) unless there is a pay-for-performance misalignment; problematic pay
practice or non-performance based element; incentive for excessive risk-taking,
options backdating; or a lack of compensation committee communication and/or
responsiveness to shareholder concerns.
• The
Adviser will vote case-by-case on equity based compensation plans taking into
account factors such as the plan cost; the plan features; and the grant
practices as well as any overriding factors that may have a significant negative
impact on shareholder interests.
Social
and Environmental Issues
• The
Adviser will vote case-by-case on topics such as consumer and product safety;
environment and energy; labor standards and human rights; workplace and board
diversity; and corporate and political issues, taking into account factors such
as the implementation of the proposal is likely to enhance or protect
shareholder value; whether the company has already responded in an appropriate
and sufficient manner to the issue raised; whether the request is unduly
burdensome; and whether the issue is more appropriately or effectively handled
through legislation or other regulations.
Occasionally,
conflicts of interest arise between the Adviser’s interests and those of a Fund
or another client. When this occurs, the Proxy
Committee must document the nature of the conflict and vote the proxy in
accordance with the Proxy Voting Guidelines unless such guidelines are judged by
the Proxy Committee to be inapplicable to the proxy matter at issue. In the
event that the Proxy Voting Guidelines are inapplicable or do not mitigate the
conflict, the Adviser will seek the opinion of the Adviser’s Chief Compliance
Officer or consult with an external independent adviser. In the case of a Proxy
Committee member having a personal conflict of interest (e.g. a family member is
on the board of the issuer), such member will abstain from voting. Finally, the
Adviser reports to the Board annually any proxy votes that took place involving
a conflict, including the nature of the conflict and the basis or rationale for
the voting decision made.
The
Funds’ Proxy Voting Policy provides that the Funds, in accordance with SEC
rules, annually will disclose on Form N- PX the Funds’
proxy voting record. Information regarding how the Funds voted proxies relating
to portfolio securities during the most recent 12-month period ended June 30th
is updated each year by August 31st and is available without charge, upon
request, by calling toll free 800-539-FUND (800-539-3863) or by accessing the
SEC’s website at www.sec.gov.
PORTFOLIO
TRANSACTIONS AND BROKERAGE COMMISSIONS
Subject
to the general supervision of the Board, the Adviser is responsible for making
decisions with respect to the purchase and sale of
portfolio securities on behalf of the Funds. The Adviser is also responsible for
the implementation of those decisions, including the selection of broker/dealers
to effect portfolio transactions, the negotiation of commissions, and the
allocation of principal business and portfolio brokerage. Under the terms of the
Advisory Agreement, the Adviser may delegate these responsibilities to a
sub-adviser.
Transactions
on stock exchanges involve the payment of brokerage commissions. In transactions
on stock exchanges in the United
States, these commissions are negotiated. Traditionally, commission rates have
generally been fixed for trades on stock markets outside the United States. In
recent years, however, an increasing number of overseas stock markets have
adopted a system of negotiated commission rates. It is expected that equity
securities will ordinarily be purchased in the primary markets for such
securities, whether over-the-counter or listed, and that listed securities may
be purchased in the over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the- counter markets, there
is generally no stated commission, but the price usually includes an undisclosed
commission or markup. In underwritten offerings, the price includes a disclosed,
fixed commission (the underwriter’s concession) or discount.
Fixed
income and convertible securities are bought and sold through broker-dealers
acting on a principal basis. These trades are not charged a
commission, but rather are marked up or marked down by the executing broker-
dealer. The Adviser does not know the actual value of the markup/markdown.
However, the Adviser attempts to ascertain whether the overall price of a
security is reasonable through the use of competitive bids. Orders to buy or
sell convertible securities and fixed income securities are placed on a
competitive basis with a reasonable attempt made to obtain three competitive
bids or offers. Exceptions are: (1) where the bid/ask spread is 5 basis points
or less, provided the order is actually filled at the bid or better for sales
and at the ask or better for purchases; (2) securities for which there are only
one or two market makers; (3) block purchases considered relatively large; (4)
swaps, a simultaneous sale of one security and purchase of another in
substantially equal amounts for the same account, intended to take advantage of
an aberration in a spread relationship, realize losses, etc.; and (5) purchases
and/or sales of fixed income securities for which, typically, more than one
offering of the same issue is unobtainable; subject to a judgment by the trader
that the bid is competitive.
It
is the policy of the Adviser to obtain the “best execution” of its clients’
securities transactions. The Adviser strives to execute each client’s
securities transactions in such a manner that the client’s total costs or
proceeds in each transaction are the most favorable under the circumstances.
Commission rates paid on securities transactions for client accounts must
reflect comparative market rates.
66
In
purchasing and selling each Fund’s portfolio securities, it is the Adviser’s
policy to obtain quality execution at the most favorable prices
through responsible broker/dealers and, in the case of agency transactions, at
competitive commission rates where such rates are negotiable. In selecting
broker/dealers to execute a Fund’s portfolio transactions, consideration is
given to such factors as the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability, integrity, financial
condition, general execution and operational capabilities of competing brokers
and dealers, their expertise in particular markets and the brokerage and
research services they provide to the Adviser or the Funds. It is not the
Adviser’s practice to seek the lowest available commission rate where it is
believed that a broker or dealer charging a higher commission rate would offer
greater reliability or provide better price or execution.
As
permitted by Section 28(e) of the Securities Exchange Act of 1934, the Adviser
may cause a Fund to pay broker- dealers that provide brokerage
and research services a commission rate that exceeds the amount other
broker/dealers would have charged for the transaction if the Adviser determines
in good faith that the greater commission is reasonable in relation to the value
of the brokerage and research services provided by the executing broker/dealer
viewed in terms of either a particular transaction or the Adviser’s overall
responsibilities to the Fund or to its other clients. The term “brokerage and
research services” includes advice as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or of purchasers or sellers of securities; furnishing
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy and the performance of accounts; and
effecting securities transactions and performing functions incidental thereto
such as clearance and settlement.
The
brokerage and research services are in addition to and do not replace the
services and research that the Adviser is required to perform
and do not reduce the investment advisory fees payable to the Adviser by the
Funds. Such information may be useful to the Adviser in serving both the Funds
and other clients and, conversely, such supplemental research information
obtained by the placement of orders on behalf of other clients may be useful to
the Adviser in carrying out its obligations to the Funds.
Brokerage
commissions may never be used to compensate a third party for client referrals
unless the client has directed such an arrangement.
In addition, brokerage commissions may never be used to obtain research and/or
services for the benefit of any employee or non-client entity.
The
Adviser will make a good faith determination that the commissions paid are
reasonable in relationship to the value of the services received
and continually reviews the quality of execution it receives from and the
commission rates charged by the brokers it uses to carry out trades for its
clients. The Adviser will consider the full range and quality of a broker’s
services in placing brokerage including, but not limited to, the value of
research provided, execution capability, commission rate, willingness and
ability to commit capital and responsiveness. The lowest possible commission
cost alone does not determine broker selection. The transaction that represents
the best quality execution for a client account will be executed. Commission
ranges and the actual commission paid for trades of listed stocks and
over-the-counter stocks may vary depending on, but not limited to, the liquidity
and volatility of the stock and services provided to the Adviser by the
broker.
Some
brokers executing trades for the Adviser’s clients may, from time to time,
receive liquidity rebates in connection with the routing of trades
to Electronic Communications Networks. Since the Adviser is not a broker,
however, it is ineligible to receive such rebates and does not obtain direct
benefits for its clients from this broker practice.
Investment
decisions for each Fund are made independently from those made for the other
Funds or any other investment company or account
managed by the Adviser. Such other investment companies or accounts may also
invest in the same securities and may follow similar investment strategies as
the Funds. The Adviser may combine transaction orders (“bunching” or “blocking”
trades) for more than one client account where such action appears to be
equitable and potentially advantageous for each account (e.g., for the purpose
of reducing brokerage commissions or obtaining a more favorable transaction
price.) The Adviser will aggregate transaction orders only if it believes that
the aggregation is consistent with its duty to seek best execution for its
clients and is consistent with the terms of investment advisory agreements with
each client for whom trades are being aggregated. Both equity and fixed income
securities may be aggregated. When making such a combination of transaction
orders for a new issue or secondary market trade in an equity security, the
Adviser adheres to the following objectives:
• Fairness
to clients both in the participation of execution of orders for their account,
and in the allocation of orders for the accounts of more than one
client.
• Allocation
of all orders in a timely and efficient manner.
In
some rare cases, “bunching” or “blocking” trades may affect the price paid or
received by a Fund or the size of the position obtained by the
Fund in an adverse manner relative to the result that would have been obtained
if only that particular Fund had participated in or been allocated such
trades.
