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Donoghue
Forlines Tactical Allocation Fund |
Donoghue
Forlines Tactical Income Fund |
Class |
A: |
GTAAX |
Class |
A: |
PWRAX |
Class |
C: |
GLACX |
Class |
C: |
PWRCX |
Class |
I: |
GTAIX |
Class |
C: |
PWRIX |
|
|
|
|
|
|
Donoghue
Forlines Dividend Fund |
Donoghue
Forlines Momentum Fund |
Class |
A: |
PWDAX |
Class |
A: |
MOJAX |
Class |
C: |
PWDCX |
Class |
C: |
MOJCX |
Class |
I: |
PWDIX |
Class |
I: |
MOJOX |
Donoghue
Forlines Risk Managed Income Fund
(fka
Donoghue Forlines Floating Rate Fund) |
Class |
A: |
FLOAX |
Class |
C: |
FLOCX |
Class |
I: |
FLOTX |
Each
a Series of Northern Lights Funds Trust
STATEMENT
OF ADDITIONAL INFORMATION
October
30, 2023
This
Statement of Additional Information ("SAI") is not a prospectus and should be
read in conjunction with the Prospectus of the Donoghue Forlines Tactical
Allocation Fund, Donoghue Forlines Tactical Income Fund, Donoghue Forlines
Dividend Fund, Donoghue Forlines Momentum Fund, and Donoghue Forlines Risk
Managed Income Fund (the "Funds") dated October 30, 2023, as supplemented. The
Funds' Prospectus is hereby incorporated by reference, which means it is legally
part of this SAI. You can obtain copies of the Funds' Prospectus, annual or
semi-annual report without charge by contacting the Funds' Transfer Agent,
Ultimus Fund Solutions, LLC, 4221 North 203rd Street, Suite 100 Elkhorn,
Nebraska 68022-3474 or by calling toll-free 1-877-779-7462. You may also
obtain a Prospectus by visiting www.donoghueforlinesfunds.com.
TABLE
OF CONTENTS
THE
FUNDS |
1 |
TYPES
OF INVESTMENTS |
2 |
INVESTMENT
RESTRICTIONS |
26 |
POLICIES
AND PROCEDURES FOR DISCLOSURE OF PORTFOLIO HOLDINGS |
28 |
MANAGEMENT |
30 |
CONTROL
PERSONS AND PRINCIPAL HOLDERS |
37 |
INVESTMENT
ADVISER |
43 |
DISTRIBUTION
OF SHARES |
46 |
PORTFOLIO
MANAGERS |
53 |
ALLOCATION
OF PORTFOLIO BROKERAGE |
55 |
PORTFOLIO
TURNOVER |
56 |
OTHER
SERVICE PROVIDERS |
57 |
DESCRIPTION
OF SHARES |
61 |
ANTI-MONEY
LAUNDERING PROGRAM |
62 |
PURCHASE,
REDEMPTION AND PRICING OF SHARES |
62 |
TAX
STATUS |
67 |
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM |
73 |
LEGAL
COUNSEL |
73 |
FINANCIAL
STATEMENTS |
73 |
APPENDIX
A – DESCRIPTION OF BOND RATINGS |
74 |
APPENDIX
B –ADVISER'S PROXY VOTING
POLICIES AND PROCEDURES |
77 |
THE
FUNDS
The
Donoghue Forlines Tactical Allocation Fund, Donoghue Forlines Tactical Income
Fund, Donoghue Forlines Dividend Fund, Donoghue Forlines Momentum Fund, and the
Donoghue Forlines Risk Managed Income Fund (individually each a “Fund” and
collectively the “Funds”) are diversified series of Northern Lights Funds Trust,
a Delaware statutory trust organized on January 19, 2005 (the “Trust”). The
Trust is registered as an open-end management investment company. The Trust is
governed by its Board of Trustees (the “Board” or “Trustees” or “Board of
Trustees”).
The
Funds may issue unlimited numbers of shares of beneficial interest. All shares
of the Funds have equal rights and privileges. Each share of the Funds is
entitled to one vote on all matters as to which shares are entitled to vote. In
addition, each share of the Funds is entitled to participate equally with other
shares (i) in dividends and distributions declared by the Funds and (ii) on
liquidation to its proportionate share of the assets remaining after
satisfaction of outstanding liabilities. Shares of the Funds are fully paid,
non-assessable and fully transferable when issued and have no pre-emptive,
conversion or exchange rights. Fractional shares have proportionately the same
rights, including voting rights, as are provided for a full share.
The
Funds are comprised of three classes of shares: Class A, Class C and Class I
shares. Each share class represents an interest in the same assets of the Funds,
has the same rights and is identical in all material respects except that (i)
each class of shares may be subject to different (or no) sales loads, (ii) each
class of shares may bear different distribution fees; (iii) certain other class
specific expenses will be borne solely by the class to which such expenses are
attributable, including transfer agent fees attributable to a specific class of
shares, printing and postage expenses related to preparing and distributing
materials to current shareholders of a specific class, registration fees
incurred by a specific class of shares, the expenses of administrative personnel
and services required to support the shareholders of a specific class,
litigation or other legal expenses relating to a class of shares, Trustees’ fees
or expenses incurred as a result of issues relating to a specific class of
shares and accounting fees and expenses relating to a specific class of shares
and (iv) each class has exclusive voting rights with respect to matters relating
to its own distribution arrangements. The Board of Trustees may classify and
reclassify the shares of the Funds into additional classes of shares at a future
date.
Donoghue
Forlines LLC (the “Adviser”) is the Funds’ investment adviser. The Funds’
investment objective, restrictions and policies are more fully described here
and in the Prospectus. The Board may start other series and offer shares of a
new Funds under the Trust at any time. The Board of Trustees may classify and
reclassify the shares of the Funds into additional classes at a future date.
Under
the Trust’s Agreement and Declaration of Trust, each Trustee will continue in
office until the termination of the Trust or his/her earlier death, incapacity,
resignation or removal. Shareholders can remove a Trustee to the extent provided
by the Investment Company Act of 1940, as amended (the “1940 Act”) and the rules
and regulations promulgated thereunder. Vacancies may be filled by a majority of
the remaining Trustees, except insofar as the 1940 Act may require the election
by shareholders. As a result, normally no annual or regular meetings of
shareholders will be held unless matters arise requiring a vote of shareholders
under the Agreement and Declaration of Trust or the 1940 Act.
TYPES
OF INVESTMENTS
The
investment objective of the Funds and a description of their principal
investment strategies are set forth under each “Fund’s Summary” in the
Prospectus. The Funds’ investment objectives are not “Fundamental” and may be
changed without the approval of a majority of its outstanding voting securities,
however, shareholders will be given at least 60 days’ notice of such a
change.
The following information describes securities in
which the Funds may invest and their related risks.
EQUITY
SECURITIES
Equity
securities include common stock 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.
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.
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. 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.
Convertible
Securities
The
Funds may invest in convertible securities and non-investment grade convertible
securities. 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.
Warrants
The
Funds 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 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.
DERIVATIVES
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) for a specified price, date, time and place designated
at the time the contract is made. Brokerage fees are incurred 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 the 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." The 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, the 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.
Options
on Futures Contracts
The
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.
Regulation
as a Commodity Pool Operator
The
Trust, on behalf of the Funds, has filed with the National Futures Association,
a notice claiming an exemption from the definition of the term "commodity pool
operator" in accordance with Rule 4.5 under the Commodity Exchange Act (“CEA”),
as amended, and the rules of the Commodity Futures Trading Commission
promulgated thereunder, with respect to the Funds’ operations. Accordingly, the
Funds are not subject, nor will they be subject, to registration or regulation
as a commodity pool operator under the CEA.
Options
On Securities
The
Fund may purchase and write (i.e., sell) put and call options. Such
options may relate to particular securities or stock indexes, 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 indexes. 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 Standard & Poor's 500® Index or
the Value Line Composite Index or a narrower market index, such as the Standard
& Poor's 100®. Indexes may also be based on an industry or market segment,
such as the NYSE Arca Oil and Gas Index or the Business Equipment Quota Index.
Options on stock indexes are currently traded on the Chicago Board Options
Exchange, the New York Stock Exchange, and the Philadelphia Stock Exchange.
The 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 the Fund will have incurred 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, that 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 a 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 a 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 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 indexes 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 indexes,
depends on the degree to which price movements in the underlying index correlate
with the price movements of the securities held by a Fund. Inasmuch as the
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 indexes. It is also possible that there may be a
negative correlation between the index and a Fund's securities that would result
in a loss on both such securities and the options on stock indexes acquired by a
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 the 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
was 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. A 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. A Fund will comply with SEC
guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash or liquid securities in a segregated account with the
Custodian in the prescribed amount. Under current SEC guidelines, a Fund will
segregate assets to cover transactions in which the Fund writes or sells
options.
Assets
used as cover or held in a segregated account cannot be sold while the position
in the corresponding option is open, unless they are replaced with similar
assets. As a result, the commitment
of
a large portion of a Fund's assets to cover or segregated accounts could impede
portfolio management or a Fund's ability to meet redemption requests or other
current obligations.
Dealer Options
The
Funds may engage in transactions involving dealer options as well as
exchange-traded options. Certain additional risks are specific to dealer
options. While the Funds might look to a clearing corporation to exercise
exchange-traded options, if a 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 a 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, a 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 the Fund writes a dealer option, a Fund 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 the 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 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 a Fund. For example, because a Fund must maintain a secured
position with respect to any call option on a security it writes, a Fund may not
sell the assets that 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 securities. 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, the Fund will treat dealer options as subject to the Fund’s
limitation on illiquid securities. If the SEC changes its position on the
liquidity of dealer options, a Fund will change its treatment of such
instruments accordingly.
Spread
Transactions
The
Funds 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 a 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.
Swap
Agreements
The
Funds may enter into interest rate, index and currency exchange rate swap
agreements in an attempt to obtain a particular desired return at a lower cost
to the Fund than if it had invested directly in an instrument that yielded that
desired return. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of returns) 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 at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations the parties to a swap agreement have agreed to exchange. A Fund's
obligations (or rights) under a swap agreement will generally be equal only to
the 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").
A Fund's obligations under a swap agreement will be accrued daily (offset
against any amounts owing to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. government securities, or other liquid
securities, to avoid leveraging of a Fund's portfolio.
Whether
a Fund's use of swap agreements enhance a Fund's total return will depend on the
adviser's ability correctly to predict whether certain types of investments are
likely to produce greater returns than other investments. Because they are
two-party contracts and may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, the 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 counterparty. A Fund's
adviser will cause a Fund to enter into swap agreements only with counterparties
that would be eligible for consideration as repurchase agreement counterparties
under a Fund's repurchase agreement guidelines. The swap market is a relatively
new market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Fund's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Certain
swap agreements are exempt from most provisions of the CEA and, therefore, are
not regulated as futures or commodity option transactions under the CEA,
pursuant to regulations of the CFTC. To qualify for this exemption, a swap
agreement must be entered into by "eligible participants," which include the
following, provided the participants' total assets exceed established levels: a
bank or trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employees benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility.
Certain
Investment Techniques and Derivatives Risks.
When
the adviser of a Fund uses investment techniques such as margin, leverage and
short sales, and forms of financial derivatives, such as options and futures, an
investment in the Fund may be more volatile than investments in other mutual
funds. Although the intention is to use such investment techniques and
derivatives to minimize risk to a Fund, as well as for speculative purposes,
there is the possibility that improper implementation of such techniques and
derivative strategies or unusual market conditions could result in significant
losses to the Fund. Derivatives are used to limit risk in a Fund or to enhance
investment return and have a return tied to a formula based upon an interest
rate, index, price of a security, or other measurement. Derivatives involve
special risks, including: (1) the risk that interest rates, securities prices
and currency markets will not move in the direction that a portfolio manager
anticipates; (2) imperfect correlation between the price of derivative
instruments and movements in the prices of the securities, interest rates or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different than those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument and possible
exchange imposed price fluctuation limits, either of which may make it difficult
or impossible to close out a position when desired; (5) the risk that adverse
price movements in an instrument can result in a loss substantially greater than
the Fund’s initial investment in that instrument (in some cases, the potential
loss in unlimited); (6) particularly in the case of privately-negotiated
instruments, the risk that the counterparty will not perform its obligations, or
that penalties could be incurred for positions held less than the required
minimum holding period, which could leave the Fund worse off than if it had not
entered into the position; and (7) the inability to close out certain hedged
positions to avoid adverse tax consequences. In addition, the use of derivatives
for non-hedging purposes (that is, to seek to increase total return) is
considered a speculative practice and may present an even greater risk of loss
than when used for hedging purposes.
FIXED
INCOME/DEBT/BOND SECURITIES
Yields
on fixed income securities, which the Funds define to include preferred stock,
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 the Funds will be subjected to risk even if all fixed income
securities in the Funds' 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 the Funds 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 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 security.
The
Funds may invest in debt securities, including non-investment grade debt
securities. The following describes some of the risks associated with fixed
income debt securities:
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.
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. The Funds are subject to the risk that an issuer will exercise its
right to pay principal on an obligation held by the Funds (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 Funds.
At
times, some of the mortgage-backed securities in which the Funds 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 Funds to experience a loss equal to any unamortized premium.
Certificates
of Deposit and Bankers’ Acceptances
The
Funds may invest in certificates of deposit and bankers’ acceptances, which are
considered to be short-term money market instruments.
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.
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
The
Funds may purchase commercial paper. Commercial paper consists of short-term
(usually from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance their current operations. 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. As a result, investment in commercial paper is 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.
Time
Deposits and Variable Rate Notes
The
Funds may invest in fixed time deposits, whether or not subject to withdrawal
penalties.
The
commercial paper obligations, which the Funds 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 Funds to invest fluctuating amounts at varying rates
of interest pursuant to a direct arrangement between the Funds as Lender, and
the issuer, as borrower. It permits daily changes in the amounts borrowed. The
Funds 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 Funds 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 Funds’ 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 Funds’
investment restriction on illiquid securities unless such notes can be put back
to the issuer on demand within seven days.
Exchange
Traded Notes
The
Funds may invest in exchange-traded notes ("ETNs"), which are a type of debt
security that is typically unsecured and unsubordinated. This type of debt
security differs from other types of bonds and notes because ETN returns are
based upon the performance of a market index minus applicable fees, and
typically, no periodic coupon payments are distributed and no principal
protections exists, even at maturity. As debt securities, ETNs do not own the
underlying commodity or other index they are tracking. The purpose of ETNs is to
create a type of security that combines both the aspects of bonds and
exchange-traded funds ("ETFs"). Similar to ETFs, ETNs are traded on a major
exchange, such as the New York Stock Exchange during normal trading hours.
However, investors such as the Funds can also hold the debt security until
maturity. At that time, the issuer will pay the investor a cash amount that
would be equal to principal amount times the return of a benchmark index, less
any fees or other reductions. Because fees reduce the amount of return at
maturity or upon redemption, if the value of the underlying decreases or does
not increase significantly, a Fund may receive less than the principal amount of
investment at maturity or upon redemption.
ETNs
are senior, unsecured, unsubordinated debt securities whose returns are linked
to the performance of a particular market benchmark or strategy minus applicable
fees. ETNs are traded on an exchange during normal trading hours. However,
investors can also hold the ETN until maturity. At maturity, the issuer pays to
the investor a cash amount equal to the principal amount, subject to the day’s
market benchmark or strategy factor. ETNs do not make periodic coupon payments
or provide principal protection. ETNs are subject to credit risk and the value
of the ETN may drop due to a downgrade in the issuer’s credit rating, despite
the underlying market benchmark or strategy remaining unchanged. The value of an
ETN may also be influenced by time to maturity, level of supply and demand for
the ETN, volatility and lack of liquidity in underlying assets, changes in the
applicable interest rates, changes in the issuer’s credit rating, and economic,
legal, political, or geographic events that affect the referenced underlying
asset. When a Fund invests in ETNs it will bear its proportionate share of any
fees and expenses borne by the ETN. Although an ETN may be listed on an
exchange, the issuer may not be required to maintain the listing and there can
be no assurance that a secondary
market
will exist for an ETN. ETNs are also subject to tax risk. No assurance can be
given that the Internal Revenue Service (the “IRS”) will accept, or a court will
uphold, how the Fund characterizes and treats ETNs for tax purposes. Further,
the IRS and Congress are considering proposals that would change the timing and
character of income and gains from ETNs. An ETN that is tied to a specific
market benchmark or strategy may not be able to replicate and maintain exactly
the composition and relative weighting of securities, commodities or other
components in the applicable market benchmark or strategy. Some ETNs that use
leverage can, at times, be relatively illiquid and, thus, they may be difficult
to purchase or sell at a fair price. Leveraged ETNs are subject to the same risk
as other instruments that use leverage in any form.
Insured
Bank Obligations
The
Funds 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. The
Funds 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.
High
Yield Securities
The
Funds 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, the Funds 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 Funds may be required to sell
investments at substantial losses or retain them indefinitely when an issuer’s
financial condition is deteriorating.
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 the Funds’ 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 Securities Act of 1933, as
amended (“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.
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. The Funds
may hold such common stock and other securities even if it does not invest in
such 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 Board of the Funds determines that an investment in
any such type of obligation is consistent with the Funds’ 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.
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. The Funds may invest in Underlying funds that
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.
United
States Government Obligations
These
consist of various types of marketable securities issued by the United States
Treasury, i.e., bills, notes and bonds. Such securities are direct obligations
of the United States 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.
The Funds 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.
United
States Government Agency
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 United States government (e.g.,
United States 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 had been 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.
The FHFA announced that it does not anticipate any disruption in pattern of
payments or ongoing business operations of FNMA and FHLMC.
Government-related
guarantors (i.e. not backed by the full faith and credit of the United States
Government) 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 seller/servicers which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks
and credit unions and mortgage bankers. 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 United States Government.
FHLMC
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. It is a government-sponsored
corporation formerly owned by the twelve Federal Home Loan Banks and now owned
entirely by private stockholders. FHLMC issues Participation Certificates
(“PC’s”), 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 United States Government. 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 securities. Pools created by such nongovernmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and principal
of these pools may be supported by various forms of
insurance
or guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers.
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 (i.e., 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.
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 pass-through securities. The Fund does not
purchase interests in pools created by such non-governmental issuers.
Resets.
The interest rates paid on the Adjustable Rate Mortgage Securities (“ARMs”) in
which the 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 indexes: 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 indexes 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 indexes, 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
the 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 the 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.
Preferred
Stock
The
Funds define preferred stock as a form of fixed income security because it has
similar features to other forms of fixed income securities. Preferred stocks are
securities that have characteristics of both common stocks and corporate bonds.
Preferred stocks may receive dividends but payment is not guaranteed as with a
bond. These securities may be undervalued because of a lack of analyst coverage
resulting in a high dividend yield or yield to maturity. The risks of
preferred stocks include a lack of voting rights and the Funds' adviser may
incorrectly analyze the security, resulting in a loss to the Fund.
Furthermore, preferred stock dividends are not guaranteed and management
can elect to forego the preferred dividend, resulting in a loss to the Fund.
