STATEMENT OF ADDITIONAL INFORMATION

November 1, 2022

 

MUTUAL FUND SERIES TRUST

 

Catalyst Insider Income Fund

Class A: IIXAX Class C: IIXCX Class I: IIXIX

Catalyst/SMH High Income Fund

Class A: HIIFX Class C: HIICX Class I: HIIIX

Catalyst/SMH Total Return Income Fund

Class A: TRIFX Class C: TRICX Class I: TRIIX

Catalyst/MAP Global Balanced Fund

Class A: TRXAX Class C: TRXCX Class I: TRXIX

Catalyst/CIFC Floating Rate Income Fund

Class A: CFRAX Class C: CFRCX Class C-1: CFRFX
Class I: CFRIX

Catalyst Enhanced Income Strategy Fund

Class A:EIXAX Class C: EIXCX Class I: EIXIX

 

 

4221 North 203rd Street, Suite 100

Elkhorn, Nebraska 68022

 

This Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with the Prospectus of the Catalyst Insider Income Fund (the “Insider Income Fund”), Catalyst/SMH High Income Fund (the “High Income Fund”), Catalyst/SMH Total Return Income Fund (the “Total Return Income Fund”), Catalyst/MAP Balanced Fund (the “Global Balanced Fund”), Catalyst/CIFC Floating Rate Income Fund (the “Floating Rate Income Fund”) and Catalyst Enhanced Income Strategy Fund (the “Enhanced Income Strategy Fund”) (each a “Fund” and, collectively, the “Funds”) dated November 1, 2022. Each Fund is a separate series of Mutual Fund Series Trust (the “Trust”), an open-end management company organized as an Ohio business trust. The Funds’ Annual Report to shareholders for the fiscal year ended June 30, 2022 is incorporated herein by reference and available on the Fund’s website, www.CatalystMF.com. This SAI has been incorporated in its entirety into the Prospectus. Copies of the Prospectus, Annual and Semi-Annual Reports may be obtained at no charge from the Trust by writing to the above address or calling 1-866-447-4228.

1 
 

 

TABLE OF CONTENTS

 

INVESTMENT RESTRICTIONS     3
OTHER INVESTMENT POLICIES     5
ADDITIONAL INFORMATION ABOUT INVESTMENTS AND RISKS     6
DISCLOSURE OF PORTFOLIO HOLDINGS     27
TRUSTEES AND OFFICERS     28
PRINCIPAL SHAREHOLDERS     34
ADVISOR AND SUB-ADVISORS     43
CODE OF ETHICS     50
TRANSFER AGENT, FUND ACCOUNTING AGENT AND ADMINISTRATOR     50
COMPLIANCE SERVICES     52
CUSTODIAN     52
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     52
COUNSEL     53
DISTRIBUTOR     53
ADDITIONAL COMPENSATION TO FINANCIAL INTERMEDIARIES     55
PROXY VOTING POLICY     57
PORTFOLIO TURNOVER     58
PORTFOLIO TRANSACTIONS     58
Purchase and Redemption of Shares     60
Reduction of Up-Front Sales Charge on Class A Shares     61
Waivers of Up-Front Sales Charge on Class A Shares     62
Exchange Privilege     63
WAIVERS OF DEFERRED SALES CHARGE ON CLASS C-1 SHARES     63
SALES CHARGE WAIVERS AND REDUCTIONS AVAILABLE THROUGH     63
CERTAIN FINANCIAL INTERMEDIARIES     63
NET ASSET VALUE     63
TAX INFORMATION     65
INVESTMENTS IN FOREIGN SECURITIES     66
BACKUP WITHHOLDING     66
FOREIGN SHAREHOLDERS     67
FINANCIAL STATEMENTS     67
Appendix A—Description of Commercial Paper and Bond Ratings     68
Appendix B     70
Appendix C     77
Appendix D     78
Appendix E     81
Appendix F     84

 

 

2 
 

MUTUAL FUND SERIES TRUST

 

The Trust, an Ohio business trust, is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company (or mutual fund). The Trust was formed by an Agreement and Declaration of Trust on February 27, 2006. The Agreement and Declaration of Trust permits the Board of Trustees of the Trust (“Board”) to issue an unlimited number of shares of beneficial interest of separate series without par value. The Insider Income Fund, High Income Fund and the Total Return Income Fund are each separate non-diversified series of the Trust and the Global Balanced Fund, Floating Rate Income Fund and the Enhanced Income Strategy Fund are diversified series of the Trust. There are currently several other series (or funds) and additional series may be created by the Board from time to time.

 

Catalyst Capital Advisors LLC (“Catalyst” or the “Advisor”) acts as advisor to the Funds.

 

SMH Capital Advisors, LLC serves as the investment sub-advisor to the High Income and Total Return Income Funds.

 

Managed Assets Portfolios, LLC serves as the investment sub-advisor to the Global Balanced Fund.

 

CIFC Investment Management LLC serves as the investment sub-advisor to the Floating Rate Income Fund.

 

Wynkoop, LLC serves as the investment sub-advisor to the Enhanced Income Strategy Fund.

 

The Trust does not issue share certificates. All shares are held in non-certificate form registered on the books of the Trust and the Trust’s transfer agent for the account of the shareholder. Each share of a series represents an equal proportionate interest in the assets and liabilities belonging to that series with each other share of that series and is entitled to such dividends and distributions out of income belonging to the series as are declared by the Board. The shares do not have cumulative voting rights or any preemptive or conversion rights, and the Board has the authority from time to time to divide or combine the shares of any series into a greater or lesser number of shares of that series so long as the proportionate beneficial interest in the assets belonging to that series and the rights of shares of any other series are in no way affected. In case of any liquidation of a series, the holders of shares of the series being liquidated will be entitled to receive as a class a distribution out of the assets, net of the liabilities, belonging to that series. Expenses attributable to any series are borne by that series. There can be no assurance that a series will grow to an economically viable size, in which case the Board may determine to liquidate the series at a time that may not be opportune for shareholders. Any general expenses of the Trust not readily identifiable as belonging to a particular series are allocated by or under the direction of the Board in such manner as the Board determine to be fair and equitable. No shareholder is liable to further calls or to assessment by the Trust without his or her express consent.

 

Each Fund offers four classes of shares: Class A, Class C, Class I and Class T Shares. Each of the Total Return Income Fund and Floating Rate Income Fund offers Class C-1 Shares. As of the date of this SAI, only Class A, Class C and Class I Shares of each Fund and Class C-1 Shares of the Floating Rate Income Fund are available for sale. Each share class represents an interest in the same assets of a Fund, has the same rights and is identical in all material respects except that (i) each class of shares may bear different distribution fees; (ii) each class of shares may be subject to different (or no) sales charges; (iii) certain other class specific expenses will be borne solely by the class to which such expenses are attributable; and (iv) each class has exclusive voting rights with respect to matters relating to its own distribution arrangements. The Board may classify and reclassify the shares of a Fund into additional classes of shares at a future date.

 

INVESTMENT RESTRICTIONS

 

The following investment restrictions are fundamental policies of each Fund and cannot be changed with respect to a Fund unless the change is approved by the lesser of (a) 67% or more of the shares present at a meeting of shareholders if the holders of more than 50% of the outstanding voting shares of that Fund are present or represented by proxy or (b) more than 50% of the outstanding voting shares of that Fund.

 

As a matter of fundamental policy, each Fund, except as otherwise noted, may not:

3 
 

 

(a)        borrow money, except as permitted under the Investment Company Act of 1940, as amended (“the 1940 Act”)*, and as interpreted or modified by regulatory authority having jurisdiction, from time to time;

 

(b)        issue senior securities, except as permitted under the 1940 Act*, and as interpreted or modified by regulatory authority having jurisdiction, from time to time;

 

(c)        engage in the business of underwriting securities issued by others, except to the extent that a Fund may be deemed to be an underwriter in connection with the disposition of portfolio securities;

 

(d)        purchase or sell real estate, which does not include securities of companies which deal in real estate or mortgages or investments secured by real estate or interests therein, except that each Fund reserves freedom of action to hold and to sell real estate acquired as a result of the Fund's ownership of securities;

 

(e)        purchase or sell physical commodities or forward contracts relating to physical commodities;

 

(f)        make loans to other persons, except (i) loans of portfolio securities, and (ii) to the extent that entry into repurchase agreements and the purchase of debt instruments or interests in indebtedness in accordance with a Fund's investment objective and policies may be deemed to be loans;

 

(g)       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. A Fund will consider the investments of underlying investment companies when determining its compliance with this restriction;

 

(h)        (Global Balanced Fund, Floating Rate Income Fund and Enhanced Income Strategy Fund Only) with respect to 75% of the Fund’s total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities issued by other investment companies, if, as a result (i) more than 5% of the Fund’s total assets would be invested in securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer.

 

*The 1940 Act limits a Fund’s ability to borrow money, prohibiting the Fund from issuing senior securities, except the Fund may borrow from any bank provided that immediately after any such borrowing there is an asset coverage of at least 300% for all borrowings by the Fund and provided further, that in the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days thereafter or such longer period as the SEC may prescribe by rules and regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowing shall be at least 300%.

 

With respect to interpretations of the SEC or its staff described in paragraph (b) above, the SEC and its staff have identified various securities trading practices and derivatives transactions used by mutual funds that give rise to potential senior security issues under Section 18(f) of the 1940 Act. However, rather than rigidly deeming all such practices as impermissible forms of issuing a "senior security" under Section 18(f), the SEC has adopted Rule 18f-4 under the 1940 Act, which permits a fund to enter into derivatives transactions and certain similar transactions notwithstanding the prohibitions and restrictions on the issuance of senior securities under Section 18(f) of the 1940 Act, subject to the conditions of the Rule.

 

 

 

 

 

 

4 
 

OTHER INVESTMENT POLICIES

 

The following investment policies are not fundamental and may be changed by the Board without the approval of the shareholders of the Funds:

 

(a)        No Fund will purchase securities or evidences of interest thereon on “margin.” This limitation is not applicable to short-term credit obtained by a Fund for the clearance of purchases and sales or redemption of securities, or to arrangements with respect to transactions involving futures contracts, and other permitted investments and techniques;

 

(b)        No Fund will mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any assets of the Fund except as may be necessary in connection with permitted borrowings. The Fund shall maintain asset coverage of 300% of all borrowing. Margin deposits, security interests, liens and collateral arrangements with respect to transactions involving options, futures contracts, short sales, securities lending and other permitted investments and techniques are not deemed to be a mortgage, pledge or hypothecation of assets for purposes of this limitation;

 

(c)         No Fund will purchase any security while borrowings representing more than one third of its total assets are outstanding;

 

(d)         (Global Balanced Fund only) Under normal circumstances, the Fund invests at least 25% of its assets in fixed income securities and at least 25% of its assets in equity securities;

 

(e)         (Global Balanced Fund only) Under normal conditions, at least 40% of the Fund’s assets will be in securities of issuers domiciled in at least 3 countries outside of the United States.

 

If a restriction on a Fund’s investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund assets invested in certain securities or other instruments, or change in average duration of the Fund’s investment portfolio, resulting from changes in the value of the Fund’s 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.