67
The
aggregation of transactions for advisory accounts and proprietary accounts
(including partnerships and other accounts in which the Adviser or
its associated persons are partners or participants, and managed employee
accounts) is permissible. However, no proprietary account may be favored over
any other participating account and such practice must be consistent with the
Adviser’s policies and procedures including its Code of Ethics.
Equity
trade orders are executed based only on trade instructions received from
portfolio managers by the trading desk. Portfolio managers
may enter trades to meet the full target allocation immediately or may meet the
allocation through moves in incremental blocks. Orders are processed on a
“first-come, first-served” basis. At times, a rotation system may determine
“first-come, first-served” treatment when the equity trading desk receives the
same order for multiple accounts simultaneously. The Adviser will utilize a
rotation whereby the Funds, even if aggregated with other orders, are in the
first block(s) to trade within the rotation. To aggregate orders, the equity
trading desk must determine that all accounts in the order will benefit. Any new
trade that can be blocked with an existing open order may be added to the open
order to form a larger block. The Adviser receives no additional compensation or
remuneration of any kind as a result of the aggregation of trades. All accounts
participating in a block execution receive the same execution price, an average
share price, for securities purchased or sold on a trading day. Execution prices
may not be carried overnight. Any portion of an order that remains unfilled at
the end of a given day shall be rewritten (absent contrary instructions) on the
following day as a new order. Accounts with trades executed the next day will
receive a new daily average price to be determined at the end of the following
day.
If
the order is filled in its entirety, securities purchased in the aggregate
transaction will be allocated among accounts participating in the trade
in accordance with an Allocation Statement prepared at the time of order entry.
If the order is partially filled, the securities will be allocated pro rata
based on the Allocation Statement. Portfolio managers may allocate executed
trades in a different manner than indicated on the Allocation Statement (e.g.,
non-pro rata) only if all client accounts receive fair and equitable
treatment.
In
some instances, such as trading in fixed income securities, it may not be
practical to complete the Allocation Statement prior to the placement
of the order. In that case, the trading desk will complete the Allocation
Statement as soon as practicable, but no later than the end of the same business
day on which the securities have been allocated to the trading desk by the
broker.
Where
the full amount of a block execution is not executed, the partial amount
actually executed will be allocated on a pro rata basis whenever
possible. The following execution methods may be used in place of a pro rata
procedure: relative size allocations, security position weighting, priority for
specialized accounts, or a special allocation based on compliance
approval.
In
making investment decisions for the Funds, the Adviser will not inquire or take
into consideration whether an issuer of securities proposed
for purchase or sale by a Fund is a customer of the Adviser, its parents,
subsidiaries or affiliates, and, in dealing with their commercial customers, the
Adviser, its parents, subsidiaries and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Funds.
Portfolio securities will not be purchased from or sold to the Adviser, or the
Distributor, or any affiliated person of any of them acting as principal, except
to the extent permitted by rule or order of the SEC.
The
following table shows the dollar amount of brokerage commissions paid by each
Fund during the last three fiscal years ended June 30,
all of which were paid to entities that are not affiliated with the Funds, the
Adviser, or the Distributor. The VictoryShares WestEnd U.S. Sector ETF commenced
operations October 12, 2022.
|
Fund |
2023 |
2022 |
2021 |
|
VictoryShares
US 500 Volatility Wtd ETF |
$125,111 |
$80,924 |
$76,954 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$40,941 |
$22,108 |
$11,562 |
|
VictoryShares
International Volatility Wtd ETF |
$47,630 |
$47,836 |
$45,169 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$182,700 |
$81,877 |
$56,238 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$658,533 |
$278,656 |
$104,451 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$20,969 |
$16,408 |
$42,988 |
|
VictoryShares
Dividend Accelerator ETF |
$40,253 |
$72,585 |
$22,696 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$64,996 |
$42,755 |
$22,296 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$1,034,504 |
$644,478 |
$120,150 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$5,717,255 |
$411,214 |
$197,928 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$278,626 |
$124,558 |
$27,316 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$134,617 |
$42,174 |
$32,389 |
|
VictoryShares
Nasdaq Next 50 ETF |
$83,795 |
$63,197 |
$17,179 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$44,078 |
$- |
$- |
Affiliated
Brokerage. The Board
has authorized the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. The Board has adopted procedures
incorporating the standards of Rule 17e-1 under the 1940 Act, which require that
the commission paid to affiliated broker-dealers must be “reasonable and fair
compared to the commission, fee or other
68
remuneration
received, or to be received, by other broker-dealers in connection with
comparable transactions involving similar securities
during a comparable period of time.”
The
Trust will not acquire portfolio securities issued by, make savings deposits in,
or enter into repurchase or reverse repurchase agreements
with the Adviser or its affiliates. From time to time, when determined by the
Adviser or Sub- Adviser to be advantageous to the Funds, the Adviser may execute
portfolio transactions through affiliated broker-dealers. All such transactions
must be consistent with best execution and completed in accordance with
procedures approved by the Board.
For the
last three fiscal years ended June 30, the Funds paid no commissions to
affiliated broker-dealers.
Allocation
of Brokerage in Connection with Research Services. During
the last completed fiscal year ended June 30, the Adviser, through agreements or
understandings with brokers, or otherwise through an internal allocation
procedure, directed brokerage transactions of the Funds to brokers due to
research services provided.
|
Fund |
Amount
of Transactions
to
Brokers Providing
Research |
Related
Commissions |
|
VictoryShares
US 500 Volatility Wtd ETF
|
$267,213,949 |
$92,068 |
|
VictoryShares
US Small Cap Volatility Wtd ETF
|
$32,956,700 |
$30,026 |
|
VictoryShares
International Volatility Wtd ETF |
$51,078,290 |
$28,145 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$320,695,662 |
$135,423 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$571,223,298 |
$488,251 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$22,691,173 |
$12,505 |
|
VictoryShares
Dividend Accelerator ETF |
$70,470,749 |
$17,028 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$177,317,147 |
$45,423 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$138,185,252
|
$39,970 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$9,914,892,111 |
$3,984,638
|
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$225,611,359 |
$178,257 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$146,094,646 |
$80,100 |
|
VictoryShares
Nasdaq Next 50 ETF |
$121,120,373 |
$59,802 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$129,562,399 |
$31,282 |
Securities
of Regular Brokers or Dealers. The SEC
requires the Trust to provide certain information for those Funds that held
securities of their regular brokers or dealers (or their parent companies)
during the most recent fiscal year. The following table identifies, for each
applicable Fund, those brokers or dealers, the type of security held and the
value of the Fund’s aggregate holdings of the securities of each such issuer as
of the last completed fiscal year ended June 30. The VictoryShares WestEnd U.S.
Sector ETF did not participate in Securities Lending during the fiscal year
ended June 30.
|
Fund |
Broker-Dealer |
Type
of
Security
(Debt
or
Equity) |
Aggregate
Value
($000s) |
|
VictoryShares
US 500 Volatility Wtd ETF |
Bank
of America Corp. |
Equity |
$971 |
|
VictoryShares
US 500 Volatility Wtd ETF |
Citigroup,
Inc. |
Equity |
$951 |
|
VictoryShares
US 500 Volatility Wtd ETF |
JPMorgan
Chase & Co. |
Equity |
$1,281 |
|
VictoryShares
US 500 Volatility Wtd ETF |
Morgan
Stanley |
Equity |
$1,051 |
|
VictoryShares
US 500 Volatility Wtd ETF |
The
Goldman Sachs Group,
Inc. |
Equity |
$1,085 |
|
VictoryShares
US 500 Volatility Wtd ETF |
Wells
Fargo & Co. |
Equity |
$1,041 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
Virtu
Financial, Inc. |
Equity |
$65 |
|
VictoryShares
International Volatility Wtd ETF |
Barclays
PLC |
Equity |
$140 |
|
VictoryShares
International Volatility Wtd ETF |
Mitsubishi
UFJ Financial
Group,
Inc. |
Equity |
$190 |
|
VictoryShares
International Volatility Wtd ETF |
Mizuho
Financial Group,
Inc. |
Equity |
$236 |
|
VictoryShares
International Volatility Wtd ETF |
UBS
Group AG |
Equity |
$136 |
|
VictoryShares
US Large Cap High Div Volatility Wtd
ETF |
Citigroup,
Inc. |
Equity |
$3,061 |
69
|
Fund |
Broker-Dealer |
Type
of
Security
(Debt
or
Equity) |
Aggregate
Value
($000s) |
|
VictoryShares
US Large Cap High Div Volatility Wtd
ETF |
Morgan
Stanley |
Equity |
$3,381 |
|
VictoryShares
US Small Cap High Div Volatility Wtd
ETF |
Virtu
Financial, Inc. |
Equity |
$4,445 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
Bank
of America Corp. |
Equity |
$308 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
Citigroup,
Inc. |
Equity |
$302 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
JPMorgan
Chase & Co. |
Equity |
$407 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
Morgan
Stanley |
Equity |
$334 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
The
Goldman Sachs Group,
Inc. |
Equity |
$344 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
Wells
Fargo & Co. |
Equity |
$331 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd
ETF |
Citigroup,
Inc. |
Equity |
$3,413 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd
ETF |
Morgan
Stanley |
Equity |
$3,771 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd
ETF |
Virtu
Financial, Inc. |
Equity |
$46 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
Barclays
PLC |
Equity |
$19 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
Mitsubishi
UFJ Financial
Group,
Inc. |
Equity |
$27 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
Mizuho
Financial Group,
Inc. |
Equity |
$32 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
UBS
Group AG |
Equity |
$19 |
Portfolio
Turnover
Each
Fund may sell a portfolio investment soon after its acquisition if the Adviser
believes that such a disposition is consistent with attaining
the investment objective of the Fund. The Funds’ portfolio turnover rates stated
in the Prospectuses are calculated by dividing the lesser of each Fund’s
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. Portfolio
turnover is calculated on the basis of a Fund as a whole without distinguishing
between the classes of shares issued.