Preferred stock may also be convertible in the common stock of the issuer.
Convertible securities 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 are senior to common
stocks in an issuer’s capital structure, but are usually subordinated to similar
non-convertible securities. 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. In general, preferred stocks
generally pay a dividend at a specified rate and have preference over common
stock in the payment of dividends and in liquidation. The Fund may invest in
preferred stock with any or no 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 junior to the debt securities of the issuer. Preferred stock
market value may change based on changes in interest rates.
Foreign
Securities
A
Fund may invest in securities of foreign issuers and ETF 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 the 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 the 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 the 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).
Emerging Markets Securities. A Fund may
purchase securities of emerging market issuers and ETFs and other closed end
funds 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 include: smaller market capitalization
of securities markets, which may suffer periods of relative illiquidity;
significant price volatility; restrictions on foreign investment; 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.
Depositary
Receipts. A Fund may invest in sponsored and unsponsored 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 above
regarding foreign securities apply to investments in ADRs.
Illiquid
and Restricted Securities
The
Funds may invest up to 15% of its net assets in illiquid securities. Illiquid
securities include securities subject to contractual or legal restrictions on
resale (e.g., because they have not been registered under the Securities Act of
1933, as amended (the "Securities Act")) and securities 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).
Securities that have not been registered under the Securities 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 securities may be subject to the potential for delays on
resale and uncertainty in valuation. The Funds might be unable to dispose of
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty in satisfying redemption requests from shareholders. The
underlying funds 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 Securities 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 Securities 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 Securities 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.
Under
guidelines adopted by the Board, the adviser of the Funds 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
Securities 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 Organization (“NRSRO”) 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 Funds’ 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 the Funds' assets
invested in illiquid securities if institutional buyers are unwilling to
purchase such securities.
Investment
Companies
The
Funds may invest in investment companies such as open-end funds (mutual Funds),
closed-end funds, and exchange traded funds (also referred to as "Underlying
Funds"). The 1940 Act provides that the mutual funds may not: (1) purchase more
than 3% of an investment company’s outstanding shares; (2) invest more than 5%
of its assets in any single such investment company (the "5% Limit"), and (3)
invest more than 10% of its assets in investment companies overall (the "10%
Limit"), unless: (i) the underlying investment company and/or the funds has
received an order for exemptive relief from such limitations from the U.S.
Securities and Exchange Commission ("SEC"); and (ii) the underlying investment
company and the funds take appropriate steps to comply with any conditions in
such order.
In
addition, Section 12(d)(1)(F) of the Investment Company Act of 1940, as amended
provides that the provisions of paragraph 12(d)(1) shall not apply to securities
purchased or otherwise acquired by the Funds if (i) immediately after such
purchase or acquisition not more than 3% of the total outstanding stock of such
registered investment company is owned by the Funds and all affiliated persons
of the Fund; and (ii) the Fund has not, and is not proposing to offer or sell
any security issued by it through a principal underwriter or otherwise at a
public or offering price which includes a sales load of more than 1 ½% percent.
An investment company that issues shares to the Fund pursuant to paragraph
12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1%
of such investment company’s total outstanding shares in any period of less than
thirty days. The Fund (or the Adviser acting on behalf of the Fund) must comply
with the following voting restrictions: when the Funds exercise voting rights,
by proxy or otherwise, with respect to investment companies owned by the Funds,
the Funds will either seek instruction from the Funds' shareholders with regard
to the voting of all proxies and vote in accordance with such instructions, or
vote the shares held by the Funds in the same proportion as the vote of all
other holders of such security.
Further,
the Funds may rely on Rule 12d1-3, which allows unaffiliated mutual Funds to
exceed the 5% Limitation and the 10% Limitation, provided the aggregate sales
loads any investor pays (i.e., the combined distribution expenses of both the
acquiring funds and the acquired funds) does not exceed the limits on sales
loads established by the NASD for funds of funds.
The
Funds and any “affiliated persons,” as defined by the 1940 Act, may purchase in
the aggregate only up to 3% of the total outstanding securities of any
Underlying Funds. Accordingly, when affiliated persons hold shares of any of the
Underlying Funds, the Funds’ ability to invest fully in shares of those Funds is
restricted, and the Adviser must then, in some instances, select alternative
investments that would not have been its first preference. The 1940 Act also
provides that an Underlying Funds whose shares are purchased by the Funds will
be obligated to redeem shares held by the Funds only in an amount up to 1% of
the Underlying Funds' outstanding securities during any period of less than 30
days.
Under
certain circumstances an Underlying Funds may determine to make payment of a
redemption by the Funds wholly or partly by a distribution in kind of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In
such cases, the Funds may hold securities distributed by an Underlying Funds
until the Adviser determines that it is appropriate to dispose of such
securities.
Investment
decisions by the investment advisers of the Underlying Funds are made
independently of the Funds and its Adviser. Therefore, the investment adviser of
one Underlying Funds may be purchasing shares of the same issuer whose shares
are being sold by the investment adviser of another such Funds. The result would
be an indirect expense to the Funds without accomplishing any investment
purpose. Because other investment companies employ an investment adviser, such
investments by the Funds may cause shareholders to bear duplicate fees.
Closed-End
Investment Companies. The Funds may invest its assets in "closed-end"
investment companies (or “closed-end Funds”), subject to the investment
restrictions set forth above. Shares of closed-end funds are typically offered
to the public in a one-time initial public offering by a group of underwriters
who retain a spread or underwriting commission of between 4% or 6% of the
initial public offering price. Such securities are then listed for trading on
the New York Stock Exchange, the National Association of Securities Dealers
Automated Quotation System (commonly known as "NASDAQ") and, in some cases, may
be traded in other over-the-counter markets. Because the shares of closed-end
funds cannot be redeemed upon demand to the issuer like the shares of an
open-end investment company (such as the Funds), investors seek to buy and sell
shares of closed-end funds in the secondary market.
The
Funds generally will purchase shares of closed-end funds only in the secondary
market. The Funds will incur normal brokerage costs on such purchases similar to
the expenses the Funds would incur for the purchase of securities of any other
type of issuer in the secondary market. The Funds may, however, also purchase
securities of a closed-end funds in an initial public offering when, in the
opinion of the Adviser, based on a consideration of the nature of the closed-end
funds' proposed investments, the prevailing market conditions and the level of
demand for such securities, they represent an attractive opportunity for growth
of capital. The initial offering price typically will include a dealer spread,
which may be higher than the applicable brokerage cost if the Funds purchased
such securities in the secondary market.
The
shares of many closed-end funds, after their initial public offering, frequently
trade at a price per share that is less than the net asset value per share, the
difference representing the "market discount" of such shares. This market
discount may be due in part to the investment objective of long-term
appreciation, which is sought by many closed-end funds, as well as to the fact
that the shares of closed-end funds are not redeemable by the holder upon demand
to the issuer at the next determined net asset value but rather are subject to
the principles of supply and demand in the secondary market. A relative lack of
secondary market purchasers of closed-end funds shares also may contribute to
such shares trading at a discount to their net asset value.
The
Funds may invest in shares of closed-end funds that are trading at a discount to
net asset value or at a premium to net asset value. There can be no assurance
that the market discount on shares of any closed-end funds purchased by the
Funds will ever decrease. In fact, it is possible that this market discount may
increase and the Funds may suffer realized or unrealized capital losses due to
further decline in the market price of the securities of such closed-end funds,
thereby adversely affecting the net asset value of the Funds' shares. Similarly,
there can be no assurance that any shares of a closed-end funds purchased by the
Funds at a premium will continue to trade at a premium or that the premium will
not decrease subsequent to a purchase of such shares by the Funds.
Closed-end
funds may issue senior securities (including preferred stock and debt
obligations) for the purpose of leveraging the closed-end Funds’ common shares
in an attempt to enhance the current return to such closed-end Funds’ common
shareholders. The Funds' investment in the common shares of closed-end funds
that are financially leveraged may create an opportunity for greater total
return on its investment, but at the same time may be expected to exhibit more
volatility in market price and net asset value than an investment in shares of
investment companies without a leveraged capital structure.
Exchange
Traded Funds. ETFs are passive funds that track their related index and have
the flexibility of trading like a security. They are managed by professionals
and provide the investor with diversification, cost and tax efficiency,
liquidity, marginability, are useful for hedging, have the ability to go long
and short, and some provide quarterly dividends. Additionally, some ETFs are
unit investment trusts (UITs), which are unmanaged portfolios overseen by
trustees. ETFs generally have two markets. The primary market is where
institutions swap “creation units” in block-multiples of 50,000 shares for
in-kind securities and cash in the form of dividends. The secondary market is
where individual investors can trade as little as a single share during trading
hours on the exchange. This is different from open-ended mutual funds that are
traded after hours once the net asset value (“NAV”) is calculated. ETFs share
many similar risks with open-end and closed-end funds.
There is a risk that an ETFs in which the Funds
invests may terminate due to extraordinary events that may cause any of the
service providers to the ETFs, such as the trustee or sponsor, to close or
otherwise fail to perform their obligations to the ETF. Also, because the ETFs
in which the Funds intend to principally invest may be granted licenses by
agreement to use the indexes as a basis for determining their compositions
and/or otherwise to use certain trade names, the ETFs may terminate if such
license agreements are terminated. In addition, an ETF may terminate if its
entire net asset value falls below a certain amount. Although the Funds believe
that, in the event of the termination of an underlying ETF, it will be able to
invest instead in shares of an alternate ETF tracking the same market index or
another market index with the same general market, there is no guarantee that
shares of an alternate ETF would be available for investment at that time. To
the extent the Funds invest in a sector product, the Funds are subject to the
risks associated with that sector.
Lending
Portfolio Securities
For
the purpose of achieving income, the Funds may lend its portfolio securities,
provided (1) the loan is secured continuously by collateral consisting of U.S.
Government securities or cash or cash equivalents (cash, U.S. Government
securities, negotiable certificates of deposit, bankers’ acceptances or letters
of credit) maintained on a daily mark-to-market basis in an amount at least
equal to the current market value of the securities loaned, (2) the Funds may at
any time call the loan and obtain the return of securities loaned, (3) the Funds
will receive any interest or dividends received on the loaned securities, and
(4) the aggregate value of the securities loaned will not at any time exceed
one-third of the total assets of the Funds.
Real
Estate Investment Trusts
The
Fund may invest in securities of real estate investment trusts (“REITs”). REITs
are publicly traded corporations or trusts that specialize in acquiring, holding
and managing residential, commercial or industrial real estate. A REIT is not
taxed at the entity level on income distributed to its shareholders or
unitholders if it distributes to shareholders or unitholders at least 95% 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 and
services its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT. Although the 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 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 make distributions to
shareholders or unitholders REITs may have limited diversification and are
subject to risks associated with obtaining financing for real property, as well
as to the risk of self-liquidation. REITs also can be adversely affected by
their failure to qualify for tax-free pass-through treatment of their income
under the Internal Revenue Code of 1986, as amended, or their failure 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 the Fund, but also may indirectly bear similar expenses
of some of the REITs in which it invests.
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 a 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 a 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 securities. 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 a 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.
When-Issued,
Forward Commitments and Delayed Settlements
The
Funds may purchase and sell securities on a when-issued, forward commitment or
delayed settlement basis. In this event, the Custodian (as defined under the
section entitled “Custodian”) will segregate liquid assets equal to the amount
of the commitment in a separate account. Normally, the Custodian will set aside
portfolio securities to satisfy a purchase commitment. In such a case, the Funds
may be required subsequently to segregate additional assets in order to assure
that the value of the account remains equal to the amount of the Funds’
commitment. It may be expected that the Funds' net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash.
The
Funds do not intend to engage in these transactions for speculative purposes but
only in furtherance of its investment objectives. Because the Funds will
segregate liquid assets to satisfy its purchase commitments in the manner
described, the Funds’ liquidity and the ability of the Funds' adviser to manage
them may be affected in the event the Funds’ forward commitments, commitments to
purchase when-issued securities and delayed settlements ever exceeded 15% of the
value of its net assets.
The
Funds 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 Funds 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 Funds on the settlement date. In these cases, the Funds may realize a
taxable capital gain or loss. When the Funds engage 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 Funds
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 Funds starting on the day the Funds agrees to purchase the
securities. The Funds do not earn interest on the securities it has committed to
purchase until it has paid for and delivered on the settlement date.
Short
Sales
A
Fund may sell securities short, including ETFs. 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
the 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. A Fund is required to make a margin deposit in connection with
such short sales; a 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, a Fund will incur a loss;
conversely, if the price declines, a 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 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 50% of the
value of a Fund's net assets. This percentage may be varied by action of the
Board of Trustees. 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.
Reverse
Repurchase Agreements
In
a reverse repurchase agreement, a Fund sells portfolio securities to another
party and agrees to repurchase the securities at an agreed-upon price and date.
Reverse repurchase agreements involve the risk that the other party will fail to
return the securities in a timely manner, or at all, which may result in losses
to the Fund. A Fund could lose money if it is unable to recover the securities
and the value of the collateral held by the Fund is less than the value of the
securities. These events could also trigger adverse tax consequences to the
Fund. Reverse repurchase agreements also involve the risk that the market value
of the securities sold will decline below the price at which a Fund is obligated
to repurchase them. Reverse repurchase agreements may increase fluctuations in
the Fund’s NAV and may be viewed as a form of borrowing by a Fund.
Borrowing
In
the event that the Fund engages in any borrowings and such borrowings exceed the
limits of Section 18 of the 1940 Act, the Fund will reduce its borrowings within
three days in order to comply with such limits.
INVESTMENT
RESTRICTIONS
The
Funds have adopted the following investment restrictions that may not be changed
without approval by a “majority of the outstanding shares” of the Funds which,
as used in this SAI, means the vote of the lesser of (a) 67% or more of the
shares of the Funds represented at a meeting, if the holders of more than 50% of
the outstanding shares of the Funds are present or represented by proxy, or (b)
more than 50% of the outstanding shares of the Funds.
1. Borrowing Money. The Funds will 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 Funds; 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 Funds’ total
assets at the time when the borrowing is made.
2.
Senior Securities. The Funds will not issue senior securities. This
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Funds, provided that the Funds’
engagement in such activities is consistent with or permitted by the Investment
Company Act of 1940, as amended, the rules and regulations promulgated
thereunder or interpretations of the SEC or its staff.
3. Underwriting. The Funds will not act
as underwriter of securities issued by other persons. This limitation is not
applicable to the extent that, in connection with the disposition of portfolio
securities (including restricted securities), the Funds may be deemed an
underwriter under certain federal securities laws.
4. Real Estate. The Funds will not
purchase or sell 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 Funds 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).
5. Commodities. The Funds will not
purchase or sell commodities unless acquired as a result of ownership of
securities or other investments. This limitation does not preclude the Funds
from purchasing or selling options or futures contracts, from investing in
securities or other instruments backed by commodities or from investing in
companies which are engaged in a commodities business or have a significant
portion of their assets in commodities.
6. Loans. The Funds will not make loans
to other persons, except: (a) by loaning portfolio securities; (b) by engaging
in repurchase agreements; or (c) by purchasing nonpublicly offered debt
securities. For purposes of this limitation, the term “loans” shall not include
the purchase of a portion of an issue of publicly distributed bonds, debentures
or other securities.
7. Concentration. The Funds will not
invest 25% or more of its total assets in a particular industry or group of
industries. This limitation is not applicable to investments in obligations
issued or guaranteed by the U.S. government, its agencies and instrumentalities
or repurchase agreements with respect thereto.
THE
FOLLOWING ARE ADDITIONAL INVESTMENT LIMITATIONS OF THE FUNDS. THE FOLLOWING
RESTRICTIONS ARE DESIGNATED AS NON-FUNDAMENTAL AND MAY BE CHANGED BY THE BOARD
OF TRUSTEES OF THE TRUST WITHOUT THE APPROVAL OF SHAREHOLDERS.
1. Pledging. The Funds will not mortgage,
pledge, hypothecate or in any manner transfer, as security for indebtedness, any
assets of the Funds 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.
2. Borrowing. The Funds will not purchase
any security while borrowings representing more than one third of its total
assets are outstanding.
3. Margin Purchases. The Funds will not
purchase securities or evidences of interest thereon on “margin.” This
limitation is not applicable to short-term credit obtained by the Funds for the
clearance of
purchases
and sales or redemption of securities, or to arrangements with respect to
transactions involving options, futures contracts, short sales and other
permitted investment techniques.
4.
Illiquid Investments. The Funds will not hold 15% or more of its net
assets in securities for which there are legal or contractual restrictions on
resale and other illiquid securities.
If
a restriction on the Funds’ investments is adhered to at the time an investment
is made, a subsequent change in the percentage of Funds assets invested in
certain securities or other instruments, or change in average duration of the
Funds’ investment portfolio, resulting from changes in the value of the Funds’
total assets, will not be considered a violation of the restriction; provided,
however, that the asset coverage requirement applicable to borrowings shall be
maintained in the manner contemplated by applicable law.
With
respect to interpretations of the SEC or its staff described in fundamental
restriction number 2 above, the SEC and its staff have identified various
securities trading practices and derivative instruments used by mutual funds
that give rise to potential senior security issues under Section 18(f) of the
1940 Act, which prohibits mutual funds from issuing senior securities. Under the
1940 Act, a mutual fund may borrow from a bank, provided that immediately after
any such borrowing there is an asset coverage of at least 300 percent for all
borrowings; or 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. However, rather than
rigidly deeming all such practices outside of bank borrowing as impermissible
forms of issuing a "senior security" under Section 18(f), the SEC and its staff
through interpretive releases, including Investment Company Act Release No.
10666 (April 18, 1979), and no-action letters has developed an evolving series
of methods by which a fund may address senior security issues. In particular,
the common theme in this line of guidance has been to use methods of "covering"
fund obligations that might otherwise create a senior security-type obligation
by holding sufficient liquid assets that permit a fund to meet potential trading
and derivative-related obligations. Thus, a potential Section 18(f) senior
security limitation is not applicable to activities that might be deemed to
involve a form of 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 Section 18 of the 1940 Act, the rules and regulations promulgated
thereunder or interpretations of the SEC or its staff.
POLICIES
AND PROCEDURES FOR DISCLOSURE OF PORTFOLIO HOLDINGS
The
Trust has adopted policies and procedures that govern the disclosure of the
Funds' portfolio holdings. These policies and procedures are designed to ensure
that such disclosure is in the best interests of Funds shareholders.
It
is the Trust’s policy to: (1) ensure that any disclosure of portfolio holdings
information is in the best interest of Trust shareholders; (2) protect the
confidentiality of portfolio holdings information; (3) have procedures in place
to guard against personal trading based on the information; and (4) ensure that
the disclosure of portfolio holdings information does not create conflicts
between the interests of the Trust’s shareholders and those of the Trust’s
affiliates.
The
Funds will disclose its portfolio holdings by mailing its annual and semi-annual
reports to shareholders approximately two months after the end of the fiscal
year and semi-annual period. The Funds may also disclose its portfolio holdings
by mailing a quarterly report to its shareholders. In
addition,
the Funds will disclose its portfolio holdings reports on Forms N-CSR and Form
N-Q two months after the end of each quarter/semi-annual period.