 

Pursuant to Rule 22e-4, no Fund will invest more than 15% of its net assets in securities for which there are legal or contractual restrictions on resale and other illiquid investments. Rule 144A securities with registration rights are not considered to be illiquid. If illiquid investments exceed 15% of a Fund’s net assets, the Fund will take corrective action consistent with Rule 22e-4.

 

Temporary Defensive Positions

From time to time, a Fund may take temporary defensive positions, which are inconsistent with the Fund's principal investment strategies, in attempting to respond to adverse market, economic, political, or other conditions. For example, a Fund may hold all or a portion of its assets in money market instruments, including cash, cash equivalents, U.S. government securities, other investment grade fixed income securities, certificates of deposit, bankers acceptances, commercial paper, money market funds and repurchase agreements. While a Fund is in a defensive position, the opportunity to achieve its investment objective will be limited. If a Fund invests in a money market fund, the shareholders of the Fund generally will be subject to duplicative management fees. Although a Fund would do this only in seeking to avoid losses, the Fund will be unable to pursue its investment objective during that time, and it could reduce the benefit from any upswing in the market.

 

 

 

5 
 

ADDITIONAL INFORMATION ABOUT INVESTMENTS AND RISKS

 

Unless restricted by the fundamental policies of any Fund, the following policies supplement the investment objectives and policies of the Funds as set forth in the Prospectus.

 

Common Stocks. The Funds may invest in common stocks, which include the common stock of any class or series of domestic or foreign corporations or any similar equity interest, such as a trust or partnership interest. These investments may or may not pay dividends and may or may not carry voting rights. Common stock occupies the most junior position in a company’s capital structure. The Funds may also invest in warrants and rights related to common stocks.

 

Investments in Small and Unseasoned Companies. Unseasoned and small companies may have limited or unprofitable operating histories, limited financial resources, and inexperienced management. In addition, they often face competition from larger or more established firms that have greater resources. Securities of small and unseasoned companies are frequently traded in the over-the-counter market or on regional exchanges where low trading volumes may result in erratic or abrupt price movements. To dispose of these securities, a Fund may need to sell them over an extended period or below the original purchase price. Investments by a Fund in these small or unseasoned companies may be regarded as speculative.

 

Securities of Other Investment Companies. The Funds may invest in securities issued by other investment companies. Each Fund intends to limit its investments in accordance with applicable law or as permitted by Rule 12d1-4. Among other things, such law would limit these investments so that, as determined immediately after a securities purchase is made by a Fund: (a) not more than 5% of the value of its total assets will be invested in the securities of any one investment company (the "5% Limitation"); (b) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group (the "10% Limitation"); (c) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund (the "3% Limitation"); and (d) not more than 10% of the outstanding voting stock of any one closed-end investment company will be owned by the Fund together with all other investment companies that have the same advisor. Under certain sets of conditions, different sets of restrictions may be applicable. As a shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of that investment company’s expenses, including advisory fees. These expenses would be in addition to the advisory and other expenses that a Fund bears directly in connection with its own operations. Investment companies in which a Fund may invest may also impose a sales or distribution charge in connection with the purchase or redemption of their Shares and other types of commissions or charges. Such charges will be payable by the Fund and, therefore, will be borne directly by the Fund’s shareholders.

 

The Funds intend to rely on Section 12(d)(1)(F) and Rule 12d1-4 under the 1940 Act which in conjunction with one another allow registered investment companies (such as the Fund) to exceed the 3%, 5% and 10% Limitation and the 10% Limitations, provided the aggregate sales loads any investor pays (i.e., the combined distribution expenses of both the acquiring fund and the acquired funds) do not exceed the limits on sales loads established by Financial Industry Regulatory Authority (“FINRA”) for funds of funds, and the registered investment company “mirror votes” any securities purchased pursuant to Section 12(d)(1)(F).

 

Exchange-Traded Funds. Each Fund may invest in a range of exchange-traded funds ("ETFs"). An ETF is an investment company that offers investors a proportionate share in a portfolio of stocks, bonds, commodities, currencies or other securities. Like individual equity securities, ETFs are traded on a stock exchange and can be bought and sold throughout the day. Traditional ETFs attempt to achieve the same investment return as that of a particular market index, such as the S&P 500 Index. To mirror the performance of a market index, an ETF invests either in all of the securities in the index or a representative sample of securities in the index. Some ETFs also invest in futures contracts or other derivative instruments to track their benchmark index. Unlike traditional indexes, which generally weight their holdings based on relative size (market capitalization), enhanced or fundamentally weighted indexes use weighting structures that include other criteria such as earnings, sales, growth, liquidity, book value or dividends. Some ETFs also use active investment strategies instead of tracking broad market indexes. Investments in ETFs are considered to be investment companies, see "Securities of Other Investment Companies" above.

6 
 

When a Fund invests in ETFs, it is subject to the specific risks of the underlying investment of the ETF. These risks could include those associated with small companies, illiquidity risk, sector risk, foreign and emerging market risk, short selling, leverage as well as risks associated with fixed income securities, real estate investments, and commodities. ETFs in which the Fund invests will not be able to replicate exactly the performance of the indices or sector they track because the total return generated by the securities will be reduced by transaction costs incurred in adjusting the actual balance of the securities. In addition, the ETFs in which the Fund invests will incur expenses not incurred by their applicable indices. Certain securities comprising the indices tracked by the ETFs may, from time to time, temporarily be unavailable, which may further impede the ETFs' ability to track their applicable indices.

When a Fund invests in sector ETFs, there is a risk that securities within the same group of industries will decline in price due to sector-specific market or economic developments. If a Fund invests more heavily in a particular sector, the value of its shares may be especially sensitive to factors and economic risks that specifically affect that sector. As a result, a Fund’s share price may fluctuate more widely than the value of shares of a mutual fund that invests in a broader range of industries. Additionally, some sectors could be subject to greater government regulation than other sectors. Therefore, changes in regulatory policies for those sectors may have a material effect on the value of securities issued by companies in those sectors. The sectors in which each Fund may be more heavily invested will vary.

To offset the risk of declining security prices, the Funds may invest in inverse ETFs.  Inverse ETFs are funds designed to rise in price when stock prices are falling.   Inverse ETF index funds seek to provide investment results that will match a certain percentage of the inverse of the performance of a specific benchmark on a daily basis.  For example, if an inverse ETF’s current benchmark is the inverse of the Russell 2000 Index and the ETF meets its objective, the value of the ETF will tend to increase on a daily basis when the value of the underlying index decreases (e.g., if the Russell 2000 Index goes down 5% then the inverse ETF’s value should go up 5%). 

 

ETFs or Inverse ETFs may employ leverage, which magnifies the changes in the underlying stock index upon which they are based.  Any strategy that includes inverse or leveraged securities could cause a Fund to suffer significant losses. 

 

Closed-End Investment Companies. The Funds may invest in “closed-end” investment companies (or “closed-end funds”), subject to the investment restrictions set forth below. The Funds, together with any company or companies controlled by the Funds, and any other investment companies having a sub-advisor as an investment advisor, may purchase only up to 10% of the total outstanding voting stock of any closed-end fund. Typically, the common shares of closed-end funds are offered to the public in a one-time initial public offering by a group of underwriters who retain a spread or underwriting commission. Such securities are then listed for trading on a national securities exchange or in the over-the-counter markets. Because the common 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 common shares of closed-end funds in the secondary market. The common shares of closed-end funds may trade at a price per share which is more or less than the net asset value (“NAV”) per share, the difference representing the “market premium” and the “market discount” of such common shares, respectively.

 

There can be no assurance that a market discount on common shares of any closed-end fund 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 NAV of that fund’s shares. Similarly, there can be no assurance that the common shares of closed-end funds which trade 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. The Funds may also invest in preferred shares of closed-end funds.

 

An investor in the Funds should recognize that he may invest directly in closed-end funds and that by investing in closed-end funds indirectly through the Funds he will bear not only his proportionate share of the expenses of the Funds (including operating costs and investment advisory and administrative fees) but also, indirectly, similar fees of the underlying closed-end funds. An investor may incur increased tax liabilities by investing in the Funds rather than directly in the underlying funds.

7 
 

 

Business Development Companies (BDCs) and Special Purpose Acquisition Companies (SPACs). The Funds may invest in BDCs and SPACs. Federal securities laws impose certain restraints upon the organization and operations of BDCs and SPACs. For example, BDCs are required to invest at least 70% of their total assets primarily in securities of private companies or in thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and high quality debt instruments that mature in one year or less. SPACs typically hold 85% to 100% of the proceeds raised from their IPO in trust to be used at a later date for a merger or acquisition. The SPAC must sign a letter of intent for a merger or acquisition within 18 months of the IPO. Otherwise it will be forced to dissolve and return the assets held in the trust to the public stockholders. However, if a letter of intent is signed within 18 months, the SPAC can close the transaction within 24 months. In addition, the target of the acquisition must have a fair market value that is equal to at least 80% of the SPAC’s assets at the time of acquisition and a majority of shareholders voting must approve this combination with no more than 20% of the shareholders voting against the acquisition and requesting their money back. When a deal is proposed, a shareholder can stay with the transaction by voting for it or elect to sell his shares in the SPAC if voting against it. SPACs are more transparent than private equity as they may be subject to certain SEC regulations, including registration statement requirements under the Securities Act of 1933 and 10-K, 10-Q and 8-K financial reporting requirements. Since SPACs are publicly traded, they provide limited liquidity to an investor (i.e., investment comes in the form of common shares and warrants which can be traded). Other than the risks normally associated with IPOs, SPACs’ public shareholders' risks include limited liquidity of their securities (as shares are generally thinly traded), loss of 0-15% of their investments (resulting from the SPACs operating costs) if no deals are made and lack of investment diversification as assets are invested in a single company.

 

Options on Securities. Each Fund may purchase put or call options on equity securities (including securities of ETFs). Each Fund may also write call options and put options on stocks only if they are covered, as described below, and such options must remain covered so long as the Fund is obligated as a writer. Option transactions can be executed either on a national exchange or through a private transaction with a broker-dealer (an “over-the-counter” transaction). Each Fund may write (sell) “covered” call options and purchase options in a spread to hedge (cover) written options, and to close out options previously written by it.

 

A call option gives the holder (buyer) the “right to purchase” a security at a specified price (the exercise price) at any time until a certain date (the expiration date). So long as the obligation of the writer (seller) of a call option continues, the writer may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring the writer to deliver the underlying security against payment of the exercise price. This obligation terminates upon the expiration of the call option, or such earlier time at which the writer effects a closing purchase transaction by purchasing an option identical to that previously sold. To secure the obligation to deliver the underlying security upon exercise of a call option subject to the Options Clearing Corporation (“OCC”), a writer is required to deposit in escrow the underlying security or other assets in accordance with OCC rules.

 

The purpose of writing covered call options is to generate additional premium income for a Fund. This premium income will serve to enhance a Fund’s total return and will reduce the effect of any price decline of the security involved in the option. Covered call options will generally be written on securities which, in the opinion of the advisor, are not expected to make any major price moves in the near future but which, over the long term, are deemed to be attractive investments for the particular Fund.