The
turnover rate for a Fund will vary from year-to-year, and, depending on market
conditions, could be greater in periods of unusual market
movement and volatility. Transaction costs associated with turnover are borne
directly by the Fund and, ultimately, by its shareholders. A high rate of
portfolio turnover (generally, over 100% annually) generally will involve
correspondingly greater transaction costs. High portfolio turnover may result in
the realization of substantial net capital gains. To the extent short-term
capital gains are realized, distributions attributable to such gains will be
ordinary income for federal income tax purposes.
The
following table shows the portfolio turnover rates for each Fund for the last
two fiscal years ended June 30. The VictoryShares WestEnd
U.S. Sector ETF commenced operations October 12, 2022.
|
Fund |
2023 |
2022 |
|
VictoryShares
US 500 Volatility Wtd ETF |
24% |
21% |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
68% |
55% |
|
VictoryShares
International Volatility Wtd ETF |
30% |
32% |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
47% |
43% |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
82% |
68% |
|
VictoryShares
International High Div Volatility Wtd ETF |
71% |
62% |
|
VictoryShares
Dividend Accelerator ETF |
54% |
43% |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
73% |
63% |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
271%* |
101% |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
333%* |
41% |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
429%* |
64% |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
320%* |
37% |
70
|
Fund |
2023 |
2022 |
|
VictoryShares
Nasdaq Next 50 ETF |
63% |
95% |
|
VictoryShares
WestEnd U.S. Sector ETF |
43% |
- |
*Portfolio
turnover changes compared to the prior fiscal year are attributable to each
Fund's rules-based methodology as described further in its
Prospectus.
DIVIDENDS,
CAPITAL GAINS AND DISTRIBUTIONS
The
Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as
well as on a fiscal year basis to the extent required for the Funds to qualify
for favorable federal tax treatment. The Funds ordinarily declare and pay
dividends from their net investment income. Each Fund declares and pays
capital gains annually. Ordinarily, dividends from net investment income, if
any, are declared and paid monthly by each Fund.
The
amount of distributions may vary from time to time depending on market
conditions, the composition of a Fund’s portfolio, and expenses
borne by a Fund. Dividends are calculated in the same manner, at the same time,
and on the same day for shares.
For
this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any and realized capital gains and losses on
the Fund’s assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to the Adviser,
are accrued each day. The expenses and liabilities of a Fund shall include those
appropriately allocable to the Fund as well as a share of the general expenses
and liabilities of the Trust in proportion to the Fund’s share of the total net
assets of the Trust.
TAXES
Information
set forth in the Prospectuses that relates to federal income taxation is only a
summary of certain key federal income tax considerations
generally affecting purchasers of shares of the Funds. The following is only a
summary of certain additional income and excise tax considerations generally
affecting each Fund and its shareholders that are not described in the
Prospectuses. No attempt has been made to present a complete explanation of the
federal tax treatment of the Funds or the implications to shareholders and the
discussions here and in each Fund’s Prospectus are not intended as substitutes
for careful tax planning. In addition, the following summary does not describe
the tax consequences to an Authorized Participant from the creation and
redemption of Creation Units. Accordingly, potential purchasers of shares
of the Funds are urged to consult their tax advisers with specific reference to
their own tax circumstances. Special tax considerations may apply to certain
types of investors subject to special treatment under the Code (including, for
example, insurance companies, banks and tax-exempt organizations). In addition,
the following summary does not describe the tax consequences to foreign trusts,
foreign estates and foreign partnerships. Lastly, the tax discussion in the
Prospectuses and this SAI is based on tax law in effect on the date of the
Prospectuses and this SAI; such laws and regulations may be changed by
legislative, judicial, or administrative action, sometimes with retroactive
effect.
Qualification
as a Regulated Investment Company
Each
Fund intends to qualify as a regulated investment company under Subchapter M of
the Code. As a regulated investment company, a Fund is
not subject to federal income tax on the portion of its net investment income
(i.e., taxable interest, dividends and other taxable ordinary income, net of
expenses) and net capital gain (i.e., the excess of long-term capital gains over
short-term capital losses) that it distributes to shareholders, provided that it
distributes at least the sum of 90% of its investment company taxable income
(i.e., net investment income and the excess of net short-term capital gain over
net long-term capital loss) and 90% of its tax-exempt income (net of expenses
allocable thereto) for the taxable year (the “Distribution Requirement”) and
satisfies certain other requirements of the Code that are described below.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains for the taxable year and will
therefore count toward satisfaction of the Distribution
Requirement.
If
a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains), the amount thereof may be carried forward and would retain its
character as either a short-term capital loss or a long-term capital loss that
can be used to offset such capital gains in future years. There is no limitation
on the number of years to which net capital losses may be carried. However, the
amount of capital loss that can be carried forward and used in any single year
is subject to an annual limitation if there is a more than 50% “change in
ownership” of the Fund.
The
following table summarizes the capital loss carryforwards not subject to
expiration for the applicable Funds as of June 30, 2023.
71
|
Fund |
Short-Term
Amount |
Long-Term
Amount |
|
VictoryShares
US 500 Volatility Wtd ETF |
$45,562,156 |
$45,112,280 |
|
VictoryShares
US Small Cap Volatility Wtd ETF |
$6,907,229 |
$4,260,465 |
|
VictoryShares
International Volatility Wtd ETF |
$3,582,609 |
$4,040,237 |
|
VictoryShares
US Large Cap High Div Volatility Wtd ETF |
$40,358,165 |
$28,594,170 |
|
VictoryShares
US Small Cap High Div Volatility Wtd ETF |
$63,291,454 |
$21,720,552 |
|
VictoryShares
International High Div Volatility Wtd ETF |
$6,374,794 |
$8,143,093 |
|
VictoryShares
Dividend Accelerator ETF |
$12,081,140 |
$11,107,203 |
|
VictoryShares
US Multi-Factor Minimum Volatility ETF |
$15,211,703 |
$4,320,254 |
|
VictoryShares
US 500 Enhanced Volatility Wtd ETF |
$110,451,880 |
$22,287,869 |
|
VictoryShares
US EQ Income Enhanced Volatility Wtd ETF |
$406,717,188 |
$34,816,735 |
|
VictoryShares
US Discovery Enhanced Volatility Wtd ETF |
$43,396,122 |
$1,788,208 |
|
VictoryShares
Developed Enhanced Volatility Wtd ETF |
$16,358,628 |
$9,195,981 |
|
VictoryShares
Nasdaq Next 50 ETF |
$31,560,968 |
$6,224,030 |
|
VictoryShares
WestEnd U.S. Sector ETF |
$1,203,430 |
$- |
In
addition to satisfying the Distribution Requirement, a regulated investment
company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company’s principal business of investing in stock or securities),
other income (including but not limited to gains from options, futures, or
forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies and net income from interests in qualified
publicly traded partnerships (the “Income Requirement”).
A
regulated investment company, in determining its investment company taxable
income and net capital gain (i.e., the excess of net long-term
capital gain over net short-term capital loss) for any taxable year, may elect
(unless it has made a taxable year election for excise tax purposes as discussed
below, in which case different rules apply) to treat all or any part of certain
net capital losses incurred after October 31 of a taxable year, and certain net
ordinary losses incurred after October 31 or December 31 of a taxable year, as
if they had been incurred in the succeeding taxable year.