The
Funds may choose to make available to rating agencies such as Lipper,
Morningstar or Bloomberg earlier and more frequently on a confidential
basis.
Under
limited circumstances, as described below, the Funds' portfolio holdings may be
disclosed to, or known by, certain third parties in advance of their filing with
the Securities and Exchange Commission on Form N-CSR or Form N-Q. In each case,
a determination has been made that such advance disclosure is supported by a
legitimate business purpose and that the recipient is subject to a duty to keep
the information confidential and to not trade on any material non-public
information.
|
· |
The Adviser.
Personnel of the Funds' adviser, including personnel responsible for
managing the Funds' portfolio, may have full daily access to Funds
portfolio holdings because that information is necessary in order for the
adviser to provide its management, administrative, and investment services
to the Funds. As required for purposes of analyzing the impact of existing
and future market changes on the prices, availability, demand and
liquidity of such securities, as well as for the assistance of portfolio
manager in the trading of such securities, adviser personnel may also
release and discuss certain portfolio holdings with various
broker-dealers. |
|
· |
Ultimus
Fund Solutions. Ultimus Fund Solutions, LLC is the
transfer agent, fund accountant and administrator for the Funds;
therefore, its personnel have full daily access to the Funds' portfolio
holdings because that information is necessary in order for them to
provide the agreed-upon services for the Trust. |
|
· |
U.S.
Bank. U.S. Bank, NA is custodian for the Fund; therefore, its
personnel have full daily access to the Fund’s portfolio holdings because
that information is necessary in order for them to provide the agreed-upon
services for the Trust. |
|
· |
Deloitte & Touche
LLP. Deloitte & Touche LLP is the Funds’ registered independent
public accounting firm; therefore, its personnel have access to the Funds’
portfolio holdings in connection with auditing of the Funds’ annual
financial statements and providing assistance and consultation in
connection with SEC filings. |
|
· |
Orion Advisor
Services, LLC. Orion Advisor Services, LLC provides back office
account support and account performance services to the Adviser;
therefore, its personnel have full daily access to the portfolio holdings
of the Adviser’s clients, including the Funds, because that information is
necessary in order for Orion to provide the agreed-upon
services. |
|
· |
Thompson Hine LLP.
Thompson Hine LLP is counsel to the Funds; therefore its personnel
have access to the Funds’ portfolio holdings in connection with the review
of the Funds’ annual and semi-annual shareholder reports and SEC
filings. |
|
· |
Counsel to the
Independent Trustees. Counsel to the Independent Trustees and its
personnel have access to the Fund’s portfolio holdings in connection with
review of the Fund’s annual and semi-annual shareholder reports and SEC
filings. |
|
· |
Derivatives
Risk Consultant. The Trust has engaged a derivatives risk consultant
(“Consultant”) to consult with the Board of Trustees, and the advisers to
certain series of the |
Trust,
regarding the effectiveness of derivatives risk management. The Consultant
therefore may have access to the Fund’s portfolio holdings in order to provide
such services to the Trust.
Additions
to List of Approved Recipients. The Trust’s Chief Compliance Officer is the
person responsible, and whose prior approval is required, for any disclosure of
the Funds’ portfolio securities at any time or to any persons other than those
described above. In such cases, the recipient must have a legitimate business
need for the information and must be subject to a duty to keep the information
confidential and to not trade on any material non-public information. There are
no ongoing arrangements in place with respect to the disclosure of portfolio
holdings. In no event shall the Funds, the Adviser or any other party receive
any direct or indirect compensation in connection with the disclosure of
information about the Funds’ portfolio holdings.
Compliance
with Portfolio Holdings Disclosure Procedures. The Trust’s Chief Compliance
Officer will report periodically to the Board with respect to compliance with
the Funds’ portfolio holdings disclosure procedures, and from time to time will
provide the Board any updates to the portfolio holdings disclosure policies and
procedures.
There
is no assurance that the Trust’s policies on disclosure of portfolio holdings
will protect the Funds from the potential misuse of holdings information by
individuals or firms in possession of that information.
MANAGEMENT
The
business of the Trust is managed under the direction of the Board in accordance
with the Agreement and Declaration of Trust and the Trust’s By-laws (the
“Governing Documents”), which have been filed with the Securities and Exchange
Commission and are available upon request. The Board consists of six (6)
individuals all of whom are not “interested persons” (as defined under the 1940
Act) of the Trust and the Adviser, any investment adviser to any series of the
Trust, or the Funds’ principal underwriter (“Independent Trustees”). Pursuant to
the Governing Documents of the Trust, the Trustees shall elect officers
including a President, a Secretary, a Treasurer, a Principal Executive Officer
and a Principal Accounting Officer. The Board retains the power to conduct,
operate and carry on the business of the Trust and has the power to incur and
pay any expenses, which, in the opinion of the Board, are necessary or
incidental to carry out any of the Trust’s purposes. The Trustees, officers,
employees and agents of the Trust, when acting in such capacities, shall not be
subject to any personal liability except for his or her own bad faith, willful
misfeasance, gross negligence or reckless disregard of his or her duties.
Board
Leadership Structure
The Trust is led by Anthony Hertl, an Independent
Trustee, who has served as the Chairman of the Board since July 2013. The Board
of Trustees is comprised of Mr. Hertl and five (5) additional Independent
Trustees. Additionally, under certain 1940 Act governance guidelines that apply
to the Trust, the Independent Trustees will meet in executive session, at least
quarterly. Under the Trust’s Agreement and Declaration of Trust and By-Laws, the
Chairman of the Board is responsible for (a) presiding at Board meetings, (b)
calling special meetings on an as-needed basis, (c) execution and administration
of Trust policies including (i) setting the agendas for Board meetings and (ii)
providing information to Board members in advance of each Board meeting and
between Board meetings. Generally, the Trust believes
it
best to have a non-executive Chairman of the Board, who together with the
President (principal executive officer), are seen by its shareholders, business
partners and other stakeholders as providing strong leadership. The Trust
believes that its Chairman, the independent chair of the Audit Committee, and,
as an entity, the full Board of Trustees, provide effective leadership that is
in the best interests of the Trust, its Funds and each shareholder.
Board Risk
Oversight
The
Board of Trustees has a standing independent Audit Committee with a separate
chair, Mark H. Taylor. The Board is responsible for overseeing risk management,
and the full Board regularly engages in discussions of risk management and
receives compliance reports that inform its oversight of risk management from
its Chief Compliance Officer at quarterly meetings and on an ad hoc basis, when
and if necessary. The Audit Committee considers financial and reporting risk
within its area of responsibilities. Generally, the Board believes that its
oversight of material risks is adequately maintained through the
compliance-reporting chain where the Chief Compliance Officer is the primary
recipient and communicator of such risk-related information.
Trustee
Qualifications
Generally,
the Trust believes that each Trustee is competent to serve because of their
individual overall merits including: (i) experience, (ii) qualifications, (iii)
attributes and (iv) skills.
Anthony
J. Hertl has over 20 years of business experience in the financial services
industry and related fields including serving as chair of the finance committee
for the Borough of Interlaken, New Jersey and Vice President-Finance and
Administration of Marymount College, holds a Certified Public Accountant
designation, serves or has served as a member of other mutual fund boards
outside of the group of Funds managed by the Adviser (the “Fund Complex”) and
possesses a strong understanding of the regulatory framework under which
investment companies must operate based on his years of service to this Board
and other fund boards.
Gary
W. Lanzen has over 20 years of business experience in the financial services
industry, holds a Master’s degree in Education Administration, is a Certified
Financial Planner, serves as a member of two other mutual fund boards outside of
the Fund Complex and possesses a strong understanding of the regulatory
framework under which investment companies must operate based on his years of
service to this Board and other mutual fund boards.
Mark H. Taylor holds PhD, Masters and Bachelors
degrees in Accountancy, is a licensed Certified Public Accountant and has over
30 years of academic and professional experience in the accounting and auditing
fields, all of which make him particularly qualified to chair the Trust’s Audit
Committee. Dr. Taylor is the Director of the Lynn Pippenger School of
Accountancy at the Muma College of Business at the University of South Florida
and is serving a three-year term as President of the American Accounting
Association (AAA) commencing August 2022 (President-Elect 2022-2023, President
2023-2024; Past President 2024-2025). Dr. Taylor previously served as AAA Vice
President-Finance, and as President of the Auditing Section of the AAA. Dr.
Taylor serves as a member of three other mutual fund boards within the Northern
Lights Fund Complex. He served a three-year term on the AICPA’s Auditing
Standards Board (2010-2012) and previously completed a fellowship in the
Professional Practice Group of the Office of the Chief Accountant at the
headquarters of the United States Securities Exchange Commission. Dr. Taylor is
a member of two research teams that have received grants from the Center for
Audit Quality to study how accounting firms’ tone-at-the top
messaging
impacts audit performance and how auditors manage the process of auditing fair
value measurements and other complex estimates in financial statements. Dr.
Taylor has published extensively in leading academic accounting journals, has
teaching interests in corporate governance and accounting policy as well as
auditing and assurance services at the graduate and undergraduate levels, and
possesses a strong understanding of the regulatory framework under which
investment companies operate.
John
V. Palancia has over 30 years of business experience in financial services
industry including serving as the Director of Futures Operations for Merrill
Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”). Mr. Palancia holds a
Bachelor of Science degree in Economics. He also possesses a strong
understanding of risk management, balance sheet analysis and the regulatory
framework under which regulated financial entities must operate based on service
to Merrill Lynch. Additionally, he is well versed in the regulatory framework
under which investment companies must operate and serves as a member of three
other fund boards.
Mark
D. Gersten has more than 30 years of experience in the financial services
industry, having served in executive roles at AllianceBernstein LP and holding
key industry positions at Prudential-Bache Securities and
PriceWaterhouseCoopers. He also serves as a member of two other mutual fund
boards outside of the Fund Complex. Mr. Gersten is a certified public accountant
and holds an MBA in accounting. Like other Trustees, his experience has given
him a strong understanding of the regulatory framework under which investment
companies operate.
Mark
S. Garbin has more than 30 years of experience in corporate balance sheet and
income statement risk management for large asset managers, serving as Managing
Principal of Coherent Capital Management LLC since 2007. Mr. Garbin has
extensive derivatives experience and has provided consulting services to
alternative asset managers. He is both a Chartered Financial Analyst and
Professional Risk Manager charterholder and holds advanced degrees in
international business. The Trust does not believe any one factor is
determinative in assessing a Trustee's qualifications, but that the collective
experience of each Trustee makes them each highly qualified.
The
Trustees and the executive officers of the
Trust are listed below with their present positions with the Trust and principal
occupations over at least the last five years. The business address of
each Trustee and Officer is 225 Pictoria Drive, Suite 450, Cincinnati, OH 45246.
All correspondence to the Trustees and Officers should be directed to c/o
Ultimus Fund Solutions, LLC, P.O. Box 541150, Omaha, Nebraska 68154.
Independent
Trustees
Name,
Address and Year of Birth |
Position/Term
of Office* |
Principal
Occupation During the Past Five Years |
Number
of Portfolios in Fund Complex** Overseen by Trustee |
Other
Directorships held by Trustee During the Past Five Years |
Mark
Garbin
Born in
1951 |
Trustee
Since
2013 |
Managing
Principal, Coherent Capital Management LLC (since 2007). |
5
|
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2013);
Two Roads Shared Trust (since 2012); Forethought Variable Insurance Trust
(since 2013); Northern Lights Variable Trust (since 2013); OHA Mortgage
Strategies Fund (offshore), Ltd. (2014 - 2017); and Altegris KKR
Commitments Master Fund (since 2014); Carlyle Tactical Private Credit Fund
(since March 2018) and Independent Director
OHA CLO Enhanced Equity II Genpar LLP
(since
June 2021).
|
Mark
D. Gersten Born in 1950 |
Trustee
Since
2013 |
Independent
Consultant
(since
2012). |
5 |
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2013);
Northern Lights Variable Trust (since 2013); Two Roads Shared Trust (since
2012); Altegris KKR Commitments Master Fund (since 2014); previously,
Ramius Archview Credit and Distressed Fund (2015-2017); and Schroder
Global Series Trust (2012 to 2017).
|
Anthony J.
Hertl
Born in
1950 |
Trustee
Since 2005;
Chairman of the Board since 2013 |
Retired,
previously held several positions in a major Wall Street firm including
Capital Markets Controller, Director of Global Taxation, and CFO of the
Specialty Finance Group.
|
5 |
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2005);
Northern Lights Variable Trust (since 2006); Alternative Strategies Fund
(since 2010); Satuit Capital Management Trust (2007-2019). |
Gary W.
Lanzen
Born in
1954 |
Trustee
Since
2005 |
Retired
(since 2012). Formerly, Founder, President, and Chief Investment Officer,
Orizon Investment Counsel, Inc.
(2000-2012). |
5 |
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2005)
Northern Lights Variable Trust (since 2006); AdvisorOne Funds (since
2003); Alternative Strategies Fund (since 2010); and previously, CLA
Strategic Allocation Fund
(2014-2015).
|
John V.
Palancia
Born in
1954 |
Trustee
Since
2011 |
Retired
(since 2011). Formerly, Director of Futures Operations, Merrill Lynch,
Pierce, Fenner & Smith Inc. (1975-2011). |
5 |
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2011);
Northern Lights Fund Trust III (since February 2012); Alternative
Strategies Fund (since 2012) and Northern Lights Variable Trust
(since
2011).
|
Mark H.
Taylor
Born in
1964 |
Trustee
Since 2007;
Chairman of the Audit Committee since 2013 |
PhD
(Accounting), CPA; Professor and Director, Lynn Pippenger School of
Accountancy, Muma College of Business, University of South Florida (2019 –
present); Professor and Department of Accountancy Chair, Case Western
Reserve University (2009-2019); President, American Accounting Association
(AAA) commencing August 2022 (President-Elect 2022-2023, President
2023-2024; Past President 2024-2025). AAA Vice
President-Finance (2017-2020); President, Auditing Section of the AAA;
Member, AICPA Auditing Standards Board (2009-2012); Academic Fellow,
Office of the Chief Accountant, United States Securities Exchange
Commission (2005-2006); Center for Audit Quality research grants (2014,
2012). |
5 |
Northern
Lights Fund Trust (for series not affiliated with the Funds since 2007);
Alternative Strategies Fund (since 2010); Northern Lights Fund Trust III
(since 2012); and Northern Lights Variable Trust
(since
2007). |
Officers
Name,
Address and Year of Birth |
Position/Term
of Office* |
Principal
Occupation During the Past Five Years |
Number
of Portfolios in Fund Complex** Overseen by Trustee |
Other
Directorships held by Trustee During the Past Five Years |
Kevin E.
Wolf Born in 1969 |
President,
Principal Executive Officer
Since June
2017
|
Executive
Vice President, Head of Fund Administration, and Product; Ultimus Fund
Solutions, LLC
(since
2020); Vice President of The Ultimus Group, LLC (since 2019);
Executive
Vice President, Gemini Fund Services, LLC (2019-2020); President, Gemini
Fund Services, LLC
(2012-2019);
Treasurer of the Trust (2006-June 2017).
|
N/A |
N/A |
James
Colantino
Born in
1969 |
Treasurer,
Principal Accounting Officer
Since June
2017 |
Senior Vice President Fund Administration,
Ultimus Fund Solutions (since 2020);
Senior Vice President Fund Administration,
Gemini Fund Services, LLC (2012-2020); Assistant Treasurer of the Trust
(2006-June 2017).
|
N/A |
N/A |
Stephanie
Shearer Born in 1979 |
Secretary Since
February 2017 |
Assistant
Secretary of the Trust (2012-February 2017); Associate Director, Ultimus
Fund Solutions (since 2022); Manager of Legal Administration, Ultimus Fund
Solutions (2020-2022); Manager of Legal Administration, Gemini Fund
Services, LLC
(2018-2020);
Senior Paralegal, Gemini Fund Services, LLC (2013 - 2018).
|
N/A
|
N/A |
Michael
J. Nanosky Born in 1966 |
Chief
Compliance Officer
Since
January 2021
|
Chief
Compliance Officer, of the Trust
(since
January 2021);
Vice
President-Senior Compliance Officer, Ultimus Fund Solutions (since 2020);
Vice President, Chief Compliance Officer for Williamsburg Investment Trust
(2020-current);
Senior Vice
President- Chief Compliance Officer, PNC Funds
(2014-2019).
|
N/A |
N/A |
*The
term of office for each Trustee and officer listed above will continue
indefinitely until the individual resigns or is removed.
**As
of September 30, 2023, the Trust was comprised of 66 active portfolios managed
by unaffiliated investment advisers. The term “Fund Complex” applies only to the
Funds in the Trust advis0ed by the Fund’s Adviser. The Funds do not hold
themselves out as related to any other series within the Trust that is not
advised by the Fund’s Adviser.
Board
Committees
Audit
Committee
The Board has an Audit Committee that consists of
all the Trustees who are not “interested persons” of the Trust within the
meaning of the 1940 Act. The Audit Committee’s responsibilities include: (i)
recommending to the Board the selection, retention or termination of the Trust’s
independent auditors; (ii) reviewing with the independent auditors the scope,
performance and anticipated cost of their audit; (iii) discussing with the
independent auditors certain matters relating to the Trust’s financial
statements, including any adjustment to such financial statements recommended by
such independent auditors, or any other results of any audit; (iv) reviewing on
a periodic basis a formal written statement from the independent auditors with
respect to their independence, discussing with the independent auditors any
relationships or services disclosed in the statement that may impact the
objectivity and independence of the Trust’s independent auditors and
recommending that the Board take appropriate action in response thereto to
satisfy itself of the auditor’s independence; and (v) considering the comments
of the independent auditors and management’s responses thereto with respect to
the quality and adequacy of the Trust’s accounting and financial reporting
policies and practices and internal controls. The Audit committee operates
pursuant to an Audit Committee Charter. The Audit Committee is responsible for
seeking and reviewing nominee candidates for consideration as Independent
Trustees as is from time to time considered necessary or appropriate. The Audit
Committee generally will not consider shareholder nominees. The Audit Committee
is also responsible for reviewing and setting Independent Trustee compensation
from time to time when considered necessary or appropriate. During the past
fiscal year, the Audit Committee held eleven meetings.
Compensation
Effective
July 1, 2021, each Trustee who is not affiliated with the Trust or an investment
adviser to any series of the Trust will receive a quarterly fee of $48,750,
allocated among each of the various portfolios comprising the Trust and Northern
Lights Variable Trust (together, the “Trusts”), a separate registrant that
shares a common board with the Trust, for his attendance at the regularly
scheduled meetings of the Board, to be paid in advance of each calendar quarter,
as well as reimbursement for any reasonable expenses incurred. In addition to
which, the Chairman of the Board receives a quarterly fee of $13,750 and the
Audit Committee Chairman receives a quarterly fee of $10,000.