 

A Fund may write only call options that are “covered”. A call option is “covered” if the Fund either owns the underlying security or has an absolute and immediate right (such as a call with the same or a later expiration date) to acquire that security on the same economic terms. If a Fund writes a call option, the purchaser of the option has the right to buy (and the Fund has the obligation to sell) the underlying security at the exercise price throughout the term of the option. The initial amount paid to a Fund by the purchaser of the option is the “premium.” A Fund’s obligation as the writer of a call option to deliver the underlying security against payment of the exercise price will terminate either upon expiration of the option or earlier if the Fund is able to effect a “closing purchase transaction” through the purchase of an equivalent option. There can be no assurance that a closing purchase transaction can be effected at any particular time or at all. A Fund would not be able to effect a closing purchase transaction after it had received notice of exercise. Fund securities on which call options may be written will be purchased solely on the basis of investment considerations consistent with a Fund’s investment

8 
 

objective. The writing of covered call options is a conservative investment technique believed to involve relatively little risk (in contrast to the writing of naked or uncovered options, which the Funds will not do), but capable of enhancing a Fund’s total return. When writing a covered call option, a Fund, in return for the premium, gives up the opportunity for profit from a price increase in the underlying security above the exercise price, but retains the risk of loss should the price of the security decline. Unlike one who owns securities not subject to an option, a Fund has no control over when the Fund may be required to sell the underlying securities, since it may be assigned an exercise notice at any time prior to the expiration of its obligation as a writer. If a call option which a Fund has written expires, the Fund will realize a gain in the amount of the premium; however, such gain may be offset by a decline in the market value of the underlying security during the option period. If the call option is exercised, the Fund will realize a gain or loss from the sale of the underlying security.

 

The premium received is the market value of an option. The premium a Fund will receive from writing a call option will reflect, among other things, the current market price of the underlying security, the relationship of the exercise price to such market price, the historical price volatility of the underlying security, and the length of the option period. Once the decision to write a call option has been made, the Advisor, in determining whether a particular call option should be written on a particular security, will consider the reasonableness of the anticipated premium and the likelihood that a liquid secondary market will exist for such option. The premium received by a Fund for writing covered call options will be recorded as a liability in the Fund’s statement of assets and liabilities. This liability will be adjusted daily to the option’s current market value which is the mean of the closing bid and asked prices, after closing rotation is completed (i.e., after such closing prices are computed, currently at 4:02 p.m. and 4:15 p.m., depending on the type of contract), the closing prices as of the time at which the net asset value per share of the Fund is computed (the close of the New York Stock Exchange). The liability will be extinguished upon expiration of the option, the purchase of an identical option in a closing transaction, or delivery of the underlying security upon the exercise of the option.

 

Closing transactions will be effected in order to realize a profit on an outstanding call option, to prevent an underlying security from being called, or to permit the sale of the underlying security. Furthermore, effecting a closing transaction will permit a Fund to write another call option on the underlying security with either a different exercise price or expiration date or both. If a Fund desires to sell a particular security from its portfolio on which it has written a call option, the Fund will seek to effect a closing transaction prior to, or concurrently with, the sale of the security. There is, of course, no assurance that a Fund will be able to effect such closing transactions at a favorable price. If a Fund cannot effect such a closing transaction, the Fund may be required to hold a security that it might otherwise have sold, in which case it would continue to be at market risk on the security. A Fund will pay transaction costs in connection with the writing of options to close out previously written options. Such transaction costs are normally higher than those applicable to purchases and sales of portfolio securities.

 

The exercise price of the options may be below, equal to, or above the current market values of the underlying securities at the time the options are written. From time to time, a Fund may purchase an underlying security for delivery in accordance with an exercise notice of a call option assigned to the Fund, rather than delivering such security from its portfolio. In such cases, additional costs will be incurred.

 

A Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from the writing of the option. It is possible that the cost of effecting a closing transaction may be greater than the premium received by a Fund for writing the option. Because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the purchase of a call option is likely to be offset in whole or in part by appreciation of the underlying security owned by a Fund.

 

In order to write a call option, a Fund is required to comply with OCC rules and the rules of the various exchanges with respect to collateral requirements.

 

A Fund may also purchase put options so long as they are listed on an exchange. If a Fund purchases a put option, it has the option to sell the subject security at a specified price at any time during the term of the option.

 

9 
 

Purchasing put options may be used as a portfolio investment strategy when the Advisor or sub-advisor perceives significant short-term risk but substantial long-term appreciation for the underlying security. The put option acts as an insurance policy, as it protects against significant downward price movement while it allows full participation in any upward movement. If a Fund is holding a stock that the Advisor or sub-advisor feels has strong fundamentals, but for some reason may be weak in the near term, it may purchase a listed put on such security, thereby giving itself the right to sell such security at a certain strike price throughout the term of the option. Consequently, a Fund will exercise the put only if the price of such security falls below the strike price of the put. The difference between the put option’s strike price and the market price of the underlying security on the date a Fund exercises the put, less transaction costs, will be the amount by which the Fund will be able to hedge against a decline in the underlying security. If, during the period of the option the market price for the underlying security remains at or above the put option’s strike price, the put will expire worthless, representing a loss of the price a Fund paid for the put, plus transaction costs. If the price of the underlying security increases, the profit a Fund realizes on the sale of the security will be reduced by the premium paid for the put option less any amount for which the put may be sold.

 

A Fund may write put options on a fully covered basis on a stock the Fund intends to purchase. If a Fund writes a put option, the purchaser of the option has the right to sell (and the Fund has the obligation to buy) the underlying security at the exercise price throughout the term of the option. The initial amount paid to a Fund by the purchaser of the option is the “premium.” A Fund’s obligation to purchase the underlying security against payment of the exercise price will terminate either upon expiration of the option or earlier if the Fund is able to effect a “closing purchase transaction” through the purchase of an equivalent option. There can be no assurance that a closing purchase transaction can be effected at any particular time or at all.

 

A Fund may purchase a call option or sell a put option on a stock (including securities of ETFs) it may purchase at some point in the future. The purchase of a call option or sale of a put option is viewed as an alternative to the purchase of the actual stock. The number of option contracts purchased multiplied by the exercise price times the option multiplier will normally not be any greater than the number of shares that would have been purchased had the underlying security been purchased. If a Fund purchases a call option, it has the right but not the obligation to purchase (and the seller has the obligation to sell) the underlying security at the exercise price throughout the term of the option. The initial amount paid by a Fund to the seller of the call option is known as the “premium.” If during the period of the option the market price of the underlying security remains at or below the exercise price, a Fund will be able to purchase the security at the lower market price. The profit or loss a Fund may realize on the eventual sale of a security purchased by means of the exercise of a call option will be reduced by the premium paid for the call option. If, during the period of the call option, the market price for the underlying security is at or below the call option’s strike price, the call option will expire worthless, representing a loss of the price a Fund paid for the call option, plus transaction costs.

 

Stock Index Options. A Fund will write call options on stock indexes only if on such date it holds a portfolio of stocks at least equal to the value of the index times the multiplier times the number of contracts.

 

Transactions in Stock Options. Purchase and sales of options involves the risk that there will be no market in which to effect a closing transaction. An option position may be closed out only on an exchange that provides a secondary market for an option of the same series or if the transaction was an over-the-counter transaction, through the original broker-dealer. Although a Fund will generally buy and sell options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange will exist for any particular option, or at any particular time, and for some options no secondary market on an exchange may exist. If the Fund, as a covered call or put option writer, is unable to effect an offsetting closing transaction in a secondary market, it will, for a call option it has written, not be able to sell the underlying security until the call option expires and, for a put option it has written, not be able to avoid purchasing the underlying security until the put option expires.

 

Options on Stock Indexes. Each Fund’s purchase and sale of options on stock indexes will be subject to risks described above under “Transactions in Stock Options.” In addition, the distinctive characteristics of options on stock indexes create certain risks that are not present with stock options.

 

Since the value of a stock index option depends upon the movements in the level of the stock index, rather than the price of a particular stock, whether a Fund will realize a gain or loss on the purchase or sale of an

10 
 

option on a stock index depends upon movements in the level of stock prices in the stock market generally or in an industry or market segment rather than movements in the price of a particular stock. Accordingly, successful use by a Fund of options on stock indexes is subject to the advisor’s ability to correctly predict movements in the direction of the stock market generally or of a particular industry or market segment. This requires skills and techniques different from predicting changes in the price of individual stocks.

 

Stock index prices may be distorted if trading of certain stocks included in the stock index is interrupted. Trading in the stock index options also may be interrupted in certain circumstances, such as if trading were halted in a substantial number of stocks included in the stock index. If this occurred, a Fund would not be able to close out options that it had purchased or written and, if restrictions on exercise were imposed, might not be able to exercise an option that it was holding, which could result in substantial losses to the Fund. It is the policy of each Fund to purchase or write options only on stock indexes that include a number of stocks sufficient to minimize the likelihood of a trading halt in the stock index, for example, the S&P 100 or S&P 500 index option.

 

Trading in stock index options commenced in April 1983 with the S&P 100 option (formerly called the CBOE 100). Since that time, a number of additional stock index option contracts have been introduced, including options on industry stock indexes. Although the markets for certain stock index option contracts have developed rapidly, the markets for other stock index options are still relatively illiquid. The ability to establish and close out positions on such options will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop in all stock index option contracts. A Fund will not purchase or sell stock index option contracts unless and until, in the Advisor or sub-advisor’s opinion, the market for such options has developed sufficiently that the risk in connection with these transactions is no greater than the risk in connection with options on stock.

 

Hedging. Hedging is a means of transferring risk that an investor does not wish to assume during an uncertain market environment. The Funds are permitted to enter into these transactions solely: (a) to hedge against changes in the market value of portfolio investments and against changes in the market value of investments intended to be purchased, (b) to close out or offset existing positions, or (c) to manage the duration of a portfolio’s fixed income investments.

 

Hedging activity in a Fund may include buying or selling (writing) put or call options on stocks, shares of exchange traded funds or stock indexes, entering into stock index futures contracts or buying or selling options on stock index futures contracts or financial futures contracts, such as futures contracts on U.S. Treasury securities and interest related indices, and options on financial futures. The Fund will buy or sell options on stock index futures traded on a national exchange or board of trade and options on securities and on stock indexes traded on national securities exchanges or through private transactions directly with a broker-dealer. The Fund may hedge a portion of its portfolio by selling stock index futures contracts or purchasing puts on these contracts to limit exposure to an actual or anticipated market decline. A Fund may hedge against fluctuations in currency exchange rates, in connection with its investments in foreign securities, by purchasing foreign forward currency exchange contracts. All hedging transactions must be appropriate for reduction of risk and they cannot be for speculation.

 

The Funds may engage in transactions in futures contracts and options on futures contracts.

 

Convertible Securities. The Funds may invest in convertible securities, including debt securities or preferred stock that may be converted into common stock or that carry the right to purchase common stock. Convertible securities entitle the holder to exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time. They also entitle the holder to receive interest or dividends until the holder elects to exercise the conversion privilege.

 

The terms of any convertible security determine its ranking in a company’s capital structure. In the case of subordinated convertible debentures, the holder’s claims on assets and earnings are generally subordinate to the claims of other creditors, and senior to the claims of preferred and common stockholders. In the case of convertible preferred stock, the holder’s claims on assets and earnings are subordinate to the claims of all creditors and are senior to the claims of common stockholders. As a result of their ranking in a company’s capitalization, convertible securities that are rated by nationally recognized statistical rating organizations are generally rated below other obligations of the company and many convertible securities are not rated.