In
addition to satisfying the Income and Distribution Requirements described above,
a Fund must satisfy an asset diversification test in order
to qualify as a regulated investment company. Under this test, at the close of
each quarter of a Fund’s taxable year, at least 50% of the value of the Fund’s
assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies and securities of other
issuers (provided that, with respect to each issuer, the Fund has not invested
more than 5% of the value of the Fund’s total assets in securities of each such
issuer and the Fund does not hold more than 10% of the outstanding voting
securities of each such issuer), and no more than 25% of the value of its total
assets may be invested in the securities of any one issuer (other than U.S.
government securities and securities of other regulated investment companies),
two or more issuers that the Fund controls and that are engaged in the same or
similar trades or businesses (other than securities of other regulated
investment companies), or the securities of one or more qualified publicly
traded partnerships. Generally, an option (call or put) with respect to a
security is treated as issued by the issuer of the security, not the issuer of
the option. For purposes of asset diversification testing, obligations issued or
guaranteed by certain agencies or instrumentalities of the U.S. government, such
as the Federal Agricultural Mortgage Corporation, the FFCB, FHLB, FHLMC, FNMA,
GNMA, and SLMA, are treated as U.S. government securities.
Certain
Funds may invest in futures contracts, options on futures contracts and other
similar investments that provide exposure to commodities
such as gold or other precious metals, energy, or other commodities. Income or
gain, if any, from such investments may not be qualifying income for purposes of
the Income Requirements and a Fund’s investments in such instruments may not be
treated as an investment in a “security” for purposes of the asset
diversification test.
If
for any taxable year a Fund does not qualify as a regulated investment company
after taking into account cure provisions available for
certain failures to so qualify (certain of which would result in the imposition
of a tax on the Fund), all of its taxable income (including its net capital
gain) will be subject to tax at the regular corporate rate without any deduction
for distributions to shareholders and such distributions will be taxable to the
shareholders as dividends to the extent of the Fund’s current and accumulated
earnings and profits. Such distributions may be eligible for: (i) the
dividends-received deduction, in the case of corporate shareholders; or (ii)
treatment as “qualified dividend income,” in the case of non-corporate
shareholders. In addition, to qualify again to be taxed as a regulated
investment company in a subsequent year, the Fund would be required to
distribute to shareholders its earnings and profits attributable to
non-qualifying years. Further, if the Fund failed to qualify for a period
greater than two taxable years, then, in order to qualify as a regulated
investment company in a subsequent year, the Fund would be required to elect to
recognize and pay tax on any net built-in gain (i.e., the excess of aggregate
gain, including items of income, over aggregate loss that would have been
realized if the Fund had been liquidated) or, alternatively, be subject to
taxation on such built-in gain recognized for a period of five
years.
72
Excise
Tax on Regulated Investment Companies
A
4% non-deductible excise tax is imposed on a regulated investment company that
fails to distribute in each calendar year an amount equal to
at least the sum of (i) 98% of its ordinary taxable income for the calendar year
and (ii) 98.2% of its capital gain net income for the one-year period ended on
October 31 of such calendar year (or, with respect to capital gain net income,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a “taxable year election”)).
Tax-exempt interest on municipal obligations is not subject to the excise tax.
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, any ordinary income or capital gain net income
retained by a regulated investment company that is subject to corporate income
tax will be treated as having been distributed during the taxable year ending in
such calendar year.
Each
Fund intends to make sufficient distributions or deemed distributions of its
ordinary taxable income and capital gain net income prior to
the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund
Investments
In
general, gain or loss recognized by a Fund on the disposition of an asset will
be a capital gain or loss. In addition, gain will be recognized
as a result of certain constructive sales, including short sales “against the
box.” However, gain recognized on the disposition of a debt obligation
(including municipal obligations) purchased by a Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount that accrued
while the Fund held the debt obligation. In addition, under the rules of Code
Section 988, gain or loss recognized on the disposition of a debt obligation
denominated in a foreign currency or an option with respect thereto, and gain or
loss recognized on the disposition of a foreign currency forward contract,
futures contract, option or similar financial instrument, or of foreign currency
itself, except for regulated futures contracts or non-equity options subject to
Code Section 1256 (unless a Fund elects otherwise), generally will be treated as
ordinary income or loss to the extent attributable to changes in foreign
currency exchange rates.
Certain
transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts and options on
stock indexes and futures contracts) will be subject to special tax treatment as
“Section 1256 Contracts.” Section 1256 Contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer’s obligations (or rights) under such Section 1256 Contracts
have not terminated (by delivery, exercise, entering into a closing transaction,
or otherwise) as of such date. Any gain or loss recognized as a consequence of
the year-end deemed disposition of Section 1256 Contracts is taken into account
for the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
Contracts that are part of a “mixed straddle” with other investments of the Fund
that are not Section 1256 Contracts.
A
Fund may enter into notional principal contracts, including interest rate swaps,
caps, floors and collars. Treasury Regulations provide, in
general, that the net income or net deduction from a notional principal contract
for a taxable year is included in or deducted from gross income for that taxable
year. The net income or deduction from a notional principal contract for a
taxable year equals the total of all of the periodic payments (generally,
payments that are payable or receivable at fixed periodic intervals of one year
or less during the entire term of the contract) that are recognized from that
contract for the taxable year, all of the non-periodic payments (including
premiums for caps, floors and collars) that are recognized from that contract
for the taxable year and any termination payments that are recognized from that
contract for the taxable year. No portion of a payment by a party to a notional
principal contract is recognized prior to the first year to which any portion of
a payment by the counterparty relates. A periodic payment is recognized ratably
over the period to which it relates. In general, a non-periodic payment must be
recognized over the term of the notional principal contract in a manner that
reflects the economic substance of the contract. A non-periodic payment that
relates to an interest rate swap, cap, floor, or collar is recognized over the
term of the contract by allocating it in accordance with the values of a series
of cash-settled forward or option contracts that reflect the specified index and
notional principal amount upon which the notional principal contract is based
(or under an alternative method provided in Treasury Regulations). A termination
payment is recognized in the year the notional principal contract is
extinguished, assigned, or terminated (i.e., in the year the termination payment
is made).
Income
from options on individual securities written by a Fund will not be recognized
by the Fund for tax purposes until an option is
exercised or lapses. Any gain recognized by a Fund on the lapse of, or any gain
or loss recognized by a Fund from a closing transaction with respect to, an
option written by the Fund will be treated as a short-term capital gain or loss.
If the Fund enters into a closing transaction, the difference between the
premiums received and the amount paid by the Fund to close out its position will
generally be treated as short-term capital gain or loss. If an option written by
the Fund is exercised, thereby requiring the Fund to sell the underlying
security, the premium will increase the amount realized upon the sale of the
security, and the character of any gain on such sale of the underlying security
as short-term or long-term capital gain will depend on the holding period of the
Fund in the
73
underlying
security. Because the Fund will not have control over the exercise of the
options it writes, such exercises or other required sales of
the underlying securities may cause the Fund to realize gains or losses at
inopportune times.
A
Fund may purchase securities of certain foreign investment funds or trusts that
constitute passive foreign investment companies (“PFICs”)
for federal income tax purposes. If a Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualified electing
fund (a “QEF”), in which event the Fund will each year have ordinary income
equal to its pro rata share of the PFIC’s ordinary earnings for the year and
long-term capital gain equal to its pro rata share of the PFIC’s net capital
gain for the year, regardless of whether the Fund receives distributions of any
such ordinary earnings or capital gains from the PFIC, and such amounts would be
subject to the 90% and excise tax distribution requirements described above. In
order to make this election with respect to a PFIC in which it invests, a Fund
must obtain certain information from the PFIC on an annual basis, which the PFIC
may be unwilling or unable to provide. Second, a Fund that invests in marketable
stock of a PFIC may make a mark-to-market election with respect to such stock.
Pursuant to such election, the Fund will include as ordinary income any excess
of the fair market value of such stock at the close of any taxable year over the
Fund’s adjusted tax basis in the stock. If the adjusted tax basis of the PFIC
stock exceeds the fair market value of the stock at the end of a given taxable
year, such excess will be deductible as ordinary loss in an amount equal to the
lesser of the amount of such excess or the net mark-to-market gains on the stock
that the Fund included in income in previous years. Solely for purposes of Code
Sections 1291 through 1298, the Fund’s holding period with respect to its PFIC
stock subject to the election will commence on the first day of the first
taxable year beginning after the last taxable year for which the mark-to-market
election applied. If the Fund makes the mark-to-market election in the first
taxable year it holds PFIC stock, it will not incur the tax described below
under the third option.