Prior
to July 1, 2021, each Trustee who was not affiliated with the Trusts or an
investment adviser to any series of the Trusts received a quarterly fee of
$46,250, allocated among each of the various portfolios comprising the Trusts.
In addition to the quarterly fees and reimbursements, the
Chairman
of the Board previously received a quarterly fee of $11,250 and the Audit
Committee Chairman receives a quarterly fee of $8,750.
Additionally,
in the event a meeting of the Board of Trustees other than its regularly
scheduled meetings (a “Special Meeting”) is required, each Independent Trustee
will receive a fee of $2,500 per Special Meeting, as well as reimbursement for
any reasonable expenses incurred, to be paid by the relevant series of the
applicable Trust or its investment adviser depending on the circumstances
necessitating the Special Meeting.
None
of the executive officers receive compensation from the Trusts.
Additionally,
in the event a meeting of the Board of Trustees other than its regularly
scheduled meetings (a “Special Meeting”) is required, each Independent Trustee
will receive a fee of $2,500 per Special Meeting, as well as reimbursement for
any reasonable expenses incurred, to be paid by the relevant series of the Trust
or its investment adviser depending on the circumstances necessitating the
Special Meeting.
The table below details the amount of
compensation the Trustees received from the Trust during the fiscal year ended
June 30, 2023. Each Independent Trustee attended all quarterly meetings during
the period. The Trust does not have a bonus, profit sharing, pension or
retirement plan.
Name
and Position |
Donoghue
Forlines Tactical Allocation/
Fund |
Donoghue
Forlines Tactical Income Fund |
Donoghue
Forlines Dividend Fund |
Pension
or Retirement Benefits Accrued as Part of Funds Expenses |
Estimated
Annual Benefits Upon Retirement |
Anthony
J. Hertl |
$2,911 |
$2,911 |
$2,911 |
None |
None |
Gary
Lanzen |
$2,451 |
$2,451 |
$2,451 |
None |
None |
Mark
H. Taylor |
$2,604 |
$2,604 |
$2,604 |
None |
None |
John
V. Palancia |
$2,451 |
$2,451 |
$2,451 |
None |
None |
Mark
D. Gersten |
$2,451 |
$2,451 |
$2,451 |
None |
None |
Mark
Garbin |
$2,451 |
$2,451 |
$2,451 |
None |
None |
Name
and Position |
Donoghue
Forlines Momentum Fund |
Donoghue
Forlines Risk Managed Income Fund |
Pension
or Retirement Benefits Accrued as Part of Funds Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from Fund Complex Paid to Directors |
Anthony
J. Hertl |
$2,911 |
$2,911 |
None |
None |
$14,555 |
Gary
Lanzen |
$2,451 |
$2,451 |
None |
None |
$12,255 |
Mark
H. Taylor |
$2,604 |
$2,604 |
None |
None |
$13,020 |
John
V. Palancia |
$2,451 |
$2,451 |
None |
None |
$12,255 |
Mark
D. Gersten |
$2,451 |
$2,451 |
None |
None |
$12,255 |
Mark
Garbin |
$2,451 |
$2,451 |
None |
None |
$12,255 |
Trustee
Ownership
The
following table indicates the dollar range of equity securities that each
Trustee beneficially owned in the Funds as of December 31, 2023.
Name
of Trustee |
Dollar
Range of Equity Securities in the Fund |
Aggregate
Dollar Range of Equity Securities in All Registered Investment Companies
Overseen by Trustee in Family of Investment Companies |
Anthony
J. Hertl |
None |
$50,000-$100,000 |
Gary
Lanzen |
None |
None |
John V.
Palancia |
None |
None |
Mark
Taylor |
None |
None |
Mark D.
Gersten |
None |
$10,001-$50,000 |
Mark
Garbin |
None |
$50,001-$100,000 |
Management
Ownership
As
of October 2, 2023, the Trustees and officers, as a group, owned less than 1.00%
of the Funds’ outstanding shares and less than 1.00% of the Fund Complex’s
outstanding shares.
CONTROL
PERSONS AND PRINCIPAL HOLDERS
A principal shareholder is any person who owns of
record or beneficially 5% or more of the outstanding shares of the Fund. A
control person is one who owns beneficially or through controlled companies more
than 25% of the voting securities of a company or acknowledged the existence of
control. A shareholder who owns of record or beneficially more than 25% of the
outstanding shares of a Fund or who is otherwise deemed to “control” a Fund may
be able to determine or significantly influence the outcome of matters submitted
to a vote of the Fund’s shareholders.
As
of October 2, 2023, the following shareholders of record owned 5% or more of the
outstanding shares of the Funds.
Donoghue
Forlines Tactical Income Fund
Class
A
Name
& Address |
Shares |
Percentage
of
Share
Class |
Sammons
Financial Network LLC
4546
Corporate Drive
Suite
100
West
Des Moines, IA 50266
|
111,966 |
32.25% |
Pershing
LLC
IRA
FBO Patricia R
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
29,940 |
8.57% |
Class
C
Name
& Address |
Shares |
Percentage
of Share Class |
Griffin,
Cecilia &/James Griffin JT TEN
PO Box
454
Columbia,
CT 06237 |
17,143 |
15.40% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
5,738 |
5.15% |
LPL
Financial
4707
Executive Drive
San
Diego CA 92121-3091 |
6,524 |
5.89% |
IRA
FBO Ellen L Harr
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
8,647 |
7.77% |
Class
I
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab & Co
ATTN
Mutual Funds
101
Montgomery St
San
Francisco, CA
94104-4122 |
1,607,1960 |
22.08 |
MG
Trust Company Cust. FBO
for
Advisor Trust, Inc.
Kades-Margolis
IRA MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
442,713 |
6.08% |
MG
Trust Company Cust. FBO for
Advisor
Trust, Inc.
Kades-Margolis
403b MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
776,875 |
10.67% |
Donoghue
Forlines Dividend Fund
Class
A
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab & Co
ATTN
Mutual Funds
101
Montgomery St
San
Francisco, CA
94104-4122 |
90,734 |
9.84% |
Sammons
Financial Network LLC
4546
Corporate Drive
Suite
100
West
Des Moines, IA 50266 |
314,111 |
34.07% |
LPL
Financial
4707
Executive Drive
San
Diego CA 92121-3091 |
46,193 |
5.01% |
Class
C
Name
& Address |
Shares |
Percentage
of
Share
Class |
LPL
Financial
4707
Executive Drive
San
Diego, CA 92121 |
28,863 |
5.35% |
Class
I
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab & Co
ATTN
Mutual Funds
101
Montgomery St
San
Francisco, CA
94104-4122 |
436,165 |
20.09% |
Matrix
Trust Company Cust. FBO as Agent for Advisor Trust, Inc.
Kades-Margolis
IRA MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
197,432 |
9.09% |
Matrix
Trust Company Cust. FBO as Agent for Advisor Trust, Inc.
Kades-Margolis
403b MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
348,766 |
16.07% |
Donoghue
Forlines Momentum Fund
Class
A
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab
101
Montgomery Street
San
Francisco, CA 94104 |
9,850
|
13.78% |
LPL
Financial
4707
Executive Drive
San
Diego CA 92121-3091 |
18,959 |
26.53% |
IRA
FBO Alan H Honn
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
4,699 |
6.58% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
3,812 |
5.34% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
3,676 |
5.14% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
3,811 |
5.33% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303-9998 |
3,927 |
5.50% |
Class
C
Name
& Address |
Shares |
Percentage
of Share Class |
Cavallaro,
Michael CUST FBO/Michael
Cavallaro
Non DFI Simple IRA
Cleaning
Authority Company
111
Oakwood Cir
Gibsonia,
PA 15044 |
5,675 |
9.89% |
Avery
S Honn Irrevoc
Pershing
LLC
PO Box
2052
Jersey
City, NJ 07303-9998 |
5,670 |
9.88% |
Harlow
Montague
Pershing
LLC
P O Box
2052
Jersey
City, NJ 07303-9998 |
3,466 |
6.04% |
Class
I
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab & Co
ATTN
Mutual Funds
101
Montgomery St
San
Francisco, CA
94104-4122 |
98,409 |
11.81% |
LPL
Financial
4707
Executive Drive
San
Diego, CA 92121 |
46,679 |
5.60% |
Matrix
Trust Company Cust. FBO as Agent for Advisor Trust, Inc.
Kades-Margolis
IRA MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
207,797 |
24.94% |
Matrix
Trust Company Cust. FBO as Agent for Advisor Trust, Inc.
Kades-Margolis
403b MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
372,022 |
44.65% |
Donoghue
Forlines Risk Managed Income Fund
Class
A
Name
& Address |
Shares |
Percentage
of Share Class |
Thompson,
Jeffrey R
5 Little
Hollow Lane
Groton,
MA 01450 |
11 |
100.00% |
Class
C
Name
& Address |
Shares |
Percentage
of Share Class |
Constellation
Trust CO
Cust
Fbo/Hanif Mukhida IRA
7192 W
Trails Dr
Glendale,
AZ 85308-9578 |
4,474.1940 |
6.06% |
Constellation
Trust CO
Cust
FBO/Timothy L Carnes IRA 10642 W Mimosa Dr.
Sun City,
AZ 85373 |
19,984.3380 |
27.05% |
Morgan
Stanley & Co Inc
LLC/For
The Exclusive
Benefit of
Its Customers
1 New York
Plz 12th Flr
New
York, NY 10004 |
19,972.4290 |
27.03% |
Pershing
LLC
P. O. Box
2052
Jersey
City, NJ 07303 |
12,397.9830 |
16.78% |
Pershing
LLC
Lynn C
Dewolfe
P. O. Box
2052
Jersey
City, NJ 07303 |
6,404.6360 |
8.67% |
Class
I
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab & Co
ATTN
Mutual Funds
101
Montgomery St
San
Francisco, CA
94104-4122 |
887,071 |
12.42% |
Donoghue
Forlines Tactical Allocation
Class
A
Name
& Address |
Shares |
Percentage
of Share Class |
Charles
Schwab
Attn
Mutual Funds
101
Montgomery Street
San
Francisco, CA 94104 |
404,305 |
58.13% |
Pershing
LLC
IRA FBO
Rita F Keyes
P. O. Box
2052
Jersey
City, NJ 07303 |
55,027 |
7.91% |
Class
C
Name
& Address |
Shares |
Percentage
of Share Class |
Eyherabide,
Rose-Ann
OD/AZ/Subject
To Sta Tod
Rules
17133 W
Glendale Ave
Waddell,
AZ 85355 |
26,184 |
38.41% |
Pershing
LLC
IRA FBO
DANIEL W F
P. O. Box
2052
Jersey
City, NJ 07303 |
3,477 |
5.10% |
Pershing
LLC
John C.
Dennis
P. O. Box
2052
Jersey
City, NJ 07303 |
4,952 |
7.26% |
Pershing
LLC
Debra
Bird
P. O. Box
2052
Jersey
City, NJ 07303 |
9,186 |
13.48% |
Class
I
Name
& Address |
Shares |
Percentage
of Share Class |
|
|
|
Charles
Schwab
Attn
Mutual Funds
101
Montgomery Street
San
Francisco, CA 94104 |
520,473 |
30.56% |
Matrix
Trust Co as Agent for
Advisor
Trust, Inc.
Kades-Margolis
IRA MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
334,566 |
19.64% |
Matrix
Trust Co as Agent for
Advisor
Trust, Inc.
Kades-Margolis
403b MBD
717 17th
Street, Suite 1300
Denver
CO 80202 |
589,793 |
34.63% |
INVESTMENT
ADVISER
Donoghue
Forlines LLC, One International Place,
Suite 310, Boston, MA 02110 serves as investment adviser to the Funds (the
"Adviser"). The Adviser was established in 1986, and also advises individuals,
financial institutions, pension plans, other pooled investment vehicles and
corporations in addition to the Funds. Minella Capital Management is deemed to
control the Adviser by virtue of its majority ownership of its shares. Subject
to the supervision and direction of the Trustees, the Adviser manages the Funds’
securities and investments in accordance with the Funds’ stated investment
objectives and policies, makes investment decisions and places orders to
purchase and sell securities on behalf of the Funds. The fee paid to the Adviser
is governed by an investment advisory agreement ("Advisory Agreement") between
the Trust, on behalf of the Funds and the Adviser.
Under
the Advisory Agreement, the Adviser, under the supervision of the Board, agrees
to invest the assets of the Funds in accordance with applicable law and the
investment objective, policies and restrictions set forth in the Funds’ current
Prospectus and Statement of Additional Information, and subject to such further
limitations as the Trust may from time to time impose by written notice to the
Adviser. The Adviser shall act as the investment adviser to the Funds and, as
such shall (i) obtain and evaluate such information relating to the economy,
industries, business, securities markets and securities as it may deem necessary
or useful in discharging its responsibilities here under, (ii) formulate a
continuing program for the investment of the assets of the Funds in a manner
consistent with its investment objective, policies and restrictions, and (iii)
determine from time to time securities to be purchased, sold, retained or lent
by the Funds, and implement those decisions, including the selection of entities
with or through which such purchases, sales or loans are to be effected;
provided, that the Adviser will place orders pursuant to its investment
determinations either directly with the issuer or with a broker or dealer, and
if with a broker or dealer, (a) will attempt to obtain the best price and
execution of its orders, and (b) may nevertheless in its discretion purchase and
sell portfolio securities from and to brokers who provide the Adviser with
research, analysis, advice and similar services and pay such brokers in return a
higher commission or spread than may be charged by other brokers. The Adviser
also provides the Funds with all necessary office facilities and personnel for
servicing the Funds’ investments, compensates all officers, Trustees and
employees of the Trust who are officers, directors or employees of the Adviser,
and all personnel of the Funds or the Adviser performing services relating to
research, statistical and investment activities.
A discussion regarding the basis for
the Trust’s Board of Trustees (the “Board”) renewal of the Investment Advisory
Agreement for the Funds is available
in the semi-annual shareholder report dated December 31, 2022.
Pursuant
to the Advisory Agreement, the Adviser receives a fee at the annual rate of
1.00% of the Funds’ average daily net assets, computed daily and payable
monthly, except, Donoghue Forlines Tactical Allocation Fund, the Adviser
receives a fee at the annual rate of 0.75% of the average daily net assets,
computed daily and payable monthly and Donoghue Forlines Risk Managed Income
Fund, the Adviser receives a fee at the annual rate of 0.65% of the average
daily net assets, computed daily. The Fund’s adviser has contractually agreed to
reduce its fees and/or absorb expenses of the Fund, until at least October 31,
2024, to ensure that Total Annual Fund Operating Expenses After Fee Waiver
and/or Reimbursement (exclusive of any front-end or contingent deferred loads,
brokerage fees and commissions, acquired fund fees and expenses, fees and
expenses associated with investments in other collective investment vehicles or
derivative instruments (including for example option and swap fees and
expenses), borrowing costs (such as interest and dividend expense on securities
sold short), taxes and extraordinary expenses, such as litigation expenses
(which may include indemnification of Fund officers and Trustees, contractual
indemnification of Fund service providers (other than the
Adviser)
will not exceed 2.25%, 3.00% and 2.00% of all Funds except, Donoghue Forlines
Tactical Allocation Fund, will not exceed 1.45%, 2.20% and 1.20% of the average
daily net assets for Class A, Class C, and Class I shares, respectively; subject
to possible recoupment from the Fund in future years on a rolling three year
basis (within the three years after the fees have been waived or reimbursed) if
such recoupment can be achieved within the foregoing expense limits. Fee waiver
and reimbursement arrangements can decrease a Fund’s expenses and boost its
performance.
For
the fiscal year ended June 30, 2021, the Adviser received a net advisory fee
from each Fund in an amount below (as a percentage of each Fund’s average daily
net assets):
FUND |
FEE
RECEIVED |
Donoghue
Forlines Tactical Allocation Fund |
0.76% |
Donoghue
Forlines Tactical Income Fund |
1.00% |
Donoghue
Forlines Dividend Fund |
1.00% |
Donoghue
Forlines Momentum Fund |
0.79% |
Donoghue
Forlines Risk Managed Income Fund |
0.65% |
For
the fiscal year ended June 30, 2022, the Adviser received a net advisory fee
from each Fund in an amount below (as a percentage of each Fund’s average daily
net assets):
FUND |
FEE
RECEIVED |
Donoghue
Forlines Tactical Allocation Fund |
0.61% |
Donoghue
Forlines Tactical Income Fund |
0.98% |
Donoghue
Forlines Dividend Fund |
1.00% |
Donoghue
Forlines Momentum Fund |
0.61% |
Donoghue
Forlines Risk Managed Income Fund |
0.65% |
For
the fiscal year ended June 30, 2023, the Adviser received a net advisory fee
from each Fund in an amount below (as a percentage of each Fund’s average daily
net assets):
FUND |
FEE
RECEIVED |
Donoghue
Forlines Tactical Allocation Fund |
0.44% |
Donoghue
Forlines Tactical Income Fund |
0.97% |
Donoghue
Forlines Dividend Fund |
1.00% |
Donoghue
Forlines Momentum Fund |
0.20% |
Donoghue
Forlines Risk Managed Income Fund |
0.65% |
Expenses
not expressly assumed by the Adviser under the Advisory Agreement are paid by
the Funds. Under the terms of the Advisory Agreement, the Funds are responsible
for the payment of the following expenses among others: (a) the fees payable to
the Adviser, (b) the fees and expenses of Trustees who are not affiliated
persons of the Adviser (c) the fees and certain expenses of the Custodian and
Transfer and Dividend Disbursing Agent (as defined under the section entitled
“Transfer Agent”), including the cost of maintaining certain required records of
the Funds and of pricing the Funds’ shares, (d) the charges and expenses of
legal counsel and independent accountants for the Funds, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Funds in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Funds to governmental agencies, (g) the fees of any trade
association of which the Funds may be a member, (h) the cost of share
certificates representing shares of the Funds, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Funds and of its shares with the SEC, qualifying
its shares under state securities laws, including the preparation and printing
of the Funds’ registration statements and prospectuses for such purposes, (k)
all expenses of shareholders and Trustees’ meetings (including travel expenses
of Trustees and officers of the Funds who are directors, officers or employees
of the Adviser) and of preparing, printing and mailing reports, proxy
statements
and prospectuses to shareholders in the amount necessary for distribution to the
shareholders and (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Funds’
business.
The
Advisory Agreement continued in effect for two (2) years initially and
thereafter continues from year to year provided such continuance is approved at
least annually by (a) a vote of the majority of the Independent Trustees, cast
in person at a meeting specifically called for the purpose of voting on such
approval and by (b) the majority vote of either all of the Trustees or the vote
of a majority of the outstanding shares of each Funds. The Advisory Agreement
may be terminated without penalty on 60 days’ written notice by a vote of a
majority of the Trustees or by the Adviser, or by holders of a majority of that
Trust’s outstanding shares. The Advisory Agreement shall terminate automatically
in the event of its assignment.