11 
 

 

Preferred Stock. The Funds may invest in preferred stock. Preferred stock, unlike common stock, offers a stated dividend rate payable from the issuer’s earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of the preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as call/redemption provisions prior to maturity, a negative feature when interest rates decline.

 

Warrants. The Funds may invest in warrants. A Fund may purchase warrants issued by domestic and foreign companies to purchase newly created equity securities consisting of common and preferred stock. Warrants are securities that give the holder the right, but not the obligation to purchase equity issues of the company issuing the warrants, or a related company, at a fixed price either on a date certain or during a set period. The equity security underlying a warrant is authorized at the time the warrant is issued or is issued together with the warrant.

 

Investing in warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and, thus, can be a speculative investment. At the time of issue, the cost of a warrant is substantially less than the cost of the underlying security itself, and price movements in the underlying security are generally magnified in the price movements of the warrant. This leveraging effect enables the investor to gain exposure to the underlying security with a relatively low capital investment. This leveraging increases an investor’s risk, however, in the event of a decline in the value of the underlying security and can result in a complete loss of the amount invested in the warrant. In addition, the price of a warrant tends to be more volatile than, and may not correlate exactly to, the price of the underlying security. If the market price of the underlying security is below the exercise price of the warrant on its expiration date, the warrant will generally expire without value. The value of a warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the company whose equity underlies the warrant or a change in the perception as to the future price of the underlying security, or any combination thereof. Warrants generally pay no dividends and confer no voting or other rights other than to purchase the underlying security.

 

United States Government Obligations. The Funds may invest in obligations issued or guaranteed by the United States Government, or by its agencies or instrumentalities. Obligations issued or guaranteed by federal agencies or instrumentalities may or may not be backed by the “full faith and credit” of the United States. Securities that are backed by the full faith and credit of the United States include Treasury bills, Treasury notes, Treasury bonds, and obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank. In the case of securities not backed by the full faith and credit of the United States, the Funds must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the United States itself in the event the agency or instrumentality does not meet its commitments. Securities that are not backed by the full faith and credit of the United States include, but are not limited to, obligations of the Tennessee Valley Authority, the Federal National Mortgage Association and the United States Postal Service, each of which has the right to borrow from the United States Treasury to meet its obligations, and obligations of the Federal Farm Credit System and the Federal Home Loan Banks, both of whose obligations may be satisfied only by the individual credit of each issuing agency.

 

Foreign Government Obligations. The Funds may invest in short-term obligations of foreign sovereign governments or of their agencies, instrumentalities, authorities or political subdivisions. These securities may be denominated in United States dollars or in another currency. See “Foreign Investments.”

 

Bank Obligations. Each Fund may invest in bank obligations such as bankers’ acceptances, certificates of deposit, and time deposits.

 

Bankers’ acceptances are negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Investments will be in bankers’ acceptances guaranteed by domestic and foreign banks having, at the time of investment, capital, surplus, and undivided profits in excess of $100,000,000 (as of the date of their most recently published financial statements).

 

12 
 

Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return.

 

Commercial Paper. Commercial paper consists of unsecured promissory notes, including Master Notes, issued by corporations. Issues of commercial paper normally have maturities of less than nine months and fixed rates of return. Master Notes, however, are obligations that provide for a periodic adjustment in the interest rate paid and permit daily changes in the amount borrowed.

 

Master Notes are governed by agreements between the issuer and the Advisor or sub-advisor acting as agent, for no additional fee, in its capacity as advisor to a Fund and as fiduciary for other clients for whom it exercises investment discretion. The monies loaned to the borrower come from accounts maintained with or managed by the Advisor or sub-advisor or its affiliates pursuant to arrangements with such accounts. Interest and principal payments are credited to such accounts. The Advisor or sub-advisor, acting as a fiduciary on behalf of its clients, has the right to increase or decrease the amount provided to the borrower under an obligation. The borrower has the right to pay without penalty all or any part of the principal amount then outstanding on an obligation together with interest to the date of payment. Since these obligations typically provide that the interest rate is tied to the Treasury bill auction rate, the rate on Master Notes is subject to change. Repayment of Master Notes to participating accounts depends on the ability of the borrower to pay the accrued interest and principal of the obligation on demand which is continuously monitored by the Advisor or sub-advisor. Master Notes typically are not rated by credit rating agencies.

 

The Funds may purchase commercial paper consisting of issues rated at the time of purchase within the three highest rating categories by a nationally recognized statistical rating organization (an “NRSRO”). The Funds may also invest in commercial paper that is not rated but is determined by the Advisor or sub-advisor, under guidelines established by the Board, to be of comparable quality.

 

Other Fixed Income Securities. Other fixed income securities in which the Funds may invest include nonconvertible preferred stocks and nonconvertible corporate debt securities.

 

The Funds may invest in short-term investments (including repurchase agreements “collateralized fully,” as provided in Rule 2a-7 under the 1940 Act; interest-bearing or discounted commercial paper, including U.S. dollar-denominated commercial paper of foreign issuers; and any other taxable and tax-exempt money market instruments, including variable rate demand notes, that are “Eligible Securities” as defined in Rule 2a-7 under the 1940 Act).

 

Variable Amount Master Demand Notes. Variable amount master demand notes are unsecured demand notes that permit the indebtedness thereunder to vary and provide for periodic readjustments in the interest rate according to the terms of the instrument. They are also referred to as variable rate demand notes. Because master demand notes are direct lending arrangements between a Fund and the issuer, they are not normally traded. Although there is no secondary market in the notes, a Fund may demand payment of principal and accrued interest at any time or during specified periods not exceeding one year, depending upon the instrument involved, and may resell the note at any time to a third party. The Advisor or sub-advisor will consider the earning power, cash flow, and other liquidity ratios of the issuers of such notes and will continuously monitor their financial status and ability to meet payment on demand.

 

Variable and Floating Rate Notes. A variable rate note is one whose terms provide for the readjustment of its interest rate on set dates and which, upon such readjustment, can reasonably be expected to have a market value that approximates its par value. A floating rate note is one whose terms provide for the readjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Such notes are frequently not rated by credit rating agencies. These notes must satisfy the same quality standards as commercial paper investments. Unrated variable and floating rate notes purchased by a Fund must be determined by the Advisor or sub-advisor under guidelines approved by the Board to be of comparable quality at the time of purchase to rated instruments eligible for purchase under the Fund’s investment policies. In making such determinations, the Advisor or sub-advisor will consider the earning power, cash flow and other liquidity ratios of the issuers of such notes (such issuers include financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. Although there may be no active secondary market with respect to a particular variable or floating

13 
 

rate note purchased by a Fund, a Fund may resell the note at any time to a third party. The absence of an active secondary market, however, could make it difficult for a Fund to dispose of a variable or floating rate note in the event the issuer of the note defaulted on its payment obligations and a Fund could, as a result or for other reasons, suffer a loss to the extent of the default. Variable or floating rate notes may be secured by bank letters of credit.

 

Foreign Investments. The Funds may invest in certain obligations or securities of foreign issuers. Certain of these investments may be in the form of American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”), other similar depositary receipts, and ETFs or other investment companies that invest in foreign securities, Yankee Obligations, and U.S. dollar-denominated securities issued by foreign branches of U.S. and foreign banks. Foreign investments may subject a Fund to investment risks that differ in some respects from those related to investment in obligations of U.S. domestic issuers. Such risks include future adverse political and economic developments, possible seizure, nationalization, or expropriation of foreign investments, less stringent disclosure requirements, the possible establishment of exchange controls or taxation at the source or other taxes, and the adoption of other foreign governmental restrictions.

 

Additional risks include less publicly available information, less government supervision and regulation of foreign securities exchanges, brokers and issuers, the risk that companies may not be subject to the accounting, auditing and financial reporting standards and requirements of U.S. companies, the risk that foreign securities markets may have less volume and that therefore many securities traded in these markets may be less liquid and their prices more volatile than U.S. securities, and the risk that custodian and brokerage costs may be higher. Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those respecting domestic issuers of similar securities or obligations. Foreign branches of U.S. banks and foreign banks may be subject to less stringent reserve requirements than those applicable to domestic branches of U.S. banks. Certain of these investments may subject the Funds to currency fluctuation risks.

 

Other investment risks include the possible imposition of foreign withholding taxes on certain amounts of a Fund’s income which may reduce the net return on non-U.S. investments as compared to income received from a U.S. issuer, the possible seizure or nationalization of foreign assets and the possible establishment of exchange controls, expropriation, confiscatory taxation, other foreign governmental laws or restrictions which might affect adversely payments due on securities held by the Fund, the lack of extensive operating experience of eligible foreign subcustodians and legal limitations on the ability of the Fund to recover assets held in custody by a foreign subcustodian in the event of the subcustodian’s bankruptcy.

 

In addition, there may be less publicly-available information about a non-U.S. issuer than about a U.S. issuer, and non-U.S. issuers may not be subject to the same accounting, auditing and financial record-keeping standards and requirements as U.S. issuers. In particular, the assets and profits appearing on the financial statements of an emerging market country issuer may not reflect its financial position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting principles. In addition, for an issuer that keeps accounting records in local currency, inflation accounting rules may require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuer’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately reflect the real condition of those issuers and securities markets.

 

Finally, in the event of a default of any such foreign obligations, it may be more difficult for a Fund to obtain or enforce a judgment against the issuers of such obligations. The manner in which foreign investors may invest in companies in certain emerging market countries, as well as limitations on such investments, also may have an adverse impact on the operations of a Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker or other entity and then have the shares purchased re-registered in the name of the Fund. Re-registration may in some instances not be able to occur on a timely basis, resulting in a delay during which the Fund may be denied certain of its rights as an investor.

 

Depositary Receipts. Each Fund’s investments may include securities of foreign issuers in the form of sponsored or unsponsored ADRs, GDRs and EDRs. ADRs are depositary receipts typically issued by a United

14 
 

State bank or trust company which evidence ownership of underlying securities issued by a foreign corporation. EDRs and GDRs are typically issued by foreign banks or trust companies, although they also may be issued by United States banks or trust companies, and evidence ownership of underlying securities issued by either a foreign or a United States corporation. Generally, depositary receipts in registered form are designed for use in the United States securities market and depositary receipts in bearer form are designed for use in securities markets outside the United States Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. Ownership of unsponsored depositary receipts may not entitle a Fund to financial or other reports from the issuer of the underlying security, to which it would be entitled as the owner of sponsored depositary receipts.

 

Emerging Markets. Each Fund may invest in securities of issuers located in “emerging markets” (lesser developed countries located outside of the U.S.) or ETFs or other investment companies that invest in emerging market securities. Investing in emerging markets involves not only the risks described above with respect to investing in foreign securities, but also other risks, including exposure to economic structures that are generally less diverse and mature than, and to political systems that can be expected to have less stability than, those of developed countries. Other characteristics of emerging markets that may affect investment include certain national policies that may restrict investment by foreigners in issuers or industries deemed sensitive to relevant national interests and the absence of developed structures governing private and foreign investments and private property. The typically small size of the markets of securities of issuers located in emerging markets and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities.