Finally,
if a Fund does not elect to treat the PFIC as a QEF and does not make a
mark-to-market election, then, in general, (1) any gain recognized
by the Fund upon the sale or other disposition of its interest in the PFIC or
any excess distribution received by the Fund from the PFIC will be allocated
ratably over the Fund’s holding period of its interest in the PFIC stock, (2)
the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund’s gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as a
dividend, but such portion will not be subject to tax at the Fund level), (3)
the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, (i) the amount of gain or excess distribution allocated to such
prior year multiplied by the highest corporate tax rate in effect for such prior
year, plus (ii) interest on the amount determined under clause (i) for the
period from the due date for filing a return for such prior year until the date
for filing a return for the year in which the gain is recognized or the excess
distribution is received, at the rates and methods applicable to underpayments
of tax for such period, and (4) the distribution by the Fund to its shareholders
of the portions of such gain or excess distribution so allocated to prior years
(net of the tax payable by the Fund thereon) will be taxable to the shareholders
as a dividend.
Some
of the debt securities (with a fixed maturity date of more than one year from
the date of issuance) that may be acquired by the Fund may
be treated as debt securities that are issued originally at a discount.
Generally, the amount of the original issue discount (“OID”) is treated as
interest income and is included in income over the term of the debt security,
even though payment of that amount is not received until a later time, usually
when the debt security matures. A portion of the OID includable in income with
respect to certain high-yield corporate debt securities (including certain
pay-in-kind securities) may be treated as a dividend for U.S. federal income tax
purposes.
Some
of the debt securities (with a fixed maturity date of more than one year from
the date of issuance) that may be acquired by the Fund in
the secondary market may be treated as having market discount. Generally, any
gain recognized on the disposition of, and any partial payment of principal on,
a debt security having market discount is treated as ordinary income to the
extent the gain, or principal payment, does not exceed the “accrued market
discount” on such debt security. Market discount generally accrues in equal
daily installments. The Fund may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and
timing of recognition of income.
A
Fund that holds the foregoing kinds of securities may be required to pay out as
an income distribution each year an amount, which is greater
than the total amount of cash interest the Fund actually received. Such
distributions may be made from the cash assets of the Fund or by liquidation of
portfolio securities, if necessary (including when it is not advantageous to do
so). The Fund may realize gains or losses from such liquidations. In the event
the Fund realizes net capital gains from such transactions, its shareholders may
receive a larger capital gain distribution, if any, than they would in the
absence of such transactions.
Gain
or loss on the sale of securities by the Fund will generally be long-term
capital gain or loss if the securities have been held by the Fund
for more than one year. Gain or loss on the sale of securities held for one year
or less will be short-term capital gain or loss.
The
Fund may invest in preferred securities or other securities the federal income
tax treatment of which may not be clear or may be subject to
recharacterization by the Internal Revenue Service (“IRS”). To the extent the
tax treatment of such securities or the income from such securities differs from
the tax treatment expected by the Fund, it could affect the timing or character
of income recognized by the Fund, potentially requiring the Fund to purchase or
sell securities, or otherwise change its portfolio, in order to comply with the
tax rules applicable to regulated investment companies under the
Code.
74
The
Fund may invest a portion of its net assets in below investment grade
securities. Investments in these types of securities may present
special tax issues for the Fund. Federal income tax rules are not entirely clear
about issues such as when the Fund may cease to accrue interest, original issue
discount or market discount, when and to what extent deductions may be taken for
bad debts or worthless securities, how payments received on obligations in
default should be allocated between principal and interest and whether
modifications or exchanges of debt obligations in a bankruptcy or workout
context are taxable. These and other issues could affect the Fund’s ability to
distribute sufficient income to preserve its status as a regulated investment
company or to avoid the imposition of U.S. federal income or excise
tax.
Fund
Distributions
Each
Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be
treated as dividends for federal income tax purposes and may be taxable to
non-corporate shareholders as long-term capital gains (a “qualified dividend”),
provided that certain requirements, as discussed below, are met. Dividends
received by corporate shareholders and dividends that do not constitute
qualified dividends are taxable as ordinary income. The portion of dividends
received from a Fund that are qualified dividends generally will be determined
on a look-through basis. If the aggregate qualified dividends received by the
Fund are less than 95% of the Fund’s gross income (as specially computed), the
portion of dividends received from the Fund that constitute qualified dividends
will be reported by the Fund and cannot exceed the ratio that the qualified
dividends received by the Fund bears to its gross income. If the aggregate
qualified dividends received by the Fund equal at least 95% of its gross income,
then all of the dividends received from the Fund will constitute qualified
dividends.
No
dividend will constitute a qualified dividend (1) if it has been paid with
respect to any share of stock that the Fund has held for less than
61 days (91 days in the case of certain preferred stock) during the 121-day
period (181-day period in the case of certain preferred stock) beginning on the
date that is 60 days (90 days in the case of certain preferred stock) before the
date on which such share becomes ex-dividend with respect to such dividend,
excluding for this purpose, under the rules of Code Section 246(c), any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of an option to
buy, or has otherwise diminished its risk of loss by holding other positions
with respect to, such (or substantially identical) stock; (2) if the
non-corporate shareholder fails to meet the holding period requirements set
forth in (1) with respect to its shares in the Fund to which the dividend is
attributable; or (3) to the extent that the Fund (or shareholder, as applicable)
is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in property substantially similar or related
to stock with respect to which an otherwise qualified dividend is
paid.
Qualified
dividends are, in general, dividends from taxable U.S. corporations and certain
foreign corporations. Dividends from a foreign
corporation may be qualified dividends if (1) the stock with respect to which
the dividend is paid is readily tradable on an established securities market in
the United States, (2) the foreign corporation is incorporated in a possession
of the United States or (3) the foreign corporation is eligible for the benefits
of a comprehensive income tax treaty with the United States that includes an
exchange of information program (and that the Treasury Department determines to
be satisfactory for these purposes). The Treasury Department has issued guidance
identifying which treaties are satisfactory for these purposes. Notwithstanding
the above, dividends received from a foreign corporation that for the taxable
year of the corporation in which the dividend was paid, or the preceding taxable
year, is a PFIC will not constitute qualified dividends.
Distributions
attributable to dividends received by a Fund from domestic corporations will
qualify for the 50% dividends-received deduction
(“DRD”) for corporate shareholders only to the extent discussed below.
Distributions attributable to dividends paid by a foreign corporation, a REIT or
a corporation exempt from tax generally do not qualify for the DRD.
Ordinary
income dividends paid by a Fund with respect to a taxable year may qualify for
the 50% DRD generally available to corporations
(other than corporations such as S corporations, which are not eligible for the
deduction because of their special characteristics, and other than for purposes
of special taxes such as the accumulated earnings tax and the personal holding
company tax) to the extent of the amount of dividends received by the Fund from
domestic corporations for the taxable year. No DRD will be allowed with respect
to any dividend (1) if it has been received with respect to any share of stock
that the Fund has held for less than 46 days (91 days in the case of certain
preferred stock) during the 91-day period (181-day period in the case of certain
preferred stock) beginning on the date that is 45 days (90 days in the case of
certain preferred stock) before the date on which such share becomes ex-dividend
with respect to such dividend, excluding for this purpose under the rules of
Code Section 246(c) any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of an option to buy, or has otherwise diminished its risk of loss
by holding other positions with respect to, such (or substantially identical)
stock; (2) to the extent that the Fund is under an obligation (pursuant to a
short sale or otherwise) to make related payments with respect to positions in
substantially similar or related property; or (3) to the extent the stock on
which the dividend is paid is treated as debt-financed under the rules of Code
Section 246A. Moreover, the DRD for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code Section 246(b), which in general limits the DRD to 50% of the shareholder’s
taxable income (determined without regard to the DRD and certain other
items).
75
If
a Fund receives a dividend (other than a capital gain dividend) in respect of
any share of REIT stock, then Fund dividends attributable to that
REIT dividend income (as reduced by certain Fund expenses) may be reported by
the Fund as eligible for the 20% deduction for “qualified REIT dividends”
generally available to non-corporate shareholders under the Code. However, a
dividend from a Fund may not be treated as a qualified REIT dividend (1) if it
has been paid with respect to any share of REIT stock that the Fund has held for
less than 46 days during the 91-day period beginning on the date that is 45 days
before the date on which such share becomes ex-dividend with respect to such
dividend, excluding for this purpose, under the rules of Code Section 246(c),
any period during which the Fund has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor of
an option to buy, or has otherwise diminished its risk of loss by holding other
positions with respect to, such (or substantially identical) stock; (2) if the
non-corporate shareholder fails to meet the holding period requirements set
forth in (1) with respect to its shares in the Fund to which the dividend is
attributable; or (3) to the extent that the Fund (or shareholder, as applicable)
is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in property substantially similar or related
to stock with respect to which an otherwise qualified dividend is
paid.
A
Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and reported as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares. The Code provides, however, that under certain conditions
none of the capital gain recognized upon a Fund’s disposition of domestic
qualified “small business” stock will be subject to tax (with certain
limitations).