The
Adviser may invest a Fund’s assets in other funds that are subadvised or advised
by the Adviser. In such cases, the Adviser has voluntarily agreed to waive its
advisory fee for the applicable Fund in an amount equal to the fee it receives
from the other fund based on the Fund assets invested in the other fund.
Additionally, the Adviser has entered into an arrangement with FCF Advisors LLC,
a registered investment adviser, whereby the Adviser will receive a fee for
marketing and support of certain other ETFs advised by FCF Advisors LLC.
Codes
of Ethics
The
Trust, the Adviser and the Distributor (as defined under the section entitled
(“The Distributor”)) have each adopted respective codes of ethics under Rule
17j-1 under the 1940 Act (each a “Code”) that govern the personal securities
transactions of their board members, officers and employees who may have access
to current trading information of the Trust. Under the Trust’s Code, the
Trustees are permitted to invest in securities that may also be purchased by the
Funds.
In
addition, the Trust has adopted a separate code of ethics that applies only to
the Trust’s executive officers to ensure that these officers promote
professional conduct in the practice of corporate governance and management. The
purpose behind these guidelines is to promote i) honest and ethical conduct,
including the ethical handling of actual or apparent conflicts of interest
between personal and professional relationships; ii) full, fair, accurate,
timely, and understandable disclosure in reports and documents that a registrant
files with, or submits to, the SEC and in other public communications made by
the Funds; iii) compliance with applicable governmental laws, rule and
regulations; iv) the prompt internal reporting of violations of this Code to an
appropriate person or persons identified in the Code; and v) accountability for
adherence to the Code.
Proxy
Voting Policies
The
Board has adopted Proxy Voting Policies and Procedures (“Policies”) on behalf of
the Trust, which delegate the responsibility for voting proxies of securities
held by the Funds to the Adviser and responsibility for voting proxies of
securities held by the Funds to the Adviser, subject to the Board’s continuing
oversight. The Policies require that the Adviser vote proxies received in a
manner consistent with the best interests of the Funds and its shareholders. The
Policies also require the Adviser to present to the Board, at least annually,
the Adviser’s Proxy Policies and a record of each proxy voted by the Adviser on
behalf of the Funds, including a report on the resolution of all proxies
identified by the Adviser as involving a conflict of interest. A copy of the
Adviser's Proxy Voting Policies is attached hereto as Appendix B.
More
information. Information regarding how the Funds voted proxies relating to
portfolio securities held by the Funds during the most recent 12-month period
ending June 30 will be available (1) without charge, upon request, by calling
the Funds at 1-877-779-7462; and (2) on the U.S. SEC’s website at
http://www.sec.gov. In addition, a copy of the Funds’ proxy voting policies and
procedures are also available by calling 1-877-779-7462 and will be sent within
three business days of receipt of a request.
DISTRIBUTION
OF SHARES
Northern
Lights Distributors, LLC, located at 4221 North 203rd Street, Suite 100 Elkhorn,
Nebraska 68022-3474 (the “Distributor”) serves as the principal underwriter
and national distributor for the shares of the Funds pursuant to an Underwriting
Agreement with the Trust (the “Underwriting Agreement”). The Distributor is
registered as a broker-dealer under the Securities Exchange Act of 1934 and each
state’s securities laws and is a member of FINRA. The offering of the Funds’
shares is continuous. The Underwriting Agreement provides that the Distributor,
as agent in connection with the distribution of Funds shares, will use
reasonable efforts to facilitate the sale of the Funds’ shares.
The
Underwriting Agreement provides that, unless sooner terminated, it will continue
in effect for two years initially and thereafter shall continue from year to
year, subject to annual approval by (a) the Board or a vote of a majority of the
outstanding shares, and (b) by a majority of the Trustees who are not interested
persons of the Trust or of the Distributor by vote cast in person at a meeting
called for the purpose of voting on such approval.
The
Underwriting Agreement may be terminated by the Funds at any time, without the
payment of any penalty, by vote of a majority of the entire Board of the Trust
or by vote of a majority of the outstanding shares of the Funds on 60 days'
written notice to the Distributor, or by the Distributor at any time, without
the payment of any penalty, on 60 days' written notice to the Funds. The
Underwriting Agreement will automatically terminate in the event of its
assignment.
The
Distributor may enter into selling agreements with broker-dealers that solicit
orders for the sale of shares of the Funds and may allow concessions to dealers
that sell shares of the Funds. The Distributor receives the portion of the sales
charge on all direct initial investments in the Funds and on all investments in
accounts with no designated dealer of record. The Funds may make other payments,
such as contingent deferred sales charges imposed on certain redemption of
shares, which are separate and apart from payments made pursuant to the
Plan.
The following
table sets forth the total compensation received by the Distributor from each
Fund during the fiscal period ended June 30, 2021:
Fund |
Net
Underwriting Discounts and Commissions |
Compensation
on Redemptions and Repurchases |
Brokerage
Commissions |
Other
Compensation |
Donoghue
Forlines Tactical Allocation Fund – Class A |
$170 |
$0 |
$0 |
* |
Donoghue
Forlines Tactical Allocation Fund – Class C |
$0 |
$0 |
$0 |
* |
Donoghue
Forlines Tactical Income Fund - Class A |
$ 112 |
$0 |
$0 |
* |
Donoghue
Forlines Tactical
Income
Fund - Class C |
$0 |
$0 |
$0 |
* |
Donoghue
Forlines Dividend Fund - Class A |
$ 1,528 |
$0 |
$0 |
* |
Donoghue
Forlines Dividend Fund - Class C |
$0 |
$0 |
$0 |
* |
Donoghue
Forlines Momentum Fund - Class A |
$ 52 |
$0 |
$0 |
* |
Donoghue
Forlines Momentum Fund - Class C |
$0 |
$0 |
$0 |
* |
Donoghue
Forlines Risk Managed Income Fund – Class A |
$170 |
$0 |
$0 |
* |
Donoghue
Forlines Risk Managed Income Fund – Class C |
$0 |
$0 |
$0 |
* |
*
The Distributor received $57,255 from the Adviser as compensation for its
distribution services to the Funds.
The
Distributor also receives 12b-1 fees from the Funds as described under the
following section entitled “Rule 12b-1 Plan”.
The
following table sets forth the total compensation received by the Distributor
from each Fund during the fiscal period ended June 30, 2022:
Fund |
Net
Underwriting Discounts and Commissions |
Compensation
on Redemptions and Repurchases |
Brokerage
Commissions |
Other
Compensation |
Donoghue
Forlines Tactical Allocation Fund – Class A |
$13 |
$0
|
$0
|
* |
Donoghue
Forlines Tactical Allocation Fund – Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Tactical Income Fund - Class A |
$80
|
$0
|
$0
|
* |
Donoghue
Forlines Tactical
Income
Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Dividend Fund - Class A |
$3,878
|
$0
|
$0
|
* |
Donoghue
Forlines Dividend Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Momentum Fund - Class A |
$97
|
$0
|
$0
|
* |
Donoghue
Forlines Momentum Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Risk Managed Income Fund – Class A |
$0 |
$0
|
$0
|
* |
Donoghue
Forlines Risk Managed Income Fund – Class C |
$0
|
$0
|
$0
|
* |
* The
Distributor received $40,092 from the Adviser as compensation for its
distribution services to the Funds. |
The
Distributor also receives 12b-1 fees from the Funds as described under the
following section entitled “Rule 12b-1 Plan”. |
The
following table sets forth the total compensation received by the Distributor
from each Fund during the fiscal period ended June 30, 2023:
Fund |
Net
Underwriting Discounts and Commissions |
Compensation
on Redemptions and Repurchases |
Brokerage
Commissions |
Other
Compensation |
Donoghue
Forlines Tactical Allocation Fund – Class A |
$39 |
$0
|
$0
|
* |
Donoghue
Forlines Tactical Allocation Fund – Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Tactical Income Fund - Class A |
$155
|
$0
|
$0
|
* |
Donoghue
Forlines Tactical
Income
Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Dividend Fund - Class A |
$758
|
$0
|
$0
|
* |
Donoghue
Forlines Dividend Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Momentum Fund - Class A |
$0 |
$0
|
$0
|
* |
Donoghue
Forlines Momentum Fund - Class C |
$0
|
$0
|
$0
|
* |
Donoghue
Forlines Risk Managed Income Fund – Class A |
$0 |
$0
|
$0
|
* |
Donoghue
Forlines Risk Managed Income Fund – Class C |
$0
|
$0
|
$0
|
* |
* The
Distributor received $41,094 from the Adviser as compensation for its
distribution services to the Funds. |
The
Distributor also receives 12b-1 fees from the Funds as described under the
following section entitled “Rule 12b-1 Plan”. |
Rule
12b-1 Plans
The
Trust with respect to the Funds, has adopted the Trust’s Master Distribution and
Shareholder Servicing Plans pursuant to Rule 12b-1 under the 1940 Act for each
of the Funds’ Class A and Class C shares (the "Plans") pursuant to which the
Funds is authorized to pay the Distributor, as compensation for Distributor’s
account maintenance services under the respective Plans, a distribution and
shareholder servicing fee at the rate of up to 0.25% for Class A share and up to
1.00% for Class C shares of each Funds’ average daily net assets attributable to
the relevant class. Such fees are to be paid by the Funds monthly, or at such
other intervals as the Board shall determine. There is no Plan for Class I
shares. Such fees shall be based upon the Funds’ average daily net assets during
the preceding month, and shall be calculated and accrued daily. The Funds may
pay fees to the Distributor at a lesser rate, as agreed upon by the Board of
Trustees of the Trust and the Distributor. The Plans authorize payments to the
Distributor as compensation for providing account maintenance services to Class
A and Class C Funds shareholders, respectively, including arranging for certain
securities dealers or brokers, administrators and others (“Recipients”) to
provide these services and paying compensation for these services.
The
services to be provided under the Plans by Recipients may include, but are not
limited to, the following: assistance in the offering and sale of Class A and
Class C shares and in other aspects of the marketing of the shares to clients or
prospective clients of the respective recipients; answering routine inquiries
concerning the Funds; assisting in the establishment and maintenance of accounts
or sub-accounts in the Funds and in processing purchase and redemption
transactions; making the Funds’ investment plan and shareholder services
available; and providing such other information and services to investors in
shares of the Funds as the Distributor or the Trust, on behalf of the Funds,
may
reasonably
request. The distribution services shall also include any advertising and
marketing services provided by or arranged by the Distributor with respect to
the Funds.
The
Distributor is required to provide a written report, at least quarterly to the
Board of Trustees of the Trust, specifying in reasonable detail the amounts
expended pursuant to each of the Plans 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.
During
the fiscal year ended June 30, 2021, Donoghue Forlines Tactical Allocation
$36,475 and $8,296 for Class A and Class C shares in distribution related fees
pursuant to the Plans, respectively. During the fiscal year ended June 30, 2022,
Donoghue Forlines Tactical Allocation $32,976 and $8,476 for Class A and Class C
shares in distribution related fees pursuant to the Plans, respectively. During
the fiscal year ended June 30, 2023, Donoghue Forlines Tactical Allocation
$23,382 and $6,803 for Class A and Class C shares in distribution related fees
pursuant to the Plans, respectively.
For the fiscal
period indicated below, the Donoghue Forlines Tactical Allocation paid the
following allocated distribution fees:
Actual
12b-1 Expenditures Paid by
Donoghue
Forlines Tactical Allocation Fund
During
the Fiscal Period Ended June 30, 2023 |
|
Donoghue Forlines Tactical Allocation Fund
Class A |
Donoghue Forlines Tactical Allocation Fund
Class C |
Advertising/Marketing |
None |
None |
Printing/Postage |
None |
None |
Payment to distributor |
$9,679 |
$3 |
Payment to dealers |
$8,456 |
$6,798 |
Compensation to sales personnel |
None |
None |
Other |
$5,247 |
$2 |
Total |
$23,382 |
$6,803 |
During
the fiscal year ended June 30, 2021, the Donoghue Forlines Tactical Income Fund
paid $15,526 and $28,789 for Class A and Class C Shares in distribution related
fees pursuant to the Plans, respectively. During the fiscal year ended June 30,
2022, Donoghue Forlines Tactical Income Fund paid $11,541 and $12,699 for Class
A and Class C shares in distribution related fees pursuant to the Plans,
respectively. During the fiscal year ended June 30, 2023, Donoghue Forlines
Tactical Income Fund paid $8,208 and $10,068 for Class A and Class C shares in
distribution related fees pursuant to the Plans, respectively.
For
the fiscal period indicated below, the Donoghue Forlines Tactical Income paid
the following allocated distribution fees:
Actual
12b-1 Expenditures Paid by
Donoghue
Forlines Tactical Income Shares
During
the Fiscal Period Ended June 30, 2023 |
|
Donoghue Forlines Tactical Income Fund Class
A |
Donoghue Forlines Tactical Income Fund Class
C |
Advertising/Marketing |
None |
None |
Printing/Postage |
None |
None |
Payment to distributor |
$336 |
$359 |
Payment to dealers |
$7,688 |
$9,517 |
Compensation to sales personnel |
None |
None |
Other |
$184 |
$192 |
Total |
$8,208 |
$10,068 |
During the
fiscal year ended June 30, 2021, Donoghue Forlines Dividend paid $37,298 and
$109,170 for Class A and Class C shares in distribution related fees pursuant to
the Plans, respectively. During the fiscal year ended June 30, 2022, Donoghue
Forlines Dividend paid $33,301 and $81,660 for Class A and Class C shares in
distribution related fees pursuant to the Plans, respectively. During the fiscal
year ended June 30, 2023, Donoghue Forlines Dividend paid $25,277 and $58,385
for Class A and Class C shares in distribution related fees pursuant to the
Plans, respectively.
For
the fiscal period indicated below, the Donoghue Forlines Dividend paid the
following allocated distribution fees:
Actual
12b-1 Expenditures Paid by
Donoghue
Forlines Dividend Fund
During
the Fiscal Period Ended June 30, 2023 |
|
Donoghue
Forlines Dividend Fund
Class
A |
Donoghue
Forlines Dividend Fund
Class
C |
Advertising/Marketing |
None |
None |
Printing/Postage |
None |
None |
Payment to distributor |
$1,773 |
$2,833 |
Payment to dealers |
$22,552 |
$54,010 |
Compensation to sales personnel |
None |
None |
Other |
$952 |
$1,542 |
Total |
$25,277 |
$58,385 |
During
the fiscal year ended June 30, 2021, Donoghue Forlines Momentum paid $3,595 and
$20,646 for Class A and Class C shares in distribution related fees pursuant to
the Plans, respectively. During the fiscal year ended June 30, 2022, Donoghue
Forlines Momentum paid $4,235 and $10,494 for Class A and Class C shares in
distribution related fees pursuant to the Plans, respectively. During the fiscal
year ended June 30, 2023, Donoghue Forlines Momentum paid $2,420 and $6,240 for
Class A and Class C shares in distribution related fees pursuant to the Plans,
respectively.
For
the fiscal period indicated below, the Donoghue Forlines Momentum paid the
following allocated distribution fees:
Actual
12b-1 Expenditures Paid by
Donoghue
Forlines Momentum Fund
During
the Fiscal Period Ended June 30, 2023 |
|
Donoghue Forlines Momentum Fund Class
A |
Donoghue Forlines Momentum Fund Class C
|
Advertising/Marketing |
None |
None |
Printing/Postage |
None |
None |
Payment to distributor |
$533 |
$162 |
Payment to dealers |
$1,600 |
$5,976 |
Compensation to sales personnel |
None |
None |
Other |
$287 |
$102 |
Total |
$2,420 |
$6,240 |
During the
fiscal year ended June 30, 2021, Donoghue Forlines Risk Managed Income Fund paid
$257 and $7,593 for Class A and Class C shares in distribution related fees
pursuant to the Plans, respectively. During the fiscal year ended June 30, 2022,
Donoghue Forlines Risk Managed Income Fund paid $80 and $6,986 for Class A and
Class C shares in distribution related fees pursuant to the Plans, respectively.
During the fiscal year ended June 30, 2023, Donoghue Forlines Risk Managed
Income Fund paid $17 and $6,575 for Class A and Class C shares in distribution
related fees pursuant to the Plans, respectively.
For
the fiscal period indicated below, the Donoghue Forlines Risk Managed Income
Fund paid the following allocated distribution fees:
Actual
12b-1 Expenditures Paid by
Donoghue
Forlines Risk Managed Income Fund
During
the Fiscal Period Ended June 30, 2023 |
|
Donoghue
Forlines Risk Managed Income Fund
Class
A |
Donoghue
Forlines Risk Managed Income Fund
Class
C |
Advertising/Marketing |
None |
None |
Printing/Postage |
None |
None |
Payment to distributor |
None |
$1,190 |
Payment to dealers |
$17 |
$4,746 |
Compensation to sales personnel |
None |
None |
Other |
None |
$639 |
Total |
$17 |
$6,575 |
The
initial term of each Plan is one year and will continue in effect from year to
year thereafter, provided such continuance is specifically approved at least
annually by a majority of the Board of Trustees of the Trust and a majority of
the Trustees who are not “interested persons” of the Trust and do not have a
direct or indirect financial interest in the Plan (“Rule 12b-1 Trustees”) by
votes cast in person at a meeting called for the purpose of voting on the Plan.
A Plan may be terminated at any time by the Trust or the Funds by vote of a
majority of the Rule 12b-1 Trustees or by vote of a majority of the outstanding
voting shares of the Funds.
Each
of the Plans may not be amended to increase materially the amount of the
Distributor’s compensation to be paid by the Funds, unless such amendment is
approved by the vote of a majority of the outstanding voting securities of the
affected class of a Funds (as defined in the 1940 Act). All material amendments
must be approved by a majority of the Board of Trustees of the Trust and a
majority of the Rule 12b- 1 Trustees by votes cast in person at a meeting called
for the purpose of voting on a Rule 12b-1 Plan. During the term of the Rule
12b-1 Plans, 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 Plans, 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 Plans will be in writing and provide that: (a) it may
be terminated by the Trust or the applicable Funds 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 Funds; (b) it will automatically terminate
in the event of its assignment (as defined in the 1940 Act); and (c) it will
continue in effect for a period of more than one year from the date of its
execution or adoption only so long as such continuance is specifically approved
at least annually by a majority of the Board and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on such agreement.
Securities
Lending
During
the fiscal year, the securities lending agent, or the investment adviser (where
the fund does not use a securities lending agent) monitored loan opportunities
for each fund, negotiated the terms of the loans with borrowers, monitored the
value of securities on loan and the value of the corresponding collateral,
communicated with borrowers and the fund's custodian regarding marking to market
the collateral, selected securities to be loaned and allocated those loan
opportunities among lenders, and arranged for the return of the loaned
securities upon the termination of the loan.