 

When-Issued and Delayed Delivery Securities. The Funds may purchase securities on a when-issued or delayed delivery basis. Delivery of and payment for these securities may take as long as a month or more after the date of the purchase commitment. The value of these securities is subject to market fluctuation during this period and no interest or income accrues to a Fund until settlement. When entering into a when-issued or delayed delivery transaction, a Fund will rely on the other party to consummate the transaction; if the other party fails to do so, the Fund may be disadvantaged.

 

Lower Rated or Unrated Securities. Securities rated Baa by Moody’s or BBB by S&P or lower, or deemed of comparable quality by the Advisor or sub-advisor, may have speculative characteristics. Securities rated below investment grade, i.e., below Baa or BBB, or deemed of comparable quality by the Advisor or sub-advisor, have higher yields but also involve greater risks than higher rated securities. Under guidelines used by rating agencies, securities rated below investment grade, or deemed of comparable quality, have large uncertainties or major risk exposures in the event of adverse conditions, which features outweigh any quality and protective characteristics. Securities with the lowest ratings are considered to have extremely poor prospects of ever attaining any real investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest and repay principal when due in the event of adverse business, financial or economic conditions, and/or to be in default or not current in the payment of interest or principal. Such securities are considered speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the terms of the obligations. The credit rating for these securities could also be further downgraded after they are purchased by a Fund, which would reduce their value. Accordingly, it is possible that these types of factors could, in certain instances, reduce the value of such securities held by a Fund with a commensurate effect on the value of its shares.

 

The secondary market for lower rated securities is not as liquid as that for higher rated securities. This market is concentrated in relatively few market makers and participants in the market are mostly institutional investors, including insurance companies, banks, other financial institutions and investment companies. In addition, the trading market for lower rated securities is generally lower than that for higher-rated securities, and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a particular issuer. These factors may have an adverse effect on a Fund’s ability to dispose of these securities and may limit its ability to obtain accurate market quotations for purposes of determining the value of its assets. If a Fund is not able to obtain precise or accurate market quotations for a particular security, it will become more difficult to value its portfolio, requiring the Fund to rely more on judgment. Less liquid secondary markets may also affect a Fund’s ability to sell securities at their fair value. Each Fund may invest up to 15% of its net assets, measured at the time of investment, in illiquid investments, which may be more difficult to value and to sell at fair value. If the secondary markets for high yield debt

15 
 

securities are affected by adverse economic conditions, the proportion of a Fund’s assets invested in illiquid investments may increase.

 

In the case of corporate debt securities, while the market values of securities rated below investment grade and comparable unrated securities tend to react less to fluctuations in interest rate levels than do those of higher-rated securities, the market values of certain of these securities also tend to be more sensitive to individual corporate developments and changes in economic conditions than higher-rated securities. Price volatility in these securities will be reflected in a Fund’s share value. In addition, such securities generally present a higher degree of credit risk. Issuers of these securities often are highly leveraged and may not have more traditional methods of financing available to them, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. The risk of loss due to default by such issuers is significantly greater than with investment grade securities because such securities generally are unsecured and frequently are subordinated to the prior payment of senior indebtedness.

 

A description of the quality ratings of certain NRSROs is contained in Appendix A.

 

Zero Coupon Securities. The Funds may invest in “zero coupon” U.S. Treasury, foreign government and U.S. and foreign corporate convertible and nonconvertible debt securities, which are bills, notes and bonds that have been stripped of their unmatured interest coupons and custodial receipts or certificates of participation representing interests in such stripped debt obligations and coupons. A zero coupon security pays no interest to its holder prior to maturity. Accordingly, such securities usually trade at a deep discount from their face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obligations of comparable maturities that make current distributions of interest. Each Fund anticipates that it will not normally hold zero coupon securities to maturity. Redemption of shares of the Fund that require it to sell zero coupon securities prior to maturity may result in capital gains or losses that may be substantial. Federal tax law requires that a holder of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year, even though the holder receives no interest payment on the security during the year. Such accrued discount will be includible in determining the amount of dividends the Fund must pay each year and, in order to generate cash necessary to pay such dividends, the Fund may liquidate portfolio securities at a time when it would not otherwise have done so.

 

Forward Foreign Currency Exchange Contracts. A Fund may enter into forward foreign currency exchange contracts in connection with its investments in foreign securities. A forward contract may be used by a Fund only to hedge against possible variations in exchange rates of currencies in countries in which it may invest. A forward foreign currency exchange contract (“forward contract”) involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Forward contracts are traded in the interbank market directly between currency traders (usually large commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades.

 

Futures Contracts. Each Fund may invest in futures contracts and options thereon (stock index futures contracts, interest rate futures contracts or currency futures contracts or options thereon) to hedge or manage risks associated with the Fund’s securities investments. When a futures contract is executed, each party deposits with a futures commission merchant (“FCM”) or broker (“Custodian”), a specified percentage of the contract amount, called the initial margin, and during the term of the contract, the amount of the deposit is adjusted based on the current value of the futures contract by payments of variation margin to or from the FCM or broker. In the case of options on futures, the holder of the option pays a premium and receives the right, upon exercise of the option at a specified price during the option period, to assume the option writer’s position in the futures contract and related margin account. If the option is exercised on the last trading day, cash in an amount equal to the difference between the option exercise price and the closing level of the relevant index, interest rate or currency price, as applicable, on the expiration date is delivered.

 

Positions in futures contracts may be closed out only on an exchange that provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, a Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a Fund had insufficient cash, it might have to sell portfolio investments to

16 
 

meet daily margin requirements at a time when it would be disadvantageous to do so. In addition, a Fund might be required to make delivery of the instruments underlying futures contracts it holds. The inability to close positions in futures or options thereon also could have an adverse impact on a Fund’s ability to hedge or manage risks effectively.

 

Successful use of futures by a Fund is also subject to the Advisor or sub-advisor’s ability to predict movements correctly in the direction of the market. There is typically an imperfect correlation between movements in the price of the future and movements in the price of the securities that are the subject of the hedge. In addition, the price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Due to the possibility of price distortion in the futures market and because of the imperfect correlation between the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest rate movements by the Advisor or sub-advisor may still not result in a successful hedging transaction over a short time frame.

 

The trading of futures contracts is also subject to the risk of trading halts, suspension, exchange or clearing house equipment failures, government intervention, insolvency of a commodities or brokerage firm or clearing house or other disruption of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover excess variation margin payments.

 

The purchase and sale of futures contracts or related options will not be a primary investment technique of the Funds. A Fund will purchase or sell futures contracts (or related options thereon) in accordance with the regulations of the Commodity Futures Trading Commission (“CFTC”) described above.

 

Interest Rate Futures. A Fund may purchase an interest rate futures contract as a hedge against changes in interest rates. An interest rate futures contract provides for the future sale by one party and the purchase by the other party of a certain amount of a specific interest rate sensitive financial instrument (debt security) at a specified price, date, time and place. Generally, if market interest rates increase, the value of outstanding debt securities declines (and vice versa). Thus, if a Fund holds long-term debt obligations and the Advisor or sub-advisor anticipates a rise in long-term interest rates, the Fund could, instead of selling its debt obligations, enter into an interest rate futures contract for the sale of similar long-term securities. If interest rates rise, the value of the futures contract would also rise, helping to offset the price decline of the obligations held by the Fund. A Fund might also purchase futures contracts as a proxy for underlying securities that it cannot currently buy.

 

Stock Index Futures. A Fund may purchase and sell stock index futures contracts as a hedge against changes resulting from market conditions in the values of securities that are held in its portfolio or that it intends to purchase or when such purchase or sale is economically appropriate for the reduction of risks inherent in the ongoing management of the Fund. A stock index futures contract is an agreement in which one party agrees to deliver to the other an amount of cash equal to a specific dollar amount times the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made.

 

A Fund may hedge a portion of its portfolio by selling stock index futures contracts or purchasing puts on these contracts to limit exposure to an actual or anticipated market decline. This provides an alternative to liquidation of securities positions. Conversely, during a market advance or when the Advisor or sub-advisor anticipates an advance, a Fund may hedge a portion of its portfolio by purchasing stock index futures, or options on these futures. This affords a hedge against a Fund not participating in a market advance when it is not fully invested and serves as a temporary substitute for the purchase of individual securities, which may later be purchased in a more advantageous manner.

 

A Fund’s successful use of stock index futures contracts depends upon the Advisor or sub-advisor’s ability to predict the direction of the market and is subject to various additional risks. The correlation between movement in the price of the stock index future and the price of the securities being hedged is imperfect and the risk from imperfect correlation increases as the composition of a Fund’s portfolio diverges from the composition of the relevant index. In addition, if a Fund purchases futures to hedge against market advances before it can invest in common stock in an advantageous manner and the market declines, there may be a loss on the futures contracts. In addition, the ability of a Fund to close out a futures position or an option on futures depends on a liquid secondary market. There is no assurance that liquid secondary markets will exist for any particular futures

17 
 

contract or option on a futures contract at any particular time. The risk of loss to a Fund is theoretically unlimited when the Fund sells an uncovered futures contract because there is an obligation to make delivery unless the contract is closed out, regardless of fluctuations in the price of the underlying security.

 

Foreign Currency Futures Transactions. Unlike forward foreign currency exchange contracts, foreign currency futures contracts and options on foreign currency futures contract are standardized as to amount and delivery period and may be traded on boards of trade and commodities exchanges or directly with a dealer which makes a market in such contracts and options. It is anticipated that such contracts may provide greater liquidity and lower cost than forward foreign currency exchange contracts. As part of their financial futures transactions, the Funds may use foreign currency futures contracts and options on such futures contracts. Through the purchase or sale of such contracts, the Funds may be able to achieve many of the same objectives as through investing in forward foreign currency exchange.

 

Foreign Currency Options. A foreign currency option provides the option buyer with the right to buy or sell a stated amount of foreign currency at the exercise price at a specified date or during the option period. A call option gives its owner the right, but not the obligation, to buy the currency, while a put option gives its owner the right, but not the obligation, to sell the currency. The option seller (writer) is obligated to fulfill the terms of the option sold if it is exercised. However, either seller or buyer may close its position during the option period in the secondary market for such options at any time prior to expiration.

 

A Fund may write only foreign currency options that are “covered” or for which the Fund has segregated liquid assets equal to the exercise liability of the option that are adjusted daily to the option’s current market value. A call option is “covered” if the Fund either owns the underlying currency or has an absolute and immediate right (such as a call with the same or a later expiration date) to acquire that currency. A Fund may write put options on a fully covered basis on a currency the Fund intends to purchase or where the Fund arranges with its Custodian to segregate cash or other liquid asset equal in value to the exercise liability of the put option adjusted daily to the option’s current market value. In addition, a Fund will not permit the option to become uncovered without segregating liquid assets as described above prior to the expiration of the option or termination through a closing purchase transaction as described in “Options on Securities” above.

 

A foreign currency call option rises in value if the underlying currency appreciates. Conversely, a foreign currency put option rises in value if the underlying currency depreciates. While purchasing a foreign currency option may protect a Fund against an adverse movement in the value of a foreign currency, it would not limit the gain which might result from a favorable movement in the value of the currency. For example, if a Fund were holding securities denominated in an appreciating foreign currency and had purchased a foreign currency put to hedge against a decline in the value of the currency, it would not have to exercise its put. In such an event, however, the amount of the Fund’s gain would be offset in part by the premium paid for the option. Similarly, if a Fund entered into a contract to purchase a security denominated in a foreign currency and purchased a foreign currency call to hedge against a rise in the value of the currency between the date of purchase and the settlement date, the Fund would not need to exercise its call if the currency instead depreciated in value. In such a case, the Fund would acquire the amount of foreign currency needed for settlement in the spot market at a lower price than the exercise price of the option.