Conversely,
if a Fund elects to retain its net capital gain, the Fund will be subject to tax
thereon (except to the extent of any available capital
loss carryovers) at the corporate tax rates. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit. Organizations or persons not subject to U.S. federal income tax on
such capital gains will be entitled to a refund of their pro rata share of such
taxes paid by the Fund upon filing appropriate returns or claims for refund with
the IRS.
Distributions
by a Fund in excess of its current and accumulated earnings and profits will be
treated as a tax-free return of capital to the extent
of (and in reduction of) the shareholder’s tax basis in his shares; any excess
will be treated as gain from the sale of his shares, as discussed
below.
Distributions
by a Fund will be treated in the manner described above regardless of whether
such distributions are paid in cash or reinvested
in additional shares of the Fund (if that option is available). Distributions
reinvested in additional shares of the Fund through the means of a dividend
reinvestment service, if available, will be taxable to shareholders acquiring
the additional shares to the same extent as if such distributions had been
received in cash. In addition, if the NAV at the time a shareholder purchases
shares of a Fund reflects undistributed net investment income, recognized net
capital gain, or unrealized appreciation in the value of the assets of the Fund,
distributions of such amounts will be taxable to the shareholder in the manner
described above, although such distributions economically constitute a return of
capital to the shareholder.
Ordinarily,
shareholders are required to take distributions by a Fund into account in the
year in which the distributions are made. However,
dividends declared in October, November, or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and paid by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. In addition, certain other distributions made after the close of
the Fund’s taxable year may be “spilled back” and treated as paid by the Fund
(except for the purposes of the 4% nondeductible excise tax) during such taxable
year. In such case, a shareholder will be treated as having received such
dividends in the taxable year in which the distributions were actually made.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the
year.
Certain
U.S. shareholders, including individuals and estates and trusts, are subject to
an additional 3.8% Medicare tax on all or a portion of their
“net investment income,” which should include dividends from a Fund and net
gains from the disposition of shares of a Fund. U.S. shareholders are urged to
consult their own tax advisers regarding the implications of the additional
Medicare tax resulting from an investment in a Fund.
Each
Fund will be required in certain cases to withhold and remit to the U.S.
Treasury backup withholding taxes at the applicable rate on
distributions paid to any shareholder (1) who has failed to provide a correct
taxpayer identification number, (2) who is subject to backup withholding for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Fund that it is not subject to backup
withholding or is an “exempt recipient” (such as a corporation). Amounts
withheld under the backup withholding rules will be allowed as a refund or a
credit against a shareholder’s U.S. federal income tax liability provided the
required information is furnished to the IRS.
76
Sale
of Shares
A
shareholder will generally recognize gain or loss on the sale of shares of a
Fund in an amount equal to the difference between the proceeds
of the sale the shareholder’s adjusted tax basis in the shares. All or a portion
of any loss may be disallowed if the shareholder purchases other shares of the
same Fund within 30 days before or after the sale. In such a case, the basis of
the shares acquired will be increased to reflect the disallowed loss. In
general, any gain or loss arising from (or treated as arising from) the sale of
shares of a Fund will be considered capital gain or loss and will be long-term
capital gain or loss if the shares were held for longer than one year. However,
any capital loss arising from the sale of shares held for six months or less
will be disallowed to the extent of the amount of exempt-interest dividends
received on such shares (unless the loss is with respect to shares of a Fund for
which the holding period began after December 22, 2010, and the Fund declares
exempt-interest dividends on a daily basis in an amount equal to at least 90% of
its net tax-exempt interest and distributes such dividends at least monthly) and
(to the extent not disallowed) will be treated as a long-term capital loss to
the extent of the amount of capital gain dividends received on such shares. For
these purposes, the special holding period rules of Code Section 246(c)
(discussed above in connection with qualified dividends, qualified REIT
dividends and the dividends-received deduction) generally will apply in
determining the holding period of shares. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Tax
Shelter and Other Reporting Requirements
If
a shareholder realizes a loss on the disposition of shares of a Fund of at least
$2 million in any single taxable year or at least $4 million
in any combination of taxable years for an individual shareholder, or at least
$10 million in any single taxable year or at least $20 million in any
combination of taxable years for a corporate shareholder, the shareholder must
file with the IRS a disclosure statement on Form 8886. Shareholders should
consult their tax advisers to determine the applicability of this requirement in
light of their individual circumstances.
Foreign
Taxation
Income
received by a Fund from sources within foreign countries may be subject to
withholding and other taxes imposed by such countries.
Tax treaties and conventions between certain countries and the United States may
reduce or eliminate such taxes. If more than 50% of the value of a Fund’s total
assets at the close of its taxable year consists of securities of foreign
corporations, the Fund may be able to elect to “pass through” to the Fund’s
shareholders the amount of eligible foreign income and similar taxes paid by the
Fund. If this election is made, a shareholder generally subject to tax will be
required to include in gross income (in addition to taxable dividends actually
received) his or her pro rata share of the foreign taxes paid by the Fund, and
may be entitled either to deduct (as an itemized deduction) his or her pro rata
share of foreign taxes in computing his or her taxable income or to use it as a
foreign tax credit against his or her U.S. federal income tax liability, subject
to certain limitations. In particular, a shareholder must hold his or her shares
(without protection from risk of loss) on the ex-dividend date and for at least
15 more days during the 30-day period surrounding the ex-dividend date to be
eligible to claim a foreign tax credit with respect to a gain dividend. No
deduction for foreign taxes may be claimed by a non-corporate shareholder who
does not itemize deductions. Each shareholder will be notified days after the
close of the Fund’s taxable year whether the foreign taxes paid by the Fund will
“pass through” for that year.
Generally,
a credit for foreign taxes is subject to the limitation that it may not exceed
the shareholder’s U.S. tax attributable to his or her total
foreign source taxable income. For this purpose, if the pass-through election is
made, the source of the Fund’s income will flow through to shareholders of the
Fund. With respect to a Fund, gains from the sale of securities will be treated
as derived from U.S. sources and certain currency fluctuation gains, including
fluctuation gains from foreign currency-denominated debt securities, receivables
and payables will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income, and to certain other types of income. A shareholder may be
unable to claim a credit for the full amount of his or her proportionate share
of the foreign taxes paid by the Fund.
Foreign
Shareholders
Taxation
of a shareholder who, as to the United States, is a nonresident alien individual
or foreign corporation (“foreign shareholder”), depends on
whether the income from a Fund is “effectively connected” with a U.S. trade or
business carried on by such shareholder.
If
the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, subject to the
discussion below with respect to “interest-related dividends” and “short-term
capital gain dividends,” ordinary income dividends (including dividends that
would otherwise be treated as qualified dividends to an applicable non-foreign
shareholder) paid to such foreign shareholder would be subject to a 30% U.S.
withholding tax (or lower applicable treaty rate) upon the gross amount of the
dividend. Such foreign shareholder would generally be exempt from U.S. federal
income tax, including withholding tax, on gains realized on the sale of shares
of a Fund or capital gain dividends unless the foreign shareholder is a
nonresident alien individual present in the United States for a period or
periods aggregating 183 days or more during the calendar
year.
77
U.S.
withholding tax generally does not apply to amounts properly designated by a
Fund as an “interest-related dividend” or a “short-term
capital gain dividend.” The aggregate amount treated as an interest-related
dividend for a year is limited to the Fund’s qualified net interest income for
the year, which is the excess of the sum of the Fund’s qualified interest income
(generally, its U.S.-source interest income) over the deductions properly
allocable to such income. The aggregate amount treated as a “short-term capital
gain dividend” is limited to the excess of the Fund’s net short-term capital
gain over its net long-term capital loss. In order to qualify for this exemption
from withholding, a foreign investor needs to comply with applicable
certification requirements relating to its non-U.S. status (including, in
general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute Form). In the
case of shares held through an intermediary, the intermediary may withhold even
if the Fund reported the payment as qualified net interest income or qualified
short-term capital gain. Foreign investors should contact their intermediaries
with respect to the application of these rules to their accounts.
If
the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then any dividends, and any
gains realized upon the sale of shares of the Fund will be subject to U.S.
federal income tax at the rates applicable to U.S. citizens or domestic
corporations, and, if the foreign shareholder is a corporation, the shareholder
may be subject to an additional “branch profits tax” imposed at the rate of 30%
(or lower applicable treaty rate).
In
the case of foreign noncorporate shareholders, a Fund may be required to
withhold backup withholding taxes at the applicable rate on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such shareholders furnish the Fund with proper
notification of their foreign status.