Income
and fees from securities lending activities for the fiscal year ended June 30,
2023, are shown in the following table:
Funds |
Donoghue
Forlines Tactical Allocation Fund |
Donoghue
Forlines Risk Managed Income Fund |
Donoghue
Forlines Tactical Income Fund |
Donoghue
Forlines Dividend Fund |
Donoghue
Forlines Momentum Fund |
Gross
income from securities lending activities (including income from cash
collateral reinvestment) |
$151,474
|
$197,871 |
$246,409 |
$234,568 |
$85,093 |
Fees
paid to securities lending agent from a revenue split |
$(7,825) |
$(13,400) |
$(17,468) |
$(2,736) |
$(1,293) |
Administrative
fees not included in revenue split |
$(1,065) |
$(1,333) |
$(1,890) |
$(1,657) |
$(809) |
(Rebate)
(paid to borrower)/Premium (paid to lender) |
$(111,281) |
$(129,538) |
$(157,176) |
$(219,232) |
$(77,818) |
Aggregate
fees/compensation for securities lending activities |
$(120,171) |
$(144,271) |
$(176,534) |
$(223,625) |
$(79,920) |
Net
income from securities lending activities |
$31,303 |
$53,600 |
$69,875 |
$10,943 |
$5,173 |
PORTFOLIO
MANAGERS
The
following table lists the number and types of accounts managed by each Portfolio
Manager in addition to those of the Funds and assets under management in those
accounts as of
June 30, 2023:
Total
Other Accounts Managed
Portfolio
Manager |
Registered
Investment Company Accounts |
Assets Managed
|
Pooled Investment Vehicle Accounts |
Assets Managed
|
Other Accounts |
Assets
Managed
|
Jeffrey
R. Thompson |
5 |
$176.8
Million |
0 |
0 |
19 |
$2.4
Million |
Richard
E. Molari |
5 |
$176.8
Million |
0 |
0 |
19 |
$2.4
Million |
John A.
Forlines III |
5 |
$176.8
Million |
0 |
0 |
19 |
$2.4
Million |
Nicholas
A. Lobley |
5 |
$176.8
Million |
0 |
0 |
19 |
$2.4
Million |
Other
Accounts Managed Subject to Performance-Based Fees
Portfolio
Manager |
Registered
Investment Company Accounts |
Assets Managed
|
Pooled Investment Vehicle Accounts |
Assets Managed
|
Other Accounts |
Assets
Managed
|
Jeffrey
R. Thompson |
None |
None |
None |
None |
None |
None |
Richard
E. Molari |
None |
None |
None |
None |
None |
None |
John A.
Forlines III |
None |
None |
None |
None |
None |
None |
Nicholas
A. Lobley |
None |
None |
None |
None |
None |
None |
Conflicts
of Interest.
As
indicated in the table above, portfolio managers at the Adviser may manage
numerous accounts for multiple clients. These accounts may include
registered investment companies, other types of pooled accounts (e.g.,
collective investment funds), and separate accounts (i.e., accounts managed on
behalf of individuals or public or private institutions). Portfolio
managers make investment decisions for each account based on the investment
objectives and policies and other relevant investment considerations applicable
to that portfolio.
When
a portfolio manager has responsibility for managing more than one account,
potential conflicts of interest may arise. Those conflicts could include
preferential treatment of one account over others in terms of allocation of
resources or of investment opportunities. For instance, the Adviser may receive
fees from certain accounts that are higher than the fee it receives from the
funds, or it may receive a performance-based fee on certain accounts. In those
instances, the portfolio manager may have an incentive to favor the higher
and/or performance-based fee accounts over the funds. The Adviser has adopted
policies and procedures designed to address these potential material conflicts.
For instance, portfolio managers within the Adviser are normally
responsible for all accounts within a certain investment discipline, and do not,
absent special circumstances, differentiate among the various accounts when
allocating resources. Additionally, the Adviser utilizes a system for
allocating investment opportunities among portfolios that is designed to provide
a fair and equitable allocation. The Adviser may invest a Fund’s assets in other
funds that are subadvised or advised by the Adviser. In such instances, the
Adviser will make such investments when it believes that doing so is in the best
interests of the Fund and its shareholders.
Each
portfolio manager receives a fixed salary and a share of the profits, if any,
related to his ownership interest in the Adviser.
Ownership.
The
following table shows the dollar range of equity securities beneficially owned
by the Portfolio Managers in the Funds as of June 30, 2023:
Name
of Portfolio Manger |
Dollar
Range of Equity Securities in the Donoghue Forlines Tactical Allocation
Fund |
Dollar
Range of Equity Securities in the Donoghue Forlines Tactical Income
Fund |
Dollar
Range of Equity Securities in the Donoghue Forlines Dividend
Fund |
Dollar
Range of Equity Securities in the Donoghue Forlines Momentum
Fund |
Jeffrey
R. Thompson |
$1-$1,000 |
Over
$100,000 |
$1-$1,000 |
$1-$1,000 |
Richard
E. Molari |
None |
None |
None |
None |
John
A. Forlines III |
None |
None |
None |
None |
Nicholas
A. Lobley |
None |
None |
None |
None |
Name
of Portfolio Manger |
Dollar
Range of Equity Securities in the Donoghue Forlines Risk Managed Income
Fund |
Jeffrey
R. Thompson |
$1-$1,000 |
Richard
E. Molari |
None |
John
A. Forlines III |
None |
Nicholas
A. Lobley |
None |
ALLOCATION
OF PORTFOLIO BROKERAGE
Specific
decisions to purchase or sell securities for the Funds are made by the portfolio
managers, who are employees of the Adviser. The Adviser is authorized by the
Trustees to allocate the orders placed on behalf of the Funds to brokers or
dealers who may, but need not, provide research or statistical material or other
services to the Funds or the Adviser for the Funds’ use. Such allocation is to
be in such amounts and proportions as the Adviser may determine.
In
selecting a broker or dealer to execute each particular transaction, the Adviser
will take the following into consideration:
·
the best net
price available;
·
the reliability,
integrity and financial condition of the broker or dealer;
·
the size of and
difficulty in executing the order; and
·
the value of the
expected contribution of the broker or dealer to the investment performance of
the Funds on a continuing basis.
Brokers
or dealers executing a portfolio transaction on behalf of the Funds may receive
a commission in excess of the amount of commission another broker or dealer
would have charged for executing the transaction if the Adviser determines in
good faith that such commission is reasonable in relation to the value of
brokerage, research and other services provided to the Funds. In allocating
portfolio brokerage, the Adviser may select brokers or dealers who also provide
brokerage, research and other services to other accounts over which the Adviser
exercises investment discretion. Some of the services received as the result of
Funds transactions may primarily benefit accounts other than the Funds, while
services received as the result of portfolio transactions effected on behalf of
those other accounts may primarily benefit the Funds.
For the fiscal
period ended June 30, 2021, the Funds incurred the following brokerage
commissions:
Fund |
Brokerage
Commissions |
Donoghue
Forlines Tactical Allocation Fund |
$35,693 |
Donoghue
Forlines Tactical Income Fund |
$50,361 |
Donoghue
Forlines Dividend Fund |
$70,816 |
Donoghue
Forlines Momentum Fund |
$21,443 |
Donoghue
Forlines Risk Managed Income Fund |
$26,952 |
For
the fiscal period ended June 30, 2022, the Funds incurred the following
brokerage commissions:
Fund |
Brokerage
Commissions |
Donoghue
Forlines Tactical Allocation Fund |
$42,953 |
Donoghue
Forlines Tactical Income Fund |
$90,640 |
Donoghue
Forlines Dividend Fund |
$27,225 |
Donoghue
Forlines Momentum Fund |
$7,380 |
Donoghue
Forlines Risk Managed Income Fund |
$92,735 |
For
the fiscal period ended June 30, 2023, the Funds incurred the following
brokerage commissions:
Fund |
Brokerage
Commissions |
Donoghue
Forlines Tactical Allocation Fund |
$25,303
|
Donoghue
Forlines Tactical Income Fund |
$51,587 |
Donoghue
Forlines Dividend Fund |
$23,458 |
Donoghue
Forlines Momentum Fund |
$7,866 |
Donoghue
Forlines Risk Managed Income Fund |
$46,388 |
PORTFOLIO
TURNOVER
The
Funds’ rate is calculated by dividing the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value of
the portfolio securities owned by the Funds during the fiscal year. The
calculation excludes from both the numerator and the denominator securities with
maturities at the time of acquisition of one year or less. High portfolio
turnover involves correspondingly greater brokerage commissions and other
transaction costs, which will be borne directly by the Funds. A 100% turnover
rate would occur if all of the Funds’ portfolio securities were replaced once
within a one-year period.
For the fiscal
period ended June 30, 2022, the Funds incurred the following portfolio
turnover:
Fund |
Portfolio
Turnover Rates |
Donoghue
Forlines Tactical Allocation Fund |
290% |
Donoghue
Forlines Tactical Income Fund |
545% |
Donoghue
Forlines Dividend Fund |
156% |
Donoghue
Forlines Momentum Fund |
222% |
Donoghue
Forlines Risk Managed Income Fund |
358% |
As
the result of changing market conditions, we implemented multiple tactical
shifts in the Donoghue Forlines Tactical Allocation Fund and the Donoghue
Forlines Tactical Income Fund during the year resulting in higher turnover than
the previous year. The turnover of the Donoghue Forlines Dividend Fund,
Donoghue Forlines Momentum Fund and the Donoghue Forlines Risk Managed Income
Fund are primarily the result of technical signals triggering buys and
sells. The number of technical signals from one year to another can have a
significant impact on the turnover for these funds.
For the fiscal
period ended June 30, 2023, the Funds incurred the following portfolio
turnover:
Fund |
Portfolio
Turnover Rates |
Donoghue
Forlines Tactical Allocation Fund |
251% |
Donoghue
Forlines Tactical Income Fund |
430% |
Donoghue
Forlines Dividend Fund |
193% |
Donoghue
Forlines Momentum Fund |
296% |
Donoghue
Forlines Risk Managed Income Fund |
404% |
The
increase in turnover for the Donoghue Forlines Tactical Income Fund can largely
be attributed to the elevated volatility seen in the fixed income asset class.
Specifically, related to our significant exposures to floating rate and high
yield. The Fund had multiple defensive tactical moves to treasuries and/or cash
equivalents due to underlying market conditions seen during the 12-month
period.
OTHER
SERVICE PROVIDERS
Funds
Administration, Funds Accounting and Transfer Agent Services
Ultimus
Fund Solutions, LLC, (“UFS”), which has its principal office at 4221 North
203rd Street, Suite 110 Elkhorn, Nebraska 68022, serves as
administrator, Funds’ accountant and transfer agent for the Funds pursuant to a
Funds Services Agreement (the “Agreement”) with the Funds and subject to the
supervision of the Board. UFS is primarily in the business of providing
administrative, Funds’ accounting and transfer agent services to retail and
institutional mutual Funds. UFS is an affiliate of the Distributor. UFS may also
provide persons to serve as officers of the Funds. Such officers may be
directors, officers or employees of UFS or its affiliates.
Effective
February 1, 2019, NorthStar Financial Services Group, LLC, the parent company of
Gemini Fund Services, LLC and its affiliated companies including Northern Lights
Distributors, LLC and Northern Lights Compliance Services, LLC and Blu Giant,
LLC (collectively, the “Gemini Companies”), sold its interest in the Gemini
Companies to a third party private equity firm that contemporaneously acquired
Ultimus Fund Solutions, LLC (an independent mutual fund administration firm) and
its affiliates (collectively, the “Ultimus Companies”). As a result of
these separate transactions, the Gemini Companies and the Ultimus Companies are
now indirectly owned through a common parent entity, The Ultimus Group, LLC.
The
Agreement became effective on June 22, 2011 and will remain in effect for two
years from the applicable effective date for the Funds, and will continue in
effect for successive twelve-month periods provided that such continuance is
specifically approved at least annually by a majority of the Board. The
Agreement is terminable by the Board or UFS on 90 days’ written notice and may
be assigned by either party, provided that the Trust may not assign this
agreement without the prior written consent of UFS. The Agreement provides that
UFS shall be without liability for any action reasonably taken or omitted
pursuant to the Agreement.
Under
the Agreement, UFS performs administrative services, including: (1) monitoring
the performance of administrative and professional services rendered to the
Trust by others service providers; (2) monitoring Fund holdings and operations
for post-trade compliance with the Funds’ registration statement and applicable
laws and rules; (3) preparing and coordinating the printing of semi-annual and
annual financial statements; (4) preparing selected management reports for
performance
and compliance analyses; (5) preparing and disseminating materials for and
attending and participating in meetings of the Board; (6) determining income and
capital gains available for distribution and calculating distributions required
to meet regulatory, income, and excise tax requirements; (7) reviewing the
Trust's federal, state, and local tax returns as prepared and signed by the
Trust's independent public accountants; (8) preparing and maintaining the
Trust's operating expense budget to determine proper expense accruals to be
charged to each Funds to calculate its daily net asset value; (9) assisting in
and monitoring the preparation, filing, printing and where applicable,
dissemination to shareholders of amendments to the Trust’s Registration
Statement on Form N-1A, periodic reports to the Trustees, shareholders and the
SEC, notices pursuant to Rule 24f-2, proxy materials and reports to the SEC on
Forms N-CEN, N-CSR, N-Q and N-PORT; (10) coordinating the Trust's audits and
examinations by assisting each Funds’ independent public accountants; (11)
determining, in consultation with others, the jurisdictions in which shares of
the Trust shall be registered or qualified for sale and facilitating such
registration or qualification; (12) monitoring sales of shares and ensure that
the shares are properly and duly registered with the SEC; (13) monitoring the
calculation of performance data for the Funds; (14) preparing, or cause to be
prepared, expense and financial reports; (15) preparing authorizations for the
payment of Trust expenses and pay, from Trust assets, all bills of the Trust;
(16) providing information typically supplied in the investment company industry
to companies that track or report price, performance or other information with
respect to investment companies; (17) upon request, assisting each Fund in the
evaluation and selection of other service providers, such as independent public
accountants, printers, EDGAR providers and proxy solicitors (such parties may be
affiliates of UFS) and (18) performing other services, recordkeeping and
assistance relating to the affairs of the Trust as the Trust may, from time to
time, reasonably request.
For
the administrative services rendered to the Funds by the Administrator, the
Funds pay UFS the greater of an annual minimum fee or an asset based fee, which
scales downward based upon net assets. The Funds also pay the Administrator for
any out-of-pocket expenses.
For
the fiscal period ended June 30, 2021, the Funds incurred in administrative
fees:
Funds |
Administration
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$71,008 |
Donoghue
Forlines Tactical Income Fund |
$76,350 |
Donoghue
Forlines Dividend Fund |
$51,515 |
Donoghue
Forlines Momentum Fund |
$27,602 |
Donoghue
Forlines Risk Managed Income Fund |
$67,032 |
For
the fiscal period ended June 30, 2022, the Funds incurred in administrative
fees:
Funds |
Administration
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$52,931 |
Donoghue
Forlines Tactical Income Fund |
$67,068 |
Donoghue
Forlines Dividend Fund |
$48,898 |
Donoghue
Forlines Momentum Fund |
$26,618 |
Donoghue
Forlines Risk Managed Income Fund |
$94,278 |
For
the fiscal period ended June 30, 2023, the Funds incurred in administrative
fees:
Funds |
Administration
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$41,659 |
Donoghue
Forlines Tactical Income Fund |
$52,571 |
Donoghue
Forlines Dividend Fund |
$44,046 |
Donoghue
Forlines Momentum Fund |
$23,257 |
Donoghue
Forlines Risk Managed Income Fund |
$82,271 |
UFS
also provides the Funds with accounting services, including: (i) daily
computation of net asset value; (ii) maintenance of security ledgers and books
and records as required by the 1940 Act; (iii) production of the Funds’ listing
of portfolio securities and general ledger reports; (iv) reconciliation of
accounting records; (v) calculation of yield and total return for the Funds;
(vi) maintenance of certain books and records described in Rule 31a-1 under the
1940 Act, and reconciliation of account information and balances among the
Funds’ custodian and Adviser; and (vii) monitoring and evaluation of daily
income and expense accruals, and sales and redemptions of shares of the
Funds.
For
the fund accounting services rendered to the Funds under the Agreement, the
Funds pays the Fund Accountant the greater of an annual minimum fee or an asset
based fee which scales downward based upon net assets. The Funds also pay the
Administrator for any out-of-pocket expenses.
For
the fiscal period ended June 30, 2021, the Funds incurred in fund accounting
fees:
Fund |
Accounting
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$41,947 |
Donoghue
Forlines Tactical Income Fund |
$42,451 |
Donoghue
Forlines Dividend Fund |
$35,175 |
Donoghue
Forlines Momentum Fund |
$37,247 |
Donoghue
Forlines Risk Managed Income Fund |
$41,359 |
For
the fiscal period ended June 30, 2022, the Funds incurred in fund accounting
fees:
Fund |
Accounting
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$40,071 |
Donoghue
Forlines Tactical Income Fund |
$43,280 |
Donoghue
Forlines Dividend Fund |
$32,937 |
Donoghue
Forlines Momentum Fund |
$38,477 |
Donoghue
Forlines Risk Managed Income Fund |
$44,991 |
For
the fiscal period ended June 30, 2023, the Funds incurred in fund accounting
fees:
Fund |
Accounting
Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$38,815 |
Donoghue
Forlines Tactical Income Fund |
$40,307 |
Donoghue
Forlines Dividend Fund |
$40,488 |
Donoghue
Forlines Momentum Fund |
$38,483 |
Donoghue
Forlines Risk Managed Income Fund |
$43,657 |
UFS
also acts as transfer, dividend disbursing, and shareholder servicing agent for
the Funds pursuant to the Agreement. Under the Agreement, UFS is responsible for
administering and performing transfer agent functions, dividend distribution,
shareholder administration, and maintaining necessary records in accordance with
applicable rules and regulations.
For
the services rendered to the Funds the Funds pays the Transfer Agent the greater
of an annual minimum fee or an asset based fee which scales downward based upon
net assets. The Funds also pay the Transfer Agent for any out-of-pocket
expenses.
For
the fiscal period ended June 30, 2021, the Funds incurred in transfer agency
fees:
Fund |
Transfer
Agency Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$22,435 |
Donoghue
Forlines Tactical Income Fund |
$32,749 |
Donoghue
Forlines Dividend Fund |
$48,675 |
Donoghue
Forlines Momentum Fund |
$13,513 |
Donoghue
Forlines Risk Managed Income Fund |
$26,626 |
For
the fiscal period ended June 30, 2022, the Funds incurred in transfer agency
fees:
Fund |
Transfer
Agency Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$13,990 |
Donoghue
Forlines Tactical Income Fund |
$21,243 |
Donoghue
Forlines Dividend Fund |
$40,606 |
Donoghue
Forlines Momentum Fund |
$8,735 |
Donoghue
Forlines Risk Managed Income Fund |
$47,271 |
For
the fiscal period ended June 30, 2023, the Funds incurred in transfer agency
fees:
Fund |
Transfer
Agency Service Fees |
Donoghue
Forlines Tactical Allocation Fund |
$12,826 |
Donoghue
Forlines Tactical Income Fund |
$19,538 |
Donoghue
Forlines Dividend Fund |
$40,629 |
Donoghue
Forlines Momentum Fund |
$9,417 |
Donoghue
Forlines Risk Managed Income Fund |
$56,240 |
Custodian
The
Fund's assets are held for safekeeping by an independent custodian, U.S. Bank,
N.A., 425 Walnut Street, Cincinnati, Ohio 45202 (the “Custodian”), pursuant to a
custody agreement by and between the Custodian and the Trust on behalf of the
Fund. The Custodian's responsibilities on behalf of the Fund include
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of cash and securities, collecting interest and dividends
on the Fund's investments, and maintaining records of purchases and sales.