 

REITs. The Funds 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 a Fund can invest in all three kinds of REITs, its emphasis is expected to be on investments in Equity REITs.

 

18 
 

Investments in the real estate industry involve particular risks. The real estate industry has been subject to substantial fluctuations and declines in real property values and income from real property on a local, regional and national basis in the past and may continue to be in the future. Real property values and income from real property may decline due to general and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, changes in zoning laws, casualty or condemnation losses, regulatory limitations on rents, changes in neighborhoods and in demographics, increases in market interest rates, or other factors. Factors such as these may adversely affect companies that own and operate real estate directly, companies that lend to such companies, and companies that service the real estate industry.

 

Direct 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.

 

Structured Securities. The Funds may purchase any type of publicly traded or privately negotiated fixed income security, including mortgage-backed securities; structured notes, bonds or debentures; and assignments of and participations in loans.

 

Mortgage-Backed Securities. The Funds may invest in mortgage-backed securities, such as those issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) or certain foreign issuers. Mortgage-backed securities represent direct or indirect participations in, or are secured by and payable from, mortgage loans secured by real property. The mortgages backing these securities include, among other mortgage instruments, conventional 30-year fixed-rate mortgages, 15-year fixed-rate mortgages, graduated payment mortgages and adjustable rate mortgages. The government or the issuing agency typically guarantees the payment of interest and principal of these securities. However, the guarantees do not extend to the securities’ yield or value, which are likely to vary inversely with fluctuations in interest rates, nor do the guarantees extend to the yield or value of a Fund’s shares. These securities generally are “pass-through” instruments, through which the holders receive a share of all interest and principal payments from the mortgages underlying the securities, net of certain fees.

 

Yields on pass-through securities are typically quoted by investment dealers and vendors based on the maturity of the underlying instruments and the associated average life assumption. The average life of pass-through pools varies with the maturities of the underlying mortgage loans. A pool’s term may be shortened by unscheduled or early payments of principal on the underlying mortgages. The occurrence of mortgage prepayments is affected by various factors, including the level of interest rates, general economic conditions, the location, scheduled maturity and age of the mortgage and other social and demographic conditions. Because prepayment rates of individual pools vary widely, it is not possible to predict accurately the average life of a particular pool. For pools of fixed-rate 30-year mortgages in a stable interest rate environment, a common industry practice in the U.S. has been to assume that prepayments will result in a 12-year average life, although it may vary depending on numerous factors. At present, pools, particularly those with loans with other maturities or different characteristics, are priced on an assumption of average life determined for each pool. In periods of falling interest rates, the rate of prepayment tends to increase, thereby shortening the actual average life of a pool of mortgage-related securities. Conversely, in periods of rising rates the rate of prepayment tends to decrease, thereby lengthening the actual average life of the pool. However, these effects may not be present, or may differ in degree, if the mortgage loans in the pools have adjustable interest rates or other special payment terms, such as a prepayment charge. Actual prepayment experience may cause the yield of mortgage-backed securities to differ from the assumed average life yield. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting a Fund’s yield.

 

The rate of interest on mortgage-backed securities is lower than the interest rates paid on the mortgages included in the underlying pool due to the annual fees paid to the servicer of the mortgage pool for passing

19 
 

through monthly payments to certificate holders and to any guarantor, such as GNMA, and due to any yield retained by the issuer. Actual yield to the holder may vary from the coupon rate, even if adjustable, if the mortgage-backed securities are purchased or traded in the secondary market at a premium or discount. In addition, there is normally some delay between the time the issuer receives mortgage payments from the servicer and the time the issuer makes the payments on the mortgage-backed securities, and this delay reduces the effective yield to the holder of such securities.

 

Asset-Backed Securities. The Funds may invest in asset-backed securities, which represent participations in, or are secured by and payable from, assets such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property and receivables from revolving credit (credit card) agreements. Such assets are securitized through the use of trusts and special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued by a financial institution unaffiliated with the trust or corporation.

 

Asset-backed securities present certain risks that are not presented by other securities in which the Funds may invest. Automobile receivables generally are secured by automobiles. Most issuers of automobile receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in the underlying automobiles. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. In addition, there is no assurance that the security interest in the collateral can be realized.

 

Structured Notes, Bonds and Debentures. The Funds may invest in structured notes, bonds and debentures. Typically, the value of the principal and/or interest on these instruments is determined by reference to changes in the value of specific currencies, interest rates, commodities, indexes or other financial indicators (the “Reference”) or the relevant change in two or more References. The interest rate or the principal amount payable upon maturity or redemption may be increased or decreased depending upon changes in the applicable Reference. The terms of the structured securities may provide that in certain circumstances no principal is due at maturity and, therefore, may result in the loss of a Fund’s entire investment. The value of structured securities may move in the same or the opposite direction as the value of the Reference, so that appreciation of the Reference may produce an increase or decrease in the interest rate or value of the security at maturity. In addition, the change in interest rate or the value of the security at maturity may be a multiple of the change in the value of the Reference so that the security may be more or less volatile than the Reference, depending on the multiple. Consequently, structured securities may entail a greater degree of market risk and volatility than other types of debt obligations.

 

Assignments and Participations. The Funds may invest in assignments of and participations in loans issued by banks and other financial institutions.

 

When a Fund purchases assignments from lending financial institutions, the Fund will acquire direct rights against the borrower on the loan. However, since assignments are generally arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Fund as the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender.

 

Participations in loans will typically result in a Fund having a contractual relationship with the lending financial institution, not the borrower. The Fund would have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender of the payments from the borrower. In connection with purchasing a participation, a Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and a Fund may not benefit directly from any collateral supporting the loan in which it has purchased a participation. As a result, a Fund purchasing a participation will assume the credit risk of both the borrower and the lender selling the

20 
 

participation. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.

 

A Fund may have difficulty disposing of assignments and participations because there is no liquid market for such investments. The lack of a liquid secondary market will have an adverse impact on the value of such investments and on a Fund’s ability to dispose of particular assignments or participations when necessary to meet the Fund’s liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the borrower. The lack of a liquid market for assignments and participations also may make it more difficult for a Fund to assign a value to these investments for purposes of valuing the Fund’s portfolio and calculating its net asset value.

 

A Fund may invest in fixed and floating rate loans (“Loans”) arranged through private negotiations between a foreign government (a “Borrower”) and one or more financial institutions (“Lenders”). The majority of a Fund’s investments in Loans are expected to be in the form of participations in Loans (“Participations”) and assignments of portions of Loans from third parties (“Assignments”). Participations typically will result in a Fund having a contractual relationship only with the Lender, not with the Borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments from the Borrower. In connection with purchasing Participations, a Fund generally will have no right to enforce compliance by the Borrower with the terms of the loan agreement relating to the Loan, nor any rights of set-off against the Borrower, and the Fund may not directly benefit from any collateral supporting the Loan in which it has purchased the Participation. As a result, a Fund will assume the credit risk of both the Borrower and the Lender that is selling the Participation. In the event of the insolvency of the Lender selling a Participation, a Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the Borrower. A Fund will acquire Participations only if the Lender interpositioned between the Fund and the Borrower is determined by the Advisor or sub-advisor to be creditworthy.

 

When a Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the Borrower on the Loan. However, since Assignments are generally arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the Fund as the purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender.

 

There are risks involved in investing in Participations and Assignments. The Fund may have difficulty disposing of them because there is no liquid market for such investments. The lack of a liquid secondary market will have an adverse impact on the value of such investments and on the Fund’s ability to dispose of particular Participations or Assignments when necessary to meet the Fund’s liquidity needs or in response to a specific economic event, such as a deterioration in the creditworthiness of the Borrower. The lack of a liquid market for Participations and Assignments also may make it more difficult for the Fund to assign a value to these securities for purposes of valuing the Fund’s portfolio and calculating its net asset value.

 

Restricted and Illiquid Investments. A Fund may acquire, in privately negotiated transactions, securities that cannot be offered for public sale in the United States without first being registered under the Securities Act of 1933 (“Securities Act”). Restricted securities are subject to restrictions on resale under federal securities law. Because of these restrictions, a Fund may not be able to readily resell these investments at a price equal to what it might obtain for similar investments with a more liquid market. A Fund’s valuation of these securities will reflect relevant liquidity considerations. Under criteria established by the Board, certain restricted securities sold pursuant to Rule 144A under the Securities Act may be determined to be liquid. To the extent that restricted securities are not determined to be liquid, each Fund will limit its purchase, together with other illiquid investments including non-negotiable time deposits and repurchase agreements providing for settlement in more than seven days after notice, to no more than 15% of its net assets.

 

Restricted securities in which a Fund may invest may include commercial paper issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act. Section 4(a)(2) commercial paper is restricted as to disposition under federal securities law, and is generally sold to institutional investors, such as the Funds, who agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. Section 4(a)(2) commercial paper is normally resold to other institutional investors like the Funds through or with the assistance of the issuer

21 
 

or investment dealers who make a market in Section 4(a)(2) commercial paper, thus providing liquidity. Each sub-advisor believes that Section 4(a)(2) commercial paper and possibly certain other restricted securities which meet the criteria for liquidity established by the Board are quite liquid. The Funds intend, therefore, to treat the restricted securities which meet the criteria for liquidity established by the Board, including Section 4(a)(2) commercial paper, as determined by the advisor, as liquid and not subject to the investment limitations applicable to illiquid investments.

 

Repurchase Agreements. Securities held by a Fund may be subject to repurchase agreements. These transactions permit a Fund to earn income for periods as short as overnight. The Fund could receive less than the repurchase price on any sale of such securities. Under the terms of a repurchase agreement, a Fund would acquire securities from member banks of the Federal Deposit Insurance Corporation and registered broker-dealers and other financial institutions that the Advisor or sub-advisor deems creditworthy under guidelines approved by the Board, subject to the seller’s agreement to repurchase such securities at a mutually agreed-upon date and price. The repurchase price would generally equal the price paid by a Fund plus interest negotiated on the basis of current short-term rates, which may be more or less than the rate on the underlying portfolio securities. The seller under a repurchase agreement will be required to maintain continually the value of collateral held pursuant to the agreement at not less than the repurchase price (including accrued interest). If the seller were to default on its repurchase obligation or become insolvent, the Fund holding such obligation would suffer a loss to the extent that the proceeds from a sale of the underlying portfolio securities were less than the repurchase price under the agreement, or to the extent that the disposition of such securities by the Fund were delayed pending court action. Additionally, there is no controlling legal precedent confirming that a Fund would be entitled, as against a claim by such seller or its receiver or trustee in bankruptcy, to retain the underlying securities, although the Trust believes that, under the regular procedures normally in effect for custody of the Funds’ securities subject to repurchase agreements and under federal laws, a court of competent jurisdiction would rule in favor of the Trust if presented with the question. Securities subject to repurchase agreements will be held by the Custodian or another qualified custodian or in the Federal Reserve/Treasury book-entry system. Repurchase agreements are considered to be loans by a Fund under the 1940 Act.