Special
rules may apply to a foreign shareholder receiving a Fund distribution if at
least 50% of the Fund’s assets consist of interests in U.S.
real property interests, including certain REITs and U.S. real property holding
corporations (as defined in the Code and Treasury Regulations). Fund
distributions that are attributable to gain from the disposition of a U.S. real
property interest will be taxable as ordinary dividends and subject to
withholding at a 30% or lower treaty rate if the foreign shareholder held no
more than 5% of the Fund's shares at any time during the one-year period ending
on the date of the distribution. If the foreign shareholder held at least 5% of
the Fund's shares, the distribution would be treated as income effectively
connected with a trade or business within the U.S. and the foreign shareholder
would be subject to withholding tax at a rate of 21% and would generally be
required to file a U.S. federal income tax return. Similar consequences would
generally apply to a foreign shareholder's gain on the sale of Fund shares
unless the Fund is domestically controlled (meaning that more than 50% of the
value of the Fund's shares is held by U.S. shareholders) or the foreign
shareholder owns no more than 5% of the Fund's shares at any time during the
five-year period ending on the date of sale. Finally, a domestically controlled
Fund may be required to recognize a portion of its gain on the in-kind
distribution of certain U.S. real property interests. Foreign shareholders are
urged to consult their own tax advisors concerning the particular tax
consequences to them of an investment in the Fund.
Under
the “Foreign Account Tax Compliance Act” and existing guidance thereunder,
commonly known as “FATCA,” a 30% withholding
tax on dividends paid by the Fund generally applies if paid to a foreign entity
unless: (i) if the foreign entity is a “foreign financial institution” as
defined under FATCA, the foreign entity undertakes certain due diligence,
reporting, withholding, and certification obligations, (ii) if the foreign
entity is not a “foreign financial institution,” it identifies certain of its
U.S. investors or (iii) the foreign entity is otherwise excepted under FATCA. If
withholding is required under FATCA on a payment related to any Fund
distribution, investors that otherwise would not be subject to withholding (or
that otherwise would be entitled to a reduced rate of withholding) on such
payment generally will be required to seek a refund or credit from the IRS to
obtain the benefit of such exemption or reduction. An intergovernmental
agreement between the United States and an applicable foreign country, or future
Treasury regulations or other guidance, may modify the foregoing requirements.
The Funds will not pay any additional amounts in respect of amounts withheld
under FATCA. Each investor should consult its tax adviser regarding the effect
of FATCA based on its individual circumstances.
The
tax consequences to a foreign shareholder entitled to claim the benefits of an
applicable tax treaty might be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
Cost
Basis Reporting
A
Fund is generally required by law to report to shareholders and the IRS on Form
1099-B “cost basis” information for shares of the Fund
acquired on or after January 1, 2012, and sold or redeemed after that date. Upon
a disposition of such shares, a Fund will be required to report the adjusted
cost basis, the gross proceeds from the disposition, and the character of
realized gains or losses attributable to such shares. These requirements do not
apply to investments through a tax-deferred arrangement, such as a 401(k) plan
or an individual retirement plan. The “cost basis” of a share is generally its
purchase price adjusted for returns of capital, and other corporate actions.
“Cost basis” is used to determine whether a sale or other disposition of the
shares results in a gain or loss.
The
Fund will permit shareholders to elect among several IRS-accepted cost basis
methods to determine the cost basis in their shares. If a
shareholder does not affirmatively elect a cost basis method, then the Fund’s
default cost basis calculation method, which is
78
currently
the average cost method, will be applied to their account. The cost basis method
elected or applied may not be changed after the
settlement date of a sale of shares.
If
a shareholder holds shares through a broker, the shareholder should contact that
broker with respect to the reporting of cost basis information.
Shareholders
are urged to consult their tax advisers regarding specific questions with
respect to the application of the new cost basis reporting
rules and, in particular, which cost basis calculation method to
elect.
Effect
of Future Legislation, Foreign, State and Local Tax Considerations
The
foregoing general discussion of U.S. federal income and excise tax consequences
is based on the Code and the Treasury Regulations
issued thereunder as in effect on the date of this SAI. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein and any such changes or decisions may have a
retroactive effect.
Rules
of foreign, state and local taxation of ordinary income dividends, qualified
dividends, exempt-interest dividends and capital gain dividends
from regulated investment companies may differ from the rules for U.S. federal
income taxation described above. Shareholders are urged to consult their tax
advisers as to the consequences of these and other foreign, state and local tax
rules affecting an investment in a Fund.
ADDITIONAL
INFORMATION
Description
of Shares
As
a Delaware statutory trust, the Trust need not hold regular annual shareholder
meetings and, in the normal course, does not expect to hold
such meetings. The Trust, however, must hold shareholder meetings for such
purposes as, for example: (1) approving certain agreements as required by the
1940 Act; (2) changing fundamental investment objectives, policies, and
restrictions of the Funds; and (3) filling vacancies on the Board of Trustees of
the Trust in the event that less than a majority of the Trustees were elected by
shareholders. Under the Trust’s Second Amended and Restated Agreement and
Declaration of Trust dated February 26, 2019 (“Declaration of Trust”), each
Trustee will continue in office until the termination of the Trust or his/her
earlier death, incapacity, resignation, or removal. Vacancies may be filled by a
majority of the remaining Trustees, except insofar as the 1940 Act may require
the election by shareholders. Therefore, the Trust expects that there will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders or unless matters arise requiring a vote of shareholders
under the Declaration of Trust or the 1940 Act. At such time, the Trustees then
in office will call a shareholders meeting. In addition, holders of record of
not less than two-thirds of the outstanding shares of the Trust may remove a
Trustee from office by a vote cast in person or by proxy at a shareholder
meeting called for that purpose at the request of holders of 10% or more of the
outstanding shares of the Trust. The Funds have the obligation to assist in such
shareholder communications. Except as set forth above, Trustees will continue in
office and may appoint successor Trustees.
The
Declaration of Trust authorizes the Trustees to issue an unlimited number of
shares, which are units of beneficial interest, with no par value.
The Declaration of Trust authorizes the Trustees to divide or re-divide any
unissued shares of the Trust into one or more additional series by setting or
changing in any one or more aspects their respective preferences, conversion, or
other rights, voting power, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption.
Shares
have no subscription or preemptive rights and only such conversion or exchange
rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this SAI, the Trust’s
shares will be fully paid and non-assessable. In the event of a liquidation or
dissolution of the Trust, shares of a Fund are entitled to receive the assets
available for distribution belonging to the Fund, and a proportionate
distribution, based upon the relative asset values of the respective series, of
any general assets not belonging to any particular series that are available for
distribution. The Board may classify and reclassify the shares of a Fund into
classes of shares at a future date.
Fund
shareholders are entitled to one vote per share (with proportional voting for
fractional shares) on such matters as shareholders are
entitled to vote (“share-based voting”). Alternatively (except where the 1940
Act requires share-based voting), the Trustees in their discretion may determine
that shareholders are entitled to one vote per dollar of NAV (with proportional
voting for fractional dollar amounts). Shareholders of all series and classes
will vote together as a single class on all matters except (1) when required by
the 1940 Act or when the Trustees have determined that a matter affects one or
more series or classes materially differently, shares shall be voted by
individual series or class; and (2) when the Trustees have determined that the
matter affects only the interests of a particular series or class, then only
shareholders of such series or class shall be entitled to vote
thereon.
There
will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority
of the Trustees have been elected by the shareholders, at which time the
Trustees then in office will call a shareholders’
79
meeting
for the election of Trustees. A meeting shall be held for such purpose upon the
written request of the holders of not less than one-third
of the outstanding shares. Upon written request by ten or more shareholders of
record meeting the qualifications of Section 16(c) of the 1940 Act, (i.e.,
persons who have been shareholders of record for at least six months, and who
hold shares having an NAV of at least $25,000 or constituting 1% of the
outstanding shares, whichever is less) stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Trust will provide a list of shareholders or disseminate appropriate materials
(at the expense of the requesting shareholders). Except as set forth above, the
Trustees shall continue to hold office and may appoint their
successors.
The
Declaration of Trust permits the Trustees to take certain actions without
obtaining shareholder approval, if the Trustees determine that doing
so would be in the best interests of shareholders. These actions include: (a)
reorganizing a Fund with another investment company or another series of the
Trust; (b) liquidating a Fund; (c) restructuring a Fund into a “master/feeder”
structure, in which a Fund (the “feeder”) would invest all of its assets in a
separate “master” fund; and (d) amending the Declaration of Trust, unless
shareholder consent is required by law.
Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an
investment company such as the Trust shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares, as defined under the 1940 Act, of the series affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a Fund will be required in connection with a matter, a
Fund will be deemed to be affected by a matter unless it is clear that the
interests of the Fund and any other series in the matter are identical, or that
the matter does not affect any interest of other series of the Trust. Under Rule
18f-2, the approval of an investment advisory agreement or any change in
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares of the Fund. However, Rule
18f-2 also provides that the ratification of independent accountants, the
approval of principal underwriting contracts, and the election of Trustees may
be effectively acted upon by shareholders of the Trust voting without regard to
series.