Compliance
Services
Northern
Lights Compliance Services, LLC (“NLCS”), 4221 North 203rd Street, Suite 100
Elkhorn, Nebraska 68022-3474, an affiliate of UFS and the Distributor,
provides a Chief Compliance Officer to the Trust as well as related compliance
services pursuant to a consulting agreement between
NLCS
and the Trust. NLCS’s compliance services consist primarily of reviewing and
assessing the policies and procedures of the Trust and its service providers
pertaining to compliance with applicable federal securities laws, including Rule
38a-1 under the 1940 Act. For the compliance services rendered to the Funds, the
Funds pay NLCS an annual fixed fee and an asset based fee, which scales downward
based upon the Fund’s net assets. The Funds also pay NLCS for any out-of-pocket
expenses.
For
the fiscal period ended June 30, 2021, the Funds incurred the following for
compliance service fees:
Fund |
Compliance
Officer Fees |
Donoghue
Forlines Tactical Allocation Fund |
$10,565 |
Donoghue
Forlines Tactical Income Fund |
$11,087 |
Donoghue
Forlines Dividend Fund |
$8,492 |
Donoghue
Forlines Momentum Fund |
$5,640 |
Donoghue
Forlines Risk Managed Income Fund |
$8,289 |
For
the fiscal period ended June 30, 2022, the Funds incurred the following for
compliance service fees:
Fund |
Compliance
Officer Fees |
Donoghue
Forlines Tactical Allocation Fund |
$13,279 |
Donoghue
Forlines Tactical Income Fund |
$14,443 |
Donoghue
Forlines Dividend Fund |
$13,146 |
Donoghue
Forlines Momentum Fund |
$8,936 |
Donoghue
Forlines Risk Managed Income Fund |
$18,402 |
For
the fiscal period ended June 30, 2023, the Funds incurred the following for
compliance service fees:
Fund |
Compliance
Officer Fees |
Donoghue
Forlines Tactical Allocation Fund |
$9,995 |
Donoghue
Forlines Tactical Income Fund |
$11,794 |
Donoghue
Forlines Dividend Fund |
$10,494 |
Donoghue
Forlines Momentum Fund |
$7,195 |
Donoghue
Forlines Risk Managed Income Fund |
$16,965 |
DESCRIPTION
OF SHARES
Each
share of beneficial interest of the Trust has one vote in the election of
Trustees. Cumulative voting is not authorized for the Trust. This means that the
holders of more than 50% of the shares voting for the election of Trustees can
elect 100% of the Trustees if they choose to do so, and, in that event, the
holders of the remaining shares will be unable to elect any Trustees.
Shareholders
of the Trust and any other future series of the Trust will vote in the aggregate
and not by series except as otherwise required by law or when the Board
determines that the matter to be voted upon affects only the interest of the
shareholders of a particular series. Matters such as ratification of the
independent public accountants and election of Trustees are not subject to
separate voting requirements and may be acted upon by shareholders of the Trust
voting without regard to series.
The
Trust is authorized to issue an unlimited number of shares of beneficial
interest. Each share has equal dividend, distribution and liquidation rights.
There are no conversions or preemptive rights applicable to any shares of the
Funds. All shares issued are fully paid and non-assessable.
ANTI-MONEY
LAUNDERING PROGRAM
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by Section 352 the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of
2001 (“USA Patriot Act”). To ensure compliance with this law, the Trust’s
Program is written and has been approved by the Funds’ Board of Trustees. The
Program provides for the development of policies, procedures and internal
controls reasonably designed to prevent money laundering, the designation of an
anti-money laundering compliance officer who is responsible for implementing and
monitoring the Program, an ongoing anti-money laundering training for
appropriate persons and an independent audit function to determine the
effectiveness of the Program.
Procedures
to implement the Program include, but are not limited to, determining that the
Funds’ Distributor, and Transfer Agent have established reasonable anti-money
laundering procedures, have reported suspicious and/or fraudulent activity and
have completed thorough reviews of all new opening account applications. The
Trust will not transact business with any person or entity whose identity cannot
be adequately verified under the provisions of the USA Patriot Act.
As
a result of the Program, the Trust may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or the Trust may be required to transfer
the account or proceeds of the account to a governmental agency.
PURCHASE,
REDEMPTION AND PRICING OF SHARES
Calculation
of Share Price
As
indicated in the Prospectus under the heading "Net Asset Value," the NAV of the
Funds’ shares, by class, is determined by dividing the total value of the Funds’
portfolio investments and other assets, less any liabilities, by the total
number of shares outstanding of the Funds, by class.
Generally,
the Fund’s domestic securities (including underlying ETFs which hold portfolio
securities primarily listed on foreign (non-U.S.) exchanges) are valued each day
at the last quoted sales price on each security’s primary exchange. Securities
traded or dealt in upon one or more securities exchanges for which market
quotations are readily available and not subject to restrictions against resale
shall be valued at the last quoted sales price on the primary exchange or, in
the absence of a sale on the primary exchange, at the mean between the current
bid and ask prices on such exchange. Securities primarily traded in the National
Association of Securities Dealers’ Automated Quotation System (“NASDAQ”)
National Market System for which market quotations are readily available shall
be valued using the NASDAQ Official Closing Price. If market quotations are not
readily available, securities will be valued at their fair market value as
determined in good faith by the Adviser in accordance with procedures approved
by the Board and as further described below. Securities that are not traded or
dealt in any securities exchange (whether domestic or foreign) and for which
over-the-
counter
market quotations are readily available generally shall be valued at the last
sale price or, in the absence of a sale, at the mean between the current bid and
ask price on such over-the- counter market.
Certain
securities or investments for which daily market quotes are not readily
available may be valued, pursuant to guidelines established by the Board, with
reference to other securities or indexes. Debt securities not traded on an
exchange may be valued at prices supplied by a pricing agent(s) based on broker
or dealer supplied valuations or matrix pricing, a method of valuing securities
by reference to the value of other securities with similar characteristics, such
as rating, interest rate and maturity. Short-term investments having a maturity
of 60 days or less may be generally valued at amortized cost. Exchange traded
options are valued at the last quoted sales price or, in the absence of a sale,
at the mean between the current bid and ask prices on the exchange on which such
options are traded. Futures and options on futures are valued at the settlement
price determined by the exchange. Other securities for which market quotes are
not readily available are valued at fair value as determined in good faith by
the Board or persons acting at their direction. Swap agreements and other
derivatives are generally valued daily based upon quotations from market makers
or by a pricing service in accordance with the valuation procedures approved by
the Board.
Under
certain circumstances, the Fund may use an independent pricing service to
calculate the fair market value of foreign equity securities on a daily basis by
applying valuation factors to the last sale price or the mean price as noted
above. The fair market values supplied by the independent pricing service will
generally reflect market trading that occurs after the close of the applicable
foreign markets of comparable securities or the value of other instruments that
have a strong correlation to the fair-valued securities. The independent pricing
service will also take into account the current relevant currency exchange rate.
A security that is fair valued may be valued at a price higher or lower than
actual market quotations or the value determined by other funds using their own
fair valuation procedures. Because foreign securities may trade on days when
Fund shares are not priced, the value of securities held by the Fund can change
on days when Fund shares cannot be redeemed or purchased. In the event that a
foreign security’s market quotations are not readily available or are deemed
unreliable (for reasons other than because the foreign exchange on which it
trades closed before the Fund’s calculation of NAV), the security will be valued
at its fair market value as determined in good faith by the Adviser in
accordance with procedures approved by the Board as discussed below. Without
fair valuation, it is possible that short-term traders could take advantage of
the arbitrage opportunity and dilute the NAV of long-term investors. Fair
valuation of the Fund’s portfolio securities can serve to reduce arbitrage
opportunities available to short-term traders, but there is no assurance that it
will prevent dilution of the Fund’s NAV by short-term traders. In addition,
because the Fund may invest in underlying ETFs which hold portfolio securities
primarily listed on foreign (non-U.S.) exchanges, and these exchanges may trade
on weekends or other days when the underlying ETFs do not price their shares,
the value of these portfolio securities may change on days when you may not be
able to buy or sell Fund shares.
Investments
initially valued in currencies other than the U.S. dollar are converted to U.S.
dollars using exchange rates obtained from pricing services. As a result, the
NAV of the Funds’ shares may be affected by changes in the value of currencies
in relation to the U.S. dollar. The value of securities traded in markets
outside the United States or denominated in currencies other than the U.S.
dollar may be affected significantly on a day that the New York Stock Exchange
is closed and an investor is not able to purchase, redeem or exchange
shares.
Funds
shares are valued at the close of regular trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day that the New
York Stock Exchange is open. For purposes of calculating the NAV, the Funds
normally use pricing data for domestic equity securities received shortly after
the NYSE Close and does not normally take into account trading, clearances or
settlements that take place after the NYSE Close. Domestic fixed income and
foreign
securities
are normally priced using data reflecting the earlier closing of the principal
markets for those securities. Information that becomes known to the Funds or its
agents after the NAV has been calculated on a particular day will not generally
be used to retroactively adjust the price of the security or the NAV determined
earlier that day.
When
market quotations are insufficient or not readily available, instead of valuing
securities in the usual manner, the Funds may value securities at fair value or
estimate their value as determined in good faith by the Board or its designees,
pursuant to procedures approved by the Board. Fair valuation may also be used by
the Board if extraordinary events occur after the close of the relevant market
but prior to the NYSE Close.
A
fund may hold securities, such as private placements, interests in commodity
pools, other non-traded securities or temporarily illiquid securities, for which
market quotations are not readily available or are determined to be unreliable.
These securities will be valued at their fair market value as determined using
the “fair value” procedures approved by the Board. The Board has designated the
Adviser as its “Valuation Designee” to execute these procedures. The Adviser may
also enlist third party consultants such as an audit firm or financial officer
of a security issuer on an as-needed basis to assist in determining a
security-specific fair value. The Board reviews and ratifies the execution of
this process and the resultant fair value prices at least quarterly to assure
the process produces reliable results.
Valuation
Process. Fair value determinations are required for the following securities:
(i) securities for which market quotations are insufficient or not readily
available on a particular business day (including securities for which there is
a short and temporary lapse in the provision of a price by the regular pricing
source), (ii) securities for which, in the judgment of the adviser, the prices
or values available do not represent the fair value of the instrument. Factors
which may cause the adviser to make such a judgment include, but are not limited
to, the following: only a bid price or an asked price is available; the spread
between bid and asked prices is substantial; the frequency of sales; the
thinness of the market; the size of reported trades; and actions of the
securities markets, such as the suspension or limitation of trading; (iii)
securities determined to be illiquid; (iv) securities with respect to which an
event that will affect the value thereof has occurred (a “significant event”)
since the closing prices were established on the principal exchange on which
they are traded, but prior to the Funds’ calculation of net asset value.
Specifically, interests in commodity pools or managed futures pools are valued
on a daily basis by reference to the closing market prices of each futures
contract or other asset held by a pool, as adjusted for pool expenses.
Restricted or illiquid securities, such as private placements or non-traded
securities are valued via inputs from the adviser valuation based upon the
current bid for the security from two or more independent dealers or other
parties reasonably familiar with the facts and circumstances of the security
(who should take into consideration all relevant factors as may be appropriate
under the circumstances). If the Adviser is unable to obtain a current bid from
such independent dealers or other independent parties, the Adviser shall
determine the fair value of such security using the following factors: (i) the
type of security; (ii) the cost at date of purchase; (iii) the size and nature
of the Funds’ holdings; (iv) the discount from market value of unrestricted
securities of the same class at the time of purchase and subsequent thereto; (v)
information as to any transactions or offers with respect to the security; (vi)
the nature and duration of restrictions on disposition of the security and the
existence of any registration rights; (vii) how the yield of the security
compares to similar securities of companies of similar or equal
creditworthiness; (viii) the level of recent trades of similar or comparable
securities; (ix) the liquidity characteristics of the security; (x) current
market conditions; and (xi) the market value of any securities into which the
security is convertible or exchangeable.
Standards
for Fair Value Determinations. As a general principle, the fair value of a
security is the amount that a Funds might reasonably expect to realize upon its
current sale. The Trust has adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards Codification Topic 820, Fair Value
Measurements and Disclosures ("ASC 820"). In accordance with ASC 820, fair value
is defined as the price that the Funds would receive upon selling an investment
in a timely transaction to an independent buyer in the principal or most
advantageous market of the investment. ASC 820 establishes a three-tier
hierarchy to maximize the use of observable market data and minimize the use of
unobservable inputs and to establish classification of fair value measurements
for disclosure purposes. Inputs refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including assumptions
about risk, for example, the risk inherent in a particular valuation technique
used to measure fair value including such a pricing model and/or the risk
inherent in the inputs to the valuation technique. Inputs may be observable or
unobservable. Observable inputs are inputs that reflect the assumptions market
participants would use in pricing the asset or liability developed based on
market data obtained from sources independent of the reporting entity.
Unobservable inputs are inputs that reflect the reporting entity's own
assumptions about the assumptions market participants would use in pricing the
asset or liability, developed based on the best information available under the
circumstances.
Various
inputs are used in determining the value of the Funds’ investments relating to
ASC 820. These inputs are summarized in the three broad levels listed below.
Level
1 – quoted prices in active markets for identical securities.
Level
2 – other significant observable inputs (including quoted prices for similar
securities, interest rates, prepayment speeds, credit risk, etc.)
Level
3 – significant unobservable inputs (including a Funds’ own assumptions in
determining the fair value of investments).
The
Adviser takes into account the relevant factors and surrounding circumstances,
which may include: (i) the nature and pricing history (if any) of the security;
(ii) whether any dealer quotations for the security are available; (iii)
possible valuation methodologies that could be used to determine the fair value
of the security; (iv) the recommendation of a portfolio manager of the Funds
with respect to the valuation of the security; (v) whether the same or similar
securities are held by other Funds managed by the Adviser or other Funds and the
method used to price the security in those Funds; (vi) the extent to which the
fair value to be determined for the security will result from the use of data or
formulae produced by independent third parties and (vii) the liquidity or
illiquidity of the market for the security.
Board
Determination. The Board of Trustees meets at least quarterly to consider the
valuations provided by the Adviser and to ratify the valuations for the
applicable securities. The Board considers the reports provided by the Adviser,
including follow up studies of subsequent market-provided prices when available,
in reviewing and determining in good faith the fair value of the applicable
portfolio securities.
The
Trust expects that the New York Stock Exchange will be closed on the following
holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Juneteenth, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day.
Purchase of
Shares
Orders
for shares received by the Funds in good order prior to the close of business on
the NYSE on each day during such periods that the NYSE is open for trading are
priced at NAV per share or offering price (NAV plus a sales charge, if
applicable) computed as of the close of the regular session of trading on the
NYSE. Orders received in good order after the close of the NYSE, or on a day it
is not open for trading, are priced at the close of such NYSE on the next day on
which it is open for trading at the next determined NAV or offering price per
share.
Whether
a sales charge waiver is available for your retirement plan or charitable
account depends upon the policies and procedures of your intermediary. Please
consult your financial adviser for further information.
Redemption of
Shares
The
Funds will redeem all or any portion of a shareholder's shares in the Funds when
requested in accordance with the procedures set forth in the "Redemptions"
section of the Prospectus. Under the 1940 Act, a shareholder’s right to redeem
shares and to receive payment therefore may be suspended at times:
|
(a) |
when the NYSE is closed,
other than customary weekend and holiday
closings; |
(b)
when trading on that exchange is restricted for any reason;
(c)
when an emergency exists as a result of which disposal by the Funds of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Funds to fairly determine the value of its net assets,
provided that applicable rules and regulations of the Securities and Exchange
Commission (or any succeeding governmental authority) will govern as to whether
the conditions prescribed in (b) or (c) exist; or
(d)
when the Securities and Exchange Commission by order permits a suspension of the
right to redemption or a postponement of the date of payment on redemption.
In
case of suspension of the right of redemption, payment of a redemption request
will be made based on the NAV next determined after the termination of the
suspension.
The
Funds may purchase shares of Underlying Funds which charge a redemption fee to
shareholders (such as the Funds) that redeem shares of the Underlying Funds
within a certain period of time (such as one year). The fee is payable to the
Underlying Funds. Accordingly, if the Funds were to invest in an Underlying
Funds and incur a redemption fee as a result of redeeming shares in such
Underlying Funds, the Funds would bear such redemption fee. The Funds will not,
however, invest in shares of an Underlying Funds that is sold with a contingent
deferred sales load.
Notice to
Texas Shareholders
Under
section 72.1021(a) of the Texas Property Code, initial investors in a Fund who
are Texas residents may designate a representative to receive notices of
abandoned property in connection with Fund shares. Texas shareholders who wish
to appoint a representative should notify the Trust’s Transfer Agent by writing
to the address below to obtain a form for providing written notice to the
Trust:
Donoghue
Forlines Funds
c/o
Ultimus Fund Solutions, LLC
4221
North 203rd Street, Suite 100
Elkhorn,
Nebraska 68022-3474
TAX
STATUS
The
following discussion is general in nature and should not be regarded as an
exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in the
Funds.
The
Funds intend to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended (the “Code”), which requires
compliance with certain requirements concerning the sources of its income,
diversification of its assets, and the amount and timing of its distributions to
shareholders. Such qualification does not involve supervision of management or
investment practices or policies by any government agency or bureau. By so
qualifying, the Funds should not be subject to federal income or excise tax on
its net investment income or net capital gain, which are distributed to
shareholders in accordance with the applicable timing requirements. Net
investment income and net capital gain of the Funds will be computed in
accordance with Section 852 of the Code.
Net
investment income is made up of dividends and interest less expenses. Net
capital gain for a fiscal year is computed by taking into account any capital
loss carryforward of the Funds. Capital losses incurred in tax years beginning
after December 22, 2010 may now be carried forward indefinitely and retain the
character of the original loss. Under previously enacted laws, capital losses
could be carried forward to offset any capital gains for only eight years, and
carried forward as short-term capital losses, irrespective of the character of
the original loss. Capital loss carryforwards are available to offset future
realized capital gains. To the extent that these carryforwards are used to
offset future capital gains it is probable that the amount offset will not be
distributed to shareholders.