 

Reverse Repurchase Agreements. The Funds may enter into reverse repurchase agreements. In a reverse repurchase agreement, a Fund sells a security and agrees to repurchase it at a mutually agreed upon date and at a price reflecting the interest rate effective for the term of the agreement. This may also be viewed as the borrowing of money by the Fund. The Funds will not invest the proceeds of a reverse repurchase agreement for a period which exceeds the duration of the reverse repurchase agreement.

 

Reverse repurchase agreements involve the risk that the market value of the securities retained by a Fund may decline below the price of the securities it has sold but is obligated to repurchase under the agreement. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Fund’s use of proceeds from the agreement may be restricted pending a determination by the other party or its trustee or receiver whether to enforce the Fund’s obligation to repurchase the securities.

 

Loans of Portfolio Securities. Each Fund may lend securities if such loans are secured continuously by liquid assets consisting of cash, U.S. government securities or irrevocable bank standby letters of credit in favor of the Fund at least equal at all times to 100% of the market value of the securities loaned, plus accrued interest. While such securities are on loan, the borrower will pay the Fund any income accruing thereon. Loans will be subject to termination by the Fund in the normal settlement time, currently three Business Days after notice, or by the borrower on one day’s notice (as used herein, “Business Day” shall denote any day on which the New York Stock Exchange and the custodian are both open for business). Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and its shareholders. The Funds may pay reasonable finders’ and custodial fees, including fees to an Advisor or its affiliate, in connection with loans. In addition, the Funds consider all facts and circumstances including the creditworthiness of the borrowing financial institution, and the Funds will not lend their securities to any director, officer, employee, or affiliate of the Advisor, a sub-advisor, the administrator, or the distributor, unless permitted by applicable law. Loans of portfolio securities involve risks, such as delays or an inability to regain the securities or collateral adjustments in the event the borrower defaults or enters into bankruptcy.

 

Short Sales “Against the Box.” The Funds may engage in short sales “against the box.” In a short sale, a Fund sells a borrowed security and has a corresponding obligation to the lender to return the identical security.

22 
 

The seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. The Funds may engage in a short sale if at the time of the short sale the Fund owns or has the right to obtain without additional cost an equal amount of the security being sold short. This investment technique is known as a short sale “against the box.” It may be entered into by a Fund to, for example, lock in a sale price for a security the Fund does not wish to sell immediately. If the Fund engages in a short sale, the collateral for the short position will be segregated in an account with the Fund’s custodian or qualified sub-custodian. No more than 10% of the Fund’s net assets (taken at current value) may be held as collateral for short sales against the box at any one time.

 

A Fund may make a short sale as a hedge, when it believes that the price of a security may decline, causing a decline in the value of a security owned by the Fund (or a security convertible or exchangeable for such security). In such case, any future losses in the Fund’s long position should be offset by a gain in the short position and, conversely, any gain in the long position should be reduced by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security sold short relative to the amount the Fund owns. There will be certain additional transaction costs associated with short sales against the box, but a Fund will endeavor to offset these costs with the income from the investment of the cash proceeds of short sales.

 

If a Fund effects a short sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize that gain as if it had actually sold the securities (as a “constructive sale”) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to which the Fund may effect short sales.

 

Short Sales (excluding Short Sales “Against the Box”). The Funds may sell securities short or purchase ETFs that sell securities short. A short sale is a transaction in which a Fund sells securities it does not own in anticipation of a decline in the market price of the securities.

 

To deliver the securities to a buyer, a Fund must arrange through a broker to borrow the securities and, in so doing, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement, whatever that price may be. The Fund will make a profit or incur a loss as a result of a short sale depending on whether the price of the securities decreases or increases between the date of the short sale and the date on which the Fund purchases the security to replace the borrowed securities that have been sold. The amount of any loss would be increased (and any gain decreased) by any premium or interest the Fund is required to pay in connection with a short sale.

 

A Fund’s obligation to replace the securities borrowed in connection with a short sale will be secured by cash or liquid securities deposited as collateral with the broker. In addition, a Fund will place in a segregated account with its custodian or a qualified sub-custodian an amount of cash or liquid securities equal to the difference, if any, between (i) the market value of the securities sold at the time they were sold short and (ii) any cash or liquid securities deposited as collateral with the broker in connection with the short sale (not including the proceeds of the short sale). Until it replaces the borrowed securities, a Fund will maintain the segregated account daily at a level so that (a) the amount deposited in the account plus the amount deposited with the broker (not including the proceeds from the short sale) will equal the current market value of the securities sold short and (b) the amount deposited in the account plus the amount deposited with the broker (not including the proceeds from the short sale) will not be less than the market value of the securities at the time they were sold short.

 

Municipal Securities. Municipal securities are debt obligations issued to obtain funds for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, hospitals, mass transportation, schools, streets and water and sewer works. Other public purposes for which municipal securities may be issued include refunding of outstanding obligations, obtaining funds for general operating expenses and obtaining funds to loan to other public institutions and facilities. In addition, certain types of industrial development bonds are issued by or on behalf of public authorities to obtain funds to provide privately-operated housing facilities, sports facilities, convention or trade show facilities, airport, mass transit, port or parking facilities, air or water pollution control facilities and certain local facilities

23 
 

for water supply, gas, electricity, or sewage or solid waste disposal. Such obligations, which may include lease arrangements, are included within the term “municipal securities” if the interest paid thereon qualifies as exempt from federal income tax. Other types of industrial development bonds, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute municipal securities, although the current federal tax laws place substantial limitations on the size of such issues.

 

The two principal classifications of municipal securities are "general obligation" and "revenue" bonds. General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Industrial development bonds that are municipal securities are in most cases revenue bonds and do not generally involve the pledge of the credit of the issuer of such bonds. There are, of course, variations in the degree of risk of municipal securities, both within a particular classification and between classifications, depending upon numerous factors.

 

The yields on municipal securities are dependent upon a variety of factors, including general money market conditions, general conditions of the municipal securities market, size of particular offering, maturity of the obligation and rating of the issue. The ratings of Moody's and S&P represent their opinions as to the quality of the municipal securities which they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, municipal securities with the same maturity, coupon and rating may have different yields, while municipal securities of the same maturity and coupon with different ratings may have the same yield.

 

Each Fund may invest in "private activity" bonds. Each Fund may also purchase participation interests in municipal securities (such as industrial development bonds) from financial institutions, including banks, insurance companies and broker-dealers. A participation interest gives a Fund an undivided interest in the municipal securities in the proportion that the Fund's participation interest bears to the total principal amount of the municipal securities. These instruments may be variable or fixed rate.

 

Provisions of the federal bankruptcy statutes relating to the adjustment of debts of political subdivisions and authorities of states of the United States provide that, in certain circumstances, such subdivisions or authorities may be authorized to initiate bankruptcy proceedings without prior notice to or consent of creditors, which proceedings could result in material and adverse modification or alteration of the rights of holders of obligations issued by such subdivisions or authorities.

 

Litigation challenging the validity under state constitutions of present systems of financing public education has been initiated or adjudicated in a number of states, and legislation has been introduced to effect changes in public school finances in some states. In other instances there has been litigation challenging the issuance of pollution control revenue bonds or the validity of their issuance under state or federal law which litigation could ultimately affect the validity of those municipal securities or the tax-free nature of the interest thereon.

 

Corporate Debt Obligations. The Funds may invest in corporate debt obligations, including senior secured loans, first lien senior secured debt, and second lien senior secured debt.

 

The factors affecting an issuer’s first and second lien leveraged loans, and its overall capital structure, are complex. Some first lien loans may not necessarily have priority over all other debt of an issuer. For example, some first lien loans may permit other obligations to be secured ratably with the loans (such as overdrafts, swaps or other derivatives made available by members of the lending syndicate to the company), or involve first liens only on specified assets of an issuer (e.g., excluding real estate or receivables). Issuers of first lien loans may have two tranches of first lien debt outstanding each with first liens on separate collateral. In the event of a Chapter 11 filing by an issuer, Title 11 of the U.S. Code (the “Bankruptcy Code”) authorizes, under certain circumstances, the issuer to use a creditor’s collateral to obtain additional credit by granting a postpetition lender “priming” liens on such collateral and/or superpriority administrative expense claims, senior even to liens and claims that were first in priority prior to the bankruptcy filing, as long as the issuer provides what the bankruptcy court determines to be adequate protection, which may, but need not always, consist of the grant of replacement

24 
 

or additional liens, additional claims (superpriority claims junior to the claims granted to the postpetition lender(s)) or the making of cash payments to the affected secured creditor. It is important to note that adequate protection is a flexible concept, and the determination of whether, and in which forms, to provide adequate protection is within the discretion of the bankruptcy court. The imposition of priming liens and/or superpriority claims would adversely affect the priority of the liens and claims held by a Fund and could adversely affect the Fund’s recovery on its loans. In addition, in a bankruptcy proceeding, certain unsecured administrative and priority claims may have priority over first lien, secured loans including, without limitation, the actual and necessary costs of administering the bankruptcy case (e.g., professional fees, certain wage claims of employees, etc.) Such claims, albeit unsecured, will have effective priority over first lien loans because these claims must be paid in full in order to confirm a plan of reorganization or liquidation.

 

As a general matter, in a bankruptcy proceeding secured debt is entitled to greater priority than unsecured debt but only to the extent of the value of the collateral securing the debt. Although the underlying assets selected as collateral to secure loans may give a Fund the ability to realize proceeds through a plan of reorganization or liquidation, if any deficiencies exceed such assumed levels or if underlying assets are sold it is possible that a Fund’s share of the proceeds of such sale or disposition will not be sufficient to pay in full the amount of principal, interest and other obligations owing to the Fund with respect to its investment. It is also possible that in a bankruptcy case, unsecured creditors driven to augment their own recoveries may seek to challenge the validity, priority and extent of the first lien lenders’ collateral. Even if the first lien lenders were able to successfully defend against such a lien challenge, it is possible that litigation costs relating to such defense could decrease the proceeds of the collateral available for distribution to lenders.

 

Issuer Insolvency Risks. If a court in a lawsuit brought by a creditor or representative of creditors (such as a trustee in bankruptcy) of an issuer of one of the Funds’ investments were to find that (a) such issuer did not receive reasonably equivalent value for incurring the indebtedness evidenced by the loans that the issuer issued to the Fund and (b) after giving effect to such indebtedness and the use of the proceeds thereof, such issuer (i) was insolvent, (ii) was engaged in a business for which its remaining assets constituted unreasonably small capital or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature, such court could invalidate, in whole or in part, such indebtedness as a fraudulent conveyance, subordinate such indebtedness to existing or future creditors of the issuer or recover amounts previously paid by such issuer to the Fund in satisfaction of such indebtedness.

 

In addition, upon the insolvency of an issuer, payments that it made to a Fund may be subject to avoidance as a preference if made within a certain period of time (which may be as long as one year in the case of the U.S.) before insolvency. There can be no assurance as to what a given court would apply in order to determine whether the issuer was insolvent or that, regardless of the method of valuation, a court would not determine that the issuer was insolvent, in each case, after giving effect to the indebtedness evidenced by the loans held by a Fund and the use of the proceeds thereof. While the Fund may be able to assert certain defenses to any such avoidance claims, the outcome of such claims is within the discretion of the bankruptcy court and is therefore inherently incapable of being predicted.