Shareholder
and Trustee Liability
The
Delaware Statutory Trust Act provides that a shareholder of a Delaware statutory
trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations and the Declaration
of Trust provides that shareholders of the Trust shall not be liable for the
obligations of the Trust. The Declaration of Trust also provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his or her being or having been a shareholder. The
risk of a shareholder incurring financial loss on account of shareholder
liability is considered to be extremely remote.
The
Declaration of Trust states further that to the fullest extent permitted by
Delaware law, no Trustee or officer of the Trust shall be personally
liable in connection with the administration or preservation of the assets of
the Funds or the conduct of the Trust’s business; nor shall any Trustee,
officer, or agent be personally liable to any person for any action or failure
to act except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Trust shall look solely
to the assets of the Trust for payment.
Derivative
Actions Brought by Shareholders
Pursuant
to the Declaration of Trust, a shareholder may bring a derivative action on
behalf of the Trust only if the shareholder or shareholders
first make a pre-suit demand upon the Trustees to bring the subject action
unless an effort to cause the Trustees to bring such action is excused. A demand
on the Trustees shall only be excused if a majority of the Board, or a majority
of any committee established to consider the merits of such action, has a
personal financial interest in the action at issue. A Trustee shall not be
deemed to have a personal financial interest in an action or otherwise be
disqualified from ruling on a shareholder demand by virtue of the fact that such
Trustee receives remuneration from his service on the Board or on the boards of
one or more investment companies managed by the Adviser or that share the same
principal underwriter. For purposes of this requirement, the Board may designate
a committee of one Trustee to consider a shareholder demand if necessary to
create a committee with a majority of Trustees who do not have a personal
financial interest in the transaction at issue.
Disclosure
of Portfolio Holdings
The
Board has adopted policies and procedures with respect to the disclosure of each
Fund’s portfolio holdings by the Fund, the Adviser,
or their affiliates. These policies and procedures provide that each Fund’s
portfolio holdings information generally may not be disclosed to any party prior
to the information becoming public. Certain limited exceptions are described
below. These policies and procedures apply to disclosures to all categories of
persons, including individual investors, institutional investors, intermediaries
who sell shares of a Fund, third parties providing services to the Funds
(accounting agent, print vendors, etc.), rating and ranking organizations
(Lipper, Morningstar, etc.) and affiliated persons of the
Funds.
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The
Trust’s Chief Compliance Officer is responsible for monitoring each Fund’s
compliance with these policies and procedures, and for
providing regular reports (at least annually) to the Board regarding the
adequacy and effectiveness of the policy and recommend changes, if
necessary.
Public
Disclosure
Each
business day, each Fund’s portfolio holdings information will generally be
provided for dissemination through the facilities of the
National Securities Clearing Corporation (“NSCC”) and/or other fee-based
subscription services to NSCC members and/or subscribers to those other
fee-based subscription services, including Authorized Participants (as defined
below), and to entities that publish and/or analyze such information in
connection with the process of purchasing or redeeming Creation Units or trading
shares of each Fund in the secondary market. This information typically reflects
the Fund’s anticipated holdings on the current business day.
For
in-kind creations, a basket composition file, which includes the names and
quantities of Deposit Securities to deliver in exchange for a
Creation Unit of shares, together with an estimated Cash Component for the
current business day, will be publicly disseminated daily prior to the opening
of the Exchange via the NSCC. The basket represents one Creation Unit of a Fund.
The Trust and the Adviser will not disseminate non-public information concerning
a Fund’s portfolio holdings. However, access to information concerning a Fund’s
portfolio holdings may be permitted to personnel of third party service
providers, including a Fund’s custodian, transfer agent, auditors, and counsel,
as may be necessary to conduct business in the ordinary course in a manner
consistent with such service providers’ agreements with the Trust on behalf of a
Fund. From time to time, information concerning portfolio holdings other than
portfolio holding information made available in connection with the Creation
Unit process, as discussed above, may be provided to other entities that provide
services to the Funds, including rating or raking organizations, in the ordinary
course of business, no earlier than one business day following the date of the
information.
The
Funds also disclose their complete portfolio holdings in its annual and
semiannual reports to shareholders, which are sent to shareholders
no later than 60 days after the relevant fiscal period (June 30th and December
31st, respectively) and are available on the Funds’ website,
VictorySharesLiterature.com. The Funds also file their complete portfolio
holdings with the SEC for the first and third fiscal quarters on Form N-PORT.
You can find these filings on the SEC’s website, www.sec.gov.
Non-Public
Disclosures
The
Adviser may authorize the disclosure of non-public portfolio holdings
information under certain limited circumstances. The Funds’ policies
provide that non-public disclosures of a Fund’s portfolio holdings may only be
made if: (i) the Fund has a “legitimate business purpose” (as determined by the
President of the Trust) for making such disclosure; and (ii) the party receiving
the non-public information enters into a confidentiality agreement, which
includes a duty not to trade on the non-public information and describes any
compensation to be paid to the Fund or any “affiliated person” of the Adviser or
Distributor, including any arrangement to maintain assets in the Fund or in
other investment companies or accounts managed by the Adviser or by any
“affiliated person” of the Adviser or Distributor.
The
Adviser will consider any actual or potential conflicts of interest between the
Adviser and a Fund’s shareholders and will act in the best
interest of the Fund’s shareholders with respect to any such disclosure of
portfolio holdings information. If a potential conflict can be resolved in a
manner that does not present detrimental effects to Fund shareholders, the
Adviser may authorize release of portfolio holdings information. Conversely, if
the potential conflict cannot be resolved in a manner that does not present
detrimental effects to Fund shareholders, the Adviser will not authorize such
release.
Expenses
Unless
agreed upon otherwise with a third party, all expenses incurred in
administration of the Funds will be charged to a particular Fund,
including investment management fees; fees and expenses of the Board; interest
charges; taxes; brokerage commissions; expenses of valuing assets; expenses of
continuing registration and qualification of the Funds and the shares under
federal and state law; share issuance expenses; fees and disbursements of
independent accountants and legal counsel; fees and expenses of custodians,
including, transfer agents and shareholder account servicing organizations;
expenses of preparing, printing and mailing prospectuses, reports, proxies,
notices and statements sent to shareholders; expenses of shareholder meetings;
costs of investing in underlying funds; and insurance premiums. The Funds are
also liable for nonrecurring expenses, including litigation to which they may
from time to time be a party. Expenses incurred for the operation of a
particular Fund, including the expenses of communications with its shareholders,
are paid by that Fund.
Legal
Counsel
Sidley
Austin LLP, 787 Seventh Avenue, New York, New York 10019, serves as counsel to
the Trust.
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Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd., located at 1350 Euclid Avenue, Suite 800, Cleveland, OH
44115, serves as the independent registered public accounting
firm for the Funds.
Miscellaneous
As
used in the Prospectuses and in this SAI, “assets belonging to a fund” (or
“assets belonging to the Fund”) means the consideration received
by the Trust upon the issuance or sale of shares of a Fund, together with all
income, earnings, profits and proceeds derived from the investment thereof,
including any proceeds from the sale, exchange, or liquidation of such
investments and any funds or payments derived from any reinvestment of such
proceeds and any general assets of the Trust, which general liabilities and
expenses are not readily identified as belonging to a particular series that are
allocated to that series by the Trustees. The Trustees may allocate such general
assets in any manner they deem fair and equitable. It is anticipated that the
factor that will be used by the Trustees in making allocations of general assets
to a particular series will be the relative NAV of each respective series at the
time of allocation. Assets belonging to a particular series are charged with the
direct liabilities and expenses in respect of that series and with a share of
the general liabilities and expenses of each of the series not readily
identified as belonging to a particular series, which are allocated to each
series in accordance with its proportionate share of the NAVs of the Trust at
the time of allocation. The timing of allocations of general assets and general
liabilities and expenses of the Trust to a particular series will be determined
by the Trustees and will be in accordance with generally accepted accounting
principles. Determinations by the Trustees as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular series are
conclusive.
As
used in the Prospectuses and in this SAI, a “vote of a majority of the
outstanding shares” of the Fund means the affirmative vote of the
lesser of (a) 67% or more of the shares of the Fund present at a meeting at
which the holders of more than 50% of the outstanding shares of the Fund are
represented in person or by proxy, or (b) more than 50% of the outstanding
shares of the Fund.
Each
Prospectus and this SAI are not an offering of the securities described in these
documents in any state in which such offering
may not lawfully be made. No salesperson, dealer, or other person is authorized
to give any information or make any representation other than those contained in
a Prospectus and this SAI.
While
this SAI and each Prospectus describe pertinent information about the Trust and
the Funds, neither this SAI nor any Prospectus
represents a contract between the Trust or a Fund and any
shareholder.
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