At
June 30, 2023, the Fund had capital loss carry forwards for federal income tax
purposes available to offset future capital gains and capital losses utilized as
follows:
Fund |
Short-Term |
|
Long-Term |
|
Total |
|
CLCF Utilized |
|
Donoghue
Forlines Tactical Allocation Fund |
$ |
4,637,351 |
|
$ |
616,172 |
|
$ |
5,253,523 |
|
$ |
— |
|
Donoghue
Forlines Tactical Income Fund |
|
21,635,977 |
|
|
391,000 |
|
|
22,026,977 |
|
|
— |
|
Donoghue
Forlines Dividend Fund |
|
87,421,374 |
|
|
32,201,141 |
|
|
119,622,515 |
|
|
36,952 |
|
Donoghue
Forlines Momentum Fund |
|
1,966,019 |
|
|
— |
|
|
1,966,019 |
|
|
— |
|
Donoghue
Forlines Risk Managed Income Fund |
|
5,432,943 |
|
|
234,356 |
|
|
5,667,299 |
|
|
— |
|
The
Funds intend to distribute all of its net investment income, any excess of net
short-term capital gains over net long-term capital losses, and any excess of
net long-term capital gains over net short-term capital losses in accordance
with the timing requirements imposed by the Code and
therefore
should not be required to pay any federal income or excise taxes. Distributions
of net investment income and net capital gain will be made after the end of each
fiscal year, and no later than December 31 of each year. Both types of
distributions will be in shares of the Funds unless a shareholder elects to
receive cash.
To
be treated as a regulated investment company under Subchapter M of the Code, the
Funds must also (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, net income from certain
publicly traded partnerships and gains from the sale or other disposition of
securities or foreign currencies, or other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
the business of investing in such securities or currencies, and (b) diversify
its holding so that, at the end of each fiscal quarter, (i) at least 50% of the
market value of the Funds’ assets is represented by cash, U.S. government
securities and securities of other regulated investment companies, and other
securities (for purposes of this calculation, generally limited in respect of
any one issuer, to an amount not greater than 5% of the market value of the
Funds’ assets and 10% of the outstanding voting securities of such issuer) and
(ii) not more than 25% of the value of its assets is invested in the securities
of (other than U.S. government securities or the securities of other regulated
investment companies) any one issuer, two or more issuers which the Funds
control and which are determined to be engaged in the same or similar trades or
businesses, or the securities of certain publicly traded partnerships.
If
the Funds fail to qualify as a regulated investment company under Subchapter M
in any fiscal year, it will be treated as a corporation for federal income tax
purposes. As such the Funds would be required to pay income taxes on its net
investment income and net realized capital gains, if any, at the rates generally
applicable to corporations. Shareholders of the Funds generally would not be
liable for income tax on the Funds’ net investment income or net realized
capital gains in their individual capacities. Distributions to shareholders,
whether from the Funds’ net investment income or net realized capital gains,
would be treated as taxable dividends to the extent of current or accumulated
earnings and profits of the Funds.
The
Funds are subject to a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gain under a prescribed formula contained
in Section 4982 of the Code. The formula requires payment to shareholders during
a calendar year of distributions representing at least 98% of the Funds’
ordinary income for the calendar year and at least 98.2% of its capital gain net
income (i.e., the excess of its capital gains over capital losses) realized
during the one-year period ending October 31 during such year plus 100% of any
income that was neither distributed nor taxed to the Funds during the preceding
calendar year. Under ordinary circumstances, the Funds expect to time
distributions so as to avoid liability for this tax.
The
following discussion of tax consequences is for the general information of
shareholders that are subject to tax. Shareholders that are IRAs or other
qualified retirement plans are exempt from income taxation under the Code.
Distributions
of taxable net investment income and the excess of net short-term capital gain
over net long-term capital loss are taxable to shareholders as ordinary income.
In most cases the Funds will hold shares in Underlying Funds for less than 12
months, such that its sales of such shares from time to time will not qualify as
long-term capital gains for those investors who hold shares of the Funds in
taxable accounts.
Distributions
of net capital gain (“capital gain dividends”) generally are taxable to
shareholders as short-term capital gain; regardless of the length of time the
shares of the Trust have been held by such shareholders.
For taxable years beginning after December 31,
2012, certain U.S. shareholders, including individuals and estates and trusts,
will be subject to an additional 3.8% Medicare tax on all or a portion of their
“net investment income,” which should include dividends from the Funds and net
gains from the disposition of shares of the Funds. U.S. Shareholders are urged
to consult their own tax advisers regarding the implications of the additional
Medicare tax resulting from an investment in the Funds.
Redemption
of Fund shares by a shareholder will result in the recognition of taxable gain
or loss in an amount equal to the difference between the amount realized and the
shareholder’s tax basis in his or her Fund shares. Such gain or loss is treated
as a capital gain or loss if the shares are held as capital assets. However, any
loss realized upon the redemption of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as capital gain dividends during such six-month period. All or a
portion of any loss realized upon the redemption of shares may be disallowed to
the extent shares are purchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
Distributions
of taxable net investment income and net capital gain will be taxable as
described above, whether received in additional cash or shares. Shareholders
electing to reinvest distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the net asset value of a share on the reinvestment date.
All
distributions of taxable net investment income and net capital gain, whether
received in shares or in cash, must be reported by each taxable shareholder on
his or her federal income tax return. Dividends or distributions declared in
October, November or December as of a record date in such a month, if any, will
be deemed to have been received by shareholders on December 31, if paid during
January of the following year. Redemptions of shares may result in tax
consequences (gain or loss) to the shareholder and are also subject to these
reporting requirements.
Under
the Code, the Funds will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain
exempt shareholders. Under the backup withholding provisions of
Section 3406 of the Code, distributions of taxable net investment income
and net capital gain and proceeds from the redemption or exchange of the shares
of a regulated investment company may be subject to withholding of federal
income tax in the case of non-exempt shareholders who fail to furnish the
investment company with their taxpayer identification numbers and with required
certifications regarding their status under the federal income tax law, or if
the Funds is notified by the IRS or a broker that withholding is required due to
an incorrect TIN or a previous failure to report taxable interest or dividends.
If the withholding provisions are applicable, any such distributions and
proceeds, whether taken in cash or reinvested in additional shares, will be
reduced by the amounts required to be withheld.
Other
Reporting and Withholding Requirements:
Payments
to a shareholder that is either a foreign financial institution (“FFI”) or a
non-financial foreign entity (“NFFE”) within the meaning of the Foreign Account
Tax Compliance Act (“FATCA”) may be subject to a generally nonrefundable 30%
withholding tax on: (a) income dividends paid by a Funds after June 30, 2014 and
(b) certain capital gain distributions and the proceeds arising from the sale of
Fund shares paid by the Funds after December 31, 2016. FATCA withholding tax
generally can be avoided: (a) by an FFI, subject to any applicable
intergovernmental agreement or other exemption, if it enters into a valid
agreement with the IRS to, among other requirements, report required information
about certain direct and indirect ownership of foreign financial accounts held
by U.S. persons with the
FFI
and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons
as owners or (ii) if it does have such owners, reports information relating to
them. The Funds may disclose the information that it receives from its
shareholders to the IRS, non-U.S. taxing authorities or other parties as
necessary to comply with FATCA. Withholding also may be required if a foreign
entity that is a shareholder of a Fund fails to provide the Fund with
appropriate certifications or other documentation concerning its status under
FATCA.
Options,
Futures, Forward Contracts and Swap Agreements
To
the extent such investments are permissible for the Funds, the Funds’
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles and foreign currencies will be subject to special tax rules
(including mark-to-market, constructive sale, straddle, wash sale and short sale
rules), the effect of which may be to accelerate income to the Funds, defer
losses to the Funds, cause adjustments in the holding periods of the Funds’
securities, convert long-term capital gains into short-term capital gains and
convert short-term capital losses into long-term capital losses. These rules
could therefore affect the amount, timing and character of distributions to
shareholders.
To
the extent such investments are permissible, certain of the Funds’ hedging
activities (including its transactions, if any, in foreign currencies or foreign
currency-denominated instruments) are likely to produce a difference between its
book income and its taxable income. If the Funds’ book income exceeds its
taxable income, the distribution (if any) of such excess book income will be
treated as (i) a dividend to the extent of the Funds’ remaining earnings and
profits (including earnings and profits arising from tax-exempt income), (ii)
thereafter, as a return of capital to the extent of the recipient’s basis in the
shares, and (iii) thereafter, as gain from the sale or exchange of a capital
asset. If the Funds’ book income is less than taxable income, the Funds could be
required to make distributions exceeding book income to qualify as a regulated
investment company that is accorded special tax treatment.
Passive
Foreign Investment Companies
Investment
by the Funds in certain "passive foreign investment companies" ("PFICs") could
subject the Funds to a U.S. federal income tax (including interest charges) on
distributions received from the company or on proceeds received from the
disposition of shares in the company, which tax cannot be eliminated by making
distributions to Funds shareholders. However, the Funds may elect to treat a
PFIC as a "qualified electing fund" ("QEF election"), in which case the Funds
will be required to include its share of the company's income and net capital
gains annually, regardless of whether it receives any distribution from the
company.
The
Funds also may make an election to mark the gains (and to a limited extent
losses) in such holdings "to the market" as though it had sold and repurchased
its holdings in those PFICs on the last day of the Funds’ taxable year. Such
gains and losses are treated as ordinary income and loss. The QEF and
mark-to-market elections may accelerate the recognition of income (without the
receipt of cash) and increase the amount required to be distributed for the
Funds to avoid taxation. Making either of these elections therefore may require
the Funds to liquidate other investments (including when it is not advantageous
to do so) to meet its distribution requirement, which also may accelerate the
recognition of gain and affect the Funds’ total return.
Foreign
Currency Transactions
The
Funds’ transactions in foreign currencies, foreign currency-denominated debt
securities and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may
give
rise to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
Foreign
Taxation
Income
received by the Funds 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 U.S. may reduce or eliminate such
taxes. If more than 50% of the value of the Funds’ total assets at the close of
its taxable year consists of securities of foreign corporations, the Funds may
be able to elect to "pass through" to its shareholders the amount of eligible
foreign income and similar taxes paid by the Funds. 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 Funds, 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 shareholder who does not itemize deductions. Each shareholder
will be notified within 60 days after the close of the Funds’ taxable year
whether the foreign taxes paid by the Funds 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 Funds’ income will flow through to shareholders of the Funds. With
respect to the Funds, 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 Funds. The foreign tax credit can be used to
offset only 90% of the revised alternative minimum tax imposed on corporations
and individuals and foreign taxes generally are not deductible in computing
alternative minimum taxable income.
Original
Issue Discount and Pay-In-Kind Securities
Current
federal tax law requires the holder of a U.S. Treasury or other fixed income
zero coupon security to accrue as income each year a portion of the discount at
which the security was purchased, even though the holder receives no interest
payment in cash on the security during the year. In addition, pay-in-kind
securities will give rise to income, which is required to be distributed and is
taxable even though the Funds holding the security receives no interest payment
in cash on the security during the year.
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 Funds 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 Funds 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
Funds 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.
Some
debt securities (with a fixed maturity date of one year or less from the date of
issuance) that may be acquired by a Fund may be treated as having acquisition
discount, or OID in the case of certain types of debt securities. Generally, the
Funds will be required to include the acquisition discount, or OID, 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. The Funds
may make one or more of the elections applicable to debt securities having
acquisition discount, or OID, which could affect the character and timing of
recognition of income.
If
the Funds hold the foregoing kinds of securities, it may be required to pay out
as an income distribution each year an amount that is greater than the total
amount of cash interest the Funds actually received. Such distributions may be
made from the cash assets of the Funds or by liquidation of portfolio
securities, if necessary (including when it is not advantageous to do so). The
Funds may realize gains or losses from such liquidations. In the event the Funds
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.
Shareholders
of the Funds may be subject to state and local taxes on distributions received
from the Funds and on redemptions of the Funds’ shares.
A
brief explanation of the form and character of the distribution accompany each
distribution. In January of each year the Funds issues to each shareholder a
statement of the federal income tax status of all distributions.
Shareholders
should consult their tax advisers about the application of federal, state and
local and foreign tax law in light of their particular situation.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The
Funds have selected Deloitte & Touche LLP, located at 695 Town Center Drive,
Suite 1000, Costa Mesa, CA 92626, as their independent registered public
accountants providing services including (1) audit of annual financial
statements, and (2) assistance and consultation in connection with SEC
filings.
LEGAL
COUNSEL
Thompson
Hine LLP, 41 South High Street, Suite 1700, Columbus, Ohio 43215 serves as the
Trust's legal counsel.
FINANCIAL
STATEMENTS
The
financial statements and report of the independent registered public accounting
firm required to be included in this SAI are hereby incorporated by reference to
the Annual Report for the Funds for the fiscal year ended June 30, 2023. You can
obtain a copy of the Annual Report without charge by calling the Funds at
1-877-779-7462.
APPENDIX
A
DESCRIPTION
OF BOND RATINGS
Standard
& Poor's Ratings Group. A Standard & Poor's corporate bond rating is a
current assessment of the credit worthiness of an obligor with respect to a
specific obligation. This assessment of credit worthiness may take into
consideration obligors, such as guarantors, insurers or lessees. The debt rating
is not a recommendation to purchase, sell or hold a security, inasmuch as it
does not comment as to market price or suitability for a particular
investor.
The
ratings are based on current information furnished to Standard & Poor's by
the issuer or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform any audit in connection with
the ratings and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in,
unavailability of such information, or for other circumstances.
The
ratings are based, in varying degrees, on the following considerations:
1.
Likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation.
2.
Nature of and provisions of the obligation.
3.
Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or their arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
AAA
- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay interest and repay
any principal.
AA
- Debt rated AA also qualifies as high quality debt obligations. Capacity to pay
interest and repay principal is very strong and in the majority of instances
they differ from AAA issues only in small degree.
A
- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB
- Debt rated BBB is regarded as having an adequate capacity to pay interest and
repay principal. Whereas they normally exhibit protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories.
BB,
B, CCC, CC, C - Debt rated BB, B, CCC, CC and C is regarded, on a balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation.
BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB
- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions, which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B
- Debt rated B has greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC
- Debt rated CCC has a currently indefinable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of
adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC
- The rating CC is typically applied to debt subordinated to senior debt that is
assigned an actual or implied CCC rating.
C
- The rating C is typically applied to debt subordinated to senior debt, which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1
- The rating C1 is reserved for income bonds on which no interest is being
paid.
D
- Debt rated D is in payment default. It is used when interest payments or
principal payments are not made on a due date even if the applicable grace
period has not expired, unless Standard & Poor's believes that such payments
will be made during such grace periods; it will also be used upon a filing of a
bankruptcy petition if debt service payments are jeopardized. Plus (+) or Minus
(-) - To provide more detailed indications of credit quality, the ratings from
AA to CCC may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
NR
- indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy. Debt obligations of
issuers outside the United States and its territories are rated on the same
basis as domestic corporate issues. The ratings measure the credit worthiness of
the obligor but do not take into account currency exchange and related
uncertainties.
Bond
Investment Quality Standards: Under present commercial bank regulations issued
by the Comptroller of the Currency, bonds rated in the top four categories (AAA,
AA, A, BBB, commonly known as "Investment Grade" ratings) are generally regarded
as eligible for bank investment. In addition, the Legal Investment Laws of
various states may impose certain rating or other standards for obligations
eligible for investment by savings banks, trust companies, insurance companies
and fiduciaries generally.
Moody's
Investors Service, Inc. A brief description of the applicable Moody's rating
symbols and their meanings follows:
Aaa
- Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge".
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa
- Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
- Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa
- Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Some bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NOTE:
Bonds within the above categories which possess the strongest investment
attributes are designated by the symbol "1" following the rating.
Ba
- Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
good and bad times over the future. Uncertainty of position characterizes bonds
in this class.
B
- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
- Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
Ca
- Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C
- Bonds which are rated C are the lowest rated class of bonds and issue so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
DESCRIPTION
OF NOTE RATINGS
A
Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
Amortization
schedule (the larger the final maturity relative to other maturities the more
likely it will be treated as a note).
Source
of Payment (the more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.) Note rating symbols are as
follows:
·
SP-1 Very
strong or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a plus (+)
designation.
·
SP-2
Satisfactory capacity to pay principal and interest.
·
SP-3
Speculative capacity to pay principal and interest.
Moody's
Short-Term Loan Ratings - Moody's ratings for state and municipal short-term
obligations will be designated Moody's Investment Grade (MIG). This distinction
is in recognition of the differences between short-term credit risk and
long-term risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of major importance in
bond risk are of lesser importance over the short run.
Rating
symbols and their meanings follow:
·
MIG 1 - This
designation denotes best quality. There is present strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing.
·
MIG 2 - This
designation denotes high quality. Margins of protection are ample although not
so large as in the preceding group.
·
MIG 3 - This
designation denotes favorable quality. All security elements are accounted for
but this is lacking the undeniable strength of the preceding grades. Liquidity
and cash flow protection may be narrow and market access for refinancing is
likely to be less well established.
·
MIG 4 - This
designation denotes adequate quality. Protection commonly regarded as required
of an investment security is present and although not distinctly or
predominantly speculative, there is specific risk.
COMMERCIAL
PAPER RATINGS
Moody's
Investors Service, Inc.: Commercial paper rated "Prime" carries the smallest
degree of investment risk. The modifiers 1, 2, and 3 are used to denote relative
strength within this highest classification.
Standard
& Poor's Ratings Group: "A" is the highest commercial paper rating category
utilized by Standard & Poor's Ratings Group which uses the numbers 1+, 1, 2
and 3 to denote relative strength within its "A" classification.
APPENDIX
B
PROXY
VOTING SUMMARY FOR
Donoghue
Forlines LLC
Proxy Voting and Corporate Actions Donoghue
Forlines LLC (“ADVISER”), as a matter of policy and as a
fiduciary, has responsibility for voting proxies for portfolio securities
consistent with the best economic interests of the Funds, Portfolios and
clients. Our firm maintains written policies and procedures as to the handling,
research, voting and reporting of proxy voting and makes appropriate disclosures
about our firm’s
proxy
policies and practices. Our policy and practice includes the responsibility to
monitor corporate actions, receive and vote client proxies and disclose any
potential conflicts of interest as well as making information available to
clients about the voting of proxies for their portfolio securities and
maintaining relevant and required records. Subject to our oversight, our firm
has delegated authority to vote proxies for our clients to a third party service
provider.
Background
Proxy voting is an important right of
shareholders and reasonable care and diligence must be undertaken to
ensure that such rights are properly and
timely exercised.
Investment advisers registered with the SEC, and
which exercise voting authority with respect to client securities, are required by Rule 206(4)-6 of the Advisers Act to (a) adopt and implement
written policies and procedures that
are reasonably designed to ensure that client securities are voted in the best
interests of clients, which must include how an adviser addresses material
conflicts that may arise between an adviser's interests and those of its Funds,
Portfolios and clients; (b) to disclose to Funds, Portfolios and clients how
they may obtain information from the adviser with respect to the voting of
proxies for their securities; (c) to describe to clients a summary of its proxy
voting policies and procedures and, upon request, furnish a copy to its clients;
and (d) maintain certain records relating to the adviser's proxy voting
activities when the adviser does have proxy voting authority.
Responsibility
The
Chief Compliance Officer has the responsibility for the implementation and
monitoring of our proxy voting policy, practices, disclosures and record keeping,
including outlining our voting guidelines in our procedures.