 

In general, if payments are voidable, whether as fraudulent conveyances or preferences, such payments can be recaptured either from the initial recipient (such as a Fund) or from subsequent transferees of such payments.

 

Non-Performing Debt Obligations. The Funds, except for the Floating Rate Income Fund, may invest in non-performing debt obligations and the Floating Rate Income Fund may invest in debt obligations that become non-performing. Non-performing debt obligations may require substantial workout negotiations, restructuring, or bankruptcy filings, all of which may entail a substantial reduction in the interest rate, deferral of payments and/or a substantial write-down of the principal of a debt obligation or conversion of some or all of the debt to equity. Upon a bankruptcy filing by an issuer of debt, the Bankruptcy Code imposes an automatic stay on a creditor’s efforts to seek or compel payment of prepetition debts. Moreover, if an issuer were to file for Chapter 11 reorganization, the Bankruptcy Code authorizes the issuer to restructure the terms of repayment of debt even if the holders of such debt do not accept the issuer’s proposed restructuring as long as, among other things, the bankruptcy court determines that the restructured terms are fair and equitable to the debt holders and certain other conditions are met. Because bankruptcy courts are courts of equity, and have broad statutory power to craft remedies and issue rulings, often without precedent, to facilitate a debtor’s reorganization and/or

25 
 

equitable distribution of assets to creditors and other stakeholders, it is inherently difficult to predict how a bankruptcy court will deal with a particular situation and to what extent the court might authorize compromise of a secured lender’s claim.

 

Senior Secured Loans. The Funds may invest in senior secured loans, which are subject to certain risks, including, without limitation, (i) invalidation of a debt or lien as a fraudulent conveyance, (ii) preference claw-backs of liens or payments made on account of an antecedent debt in the 90 days (or one year in case of a creditor that is also an insider of the debtor) before a bankruptcy filing, (iii) equitable subordination of claims in cases of misconduct, (iv) so-called lender liability claims by the issuer of the obligations and (v) environmental liabilities that may arise with respect to collateral securing the obligations. Recent decisions in bankruptcy cases have held that a secondary loan market participant can be denied a recovery from the debtor in a bankruptcy if a prior holder of the loans either received such loans as a preference or fraudulent conveyance or engaged in conduct that would qualify for equitable subordination if the secondary holder either took the loan by assignment (as opposed to an open market purchase) or had knowledge of the transferor’s misconduct when it purchased the loan.

 

LIBOR and Floating Rate Loans. The Funds may invest in loans that bear interest at a floating rate based on LIBOR. Following allegations of manipulation of LIBOR, regulators and law enforcement agencies from a number of governments and the European Union conducted investigations into whether the banks that contributed data in connection with the calculation of daily EURIBOR, a different measure of inter-bank lending rates, or the calculation of LIBOR may have been manipulating or attempting to manipulate EURIBOR and LIBOR. In addition, LIBOR, EURIBOR and other interest rates or other types of rates and indices deemed to be benchmarks were the subject of ongoing national and international regulatory reform, including the implementation of the IOSCO Principles for Financial Market Benchmarks (July 2013) and the European regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, which entered into force on June 30, 2016. The UK Financial Conduct Authority has ceased publishing all LIBOR benchmarks related to sterling, euro, Swiss franc and Japanese yen and the 1-week and 2-month US dollar settings and will cease publishing the remaining US dollar settings after June 30, 2023. This announcement and any additional regulatory or market changes may have an adverse impact on a Fund or its investments, including increased volatility or illiquidity in markets for instruments that rely on LIBOR. The elimination of the LIBOR benchmark or any other benchmark, changes in the manner of administration of any benchmark, or actions by regulators or law enforcement agencies could result in changes to the manner in which EURIBOR or LIBOR is determined, which could require an adjustment to the terms and conditions, or result in other consequences, in respect of any debt linked to such benchmark (including but not limited to the senior secured corporate loans whose interest rates are linked to LIBOR and EURIBOR).

 

Below Investment Grade Assets. The Funds may invest in non-investment grade senior secured corporate loans (or participations or other interests in these loans), which are subject to liquidity, market value, credit, interest rate, reinvestment and certain other risks. Such investments will be subject to greater risks than investments in investment grade corporate obligations. These risks could be exacerbated to the extent that the portfolio is concentrated in one or more particular types of exposures.

 

Prices of the exposures may be volatile, and will generally fluctuate due to a variety of factors that are inherently difficult to predict, including but not limited to changes in interest rates, prevailing credit spreads, general economic conditions, financial market conditions, domestic and international economic or political events, developments or trends in any particular industry, and the financial condition of the obligors. Additionally, loans and interests in loans have significant liquidity and market value risks since they are not generally traded in organized exchange markets but are traded by banks and other institutional investors engaged in loan syndications. Because loans are privately syndicated and loan agreements are privately negotiated and customized, loans are not purchased or sold as easily as publicly traded securities. In addition, historically the trading volume in the loan market has been small relative to the high-yield debt securities market.

 

Participation on Creditors’ Committees. The Funds may participate on committees formed by creditors to negotiate with the management of financially troubled companies both inside and outside of bankruptcy or insolvency proceedings, or the Funds may seek to negotiate directly with the debtors with respect to restructuring issues. The participants on such a committee may seek outcomes in their respective individual best interests, and there can be no assurance that results that are the most favorable to a Fund will be obtained in

26 
 

such proceedings. If a committee is appointed in a bankruptcy case, the committee’s actions will necessarily be subject to the jurisdiction and discretion of the bankruptcy court. By participating on such committees, a Fund may be deemed to have duties to other creditors represented by the committees, which might thereby expose the Fund to liability to such other creditors that disagree with the Fund’s actions. However, a Fund’s ability to serve on a creditor’s committee in a Chapter 11 case will be limited to situations in which the Fund holds unsecured loans.

 

Regulatory Risk. Legal, tax, and regulatory changes could occur and may adversely affect the Funds and their ability to pursue their investment strategies and/or increase the costs of implementing such strategies. New (or revised) laws or regulations may be imposed by the CFTC, the SEC, the Internal Revenue Service (“IRS”), the Federal Reserve or other banking regulators, other governmental regulatory authorities or self-regulatory organizations that supervise the financial markets that could adversely affect the Funds. In particular, these agencies are implementing a variety of new rules pursuant to financial reform legislation in the United States including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, and includes provisions that are expected to have a broad impact on the credit and other financial markets. The EU (and some other countries) is implementing similar requirements.

On June 23, 2016, the people of the United Kingdom (“UK”) voted in a referendum to leave the European Union (“EU”). The shape of the regulatory landscape following the UK’s exit from the EU is still being defined; the legal, political and economic uncertainty generally resulting from the UK referendum result and anticipated exit from the EU may adversely impact UK-based businesses, and may also result in an economic slowdown and/or a deteriorating business environment in one or more EU member states.

Future legislative, judicial or administrative action could adversely affect the Funds’ ability to implement their investment program, as well as the ability of the Funds to conduct their operations. Increased regulation could have a material adverse impact on the investment returns of the Funds. Recent changes in legislation, together with uncertainty about the nature and timing of regulations that will be promulgated to implement such legislation, may create uncertainty in the credit and other financial markets and create other unknown risks. The Funds also may be adversely affected by changes in the enforcement or interpretation of existing statutes and rules by governmental regulatory authorities or self-regulatory organizations.

 

DISCLOSURE OF PORTFOLIO HOLDINGS

 

The Board has adopted policies and procedures for the public and nonpublic disclosure of the Funds’ portfolio investments.

 

As a general matter, no information concerning the portfolio holdings of a Fund may be disclosed to any unaffiliated third party except (1) to service providers that require such information in the course of performing their duties (for example, the Funds’ custodian, administrator, investment advisor, sub-investment advisor, independent public accountants, attorneys, officers and trustees) and are subject to a duty of confidentiality including duties not to trade on non-public information, and (2) pursuant to certain exceptions that serve a legitimate business purpose. These exceptions may include: (1) disclosure of portfolio holdings only after such information has been publicly disclosed on the Fund’s website, in marketing materials (provided the portfolio holdings disclosed in the materials are at least 15 days old) or through filings with the SEC as described below and (2) to third-party vendors that (a) agree to not distribute the portfolio holdings or results of the analysis to third parties, other departments or persons who are likely to use the information for purposes of purchasing or selling the Fund before the portfolio holdings or results of the analysis become publicly available; and (b) sign a written confidentiality agreement. The confidentiality agreement must provide, but is not limited to, that the recipient of the portfolio holdings information agrees to limit access to the portfolio holdings information to its employees who, on a need to know basis are (1) authorized to have access to the portfolio holdings information and (2) subject to confidentiality obligations, including duties not to trade on non-public information, no less restrictive that the confidentiality obligations contained in the confidentiality agreement.

 

The Funds’ portfolio holdings are currently disclosed to the public through filings with the SEC. The Funds disclose their portfolio holdings by delivering the annual and semi-annual reports, or notice of electronic availability thereof, to shareholders approximately two months after the end of the fiscal year and semi-annual

27 
 

period. In addition, the Funds disclose their portfolio holdings reports on Forms N-CSR two months after the end of each semi-annual period and Form N-PORT within 30 days after each fiscal quarter end.

 

Neither the Funds nor the Advisor may enter into any arrangement providing for the disclosure of non-public portfolio holding information for the receipt of compensation or benefit of any kind. Any exceptions to the policies and procedures may only be made by the consent of the Trust’s chief compliance officer upon a determination that such disclosure serves a legitimate business purpose and is in the best interests of the Funds and will be reported to the Board at the Board’s next regularly scheduled meeting.

 

 

TRUSTEES AND OFFICERS

 

The Board manages the business and affairs of the Trust and appoints or elects officers responsible for the day-to-day operations of the Trust and the execution of policies established by Board resolution or directive. In the absence of such provisions, the respective officers have the powers and discharge the duties customarily held and performed by like officers of corporations similar in organization and business purposes.

 

The Trustees who are not “interested persons” (for regulatory purposes) of the Trust or an advisor or the distributor (the “Independent Trustees”) are charged with, among other functions, recommending to the full Board approval of the distribution, transfer agency and accounting services agreements, and the investment advisory and sub-advisory agreements. When considering approval of the existing advisory and sub-advisory agreements, the Independent Trustees evaluate the nature and quality of the services provided by the Advisor and the sub-advisors, the performance of the Funds, the Advisor and sub-advisors’ costs and the profitability of the agreements to the Advisor and sub-advisors, ancillary benefits to the Advisor and sub-advisors or their affiliates in connection with its relationship to the Funds, and the amount of fees charged in comparison to those of other investment companies.

 

The Board currently has three standing committees: the Audit Committee, the Risk and Compliance Committee and the Nominating Committee. In addition, the Board currently has a Special Committee that oversees litigation matters on behalf of the Trust. Each committee is described below.

 

The term of office for each Trustee is for the duration of the Trust or until death, removal, resignation or retirement. The term of office of each officer is until the successor is elected.

 

Information pertaining to the Trustees and officers of the Trust, including their principal occupations for the last five years, is set forth below.

 

Independent Trustees

 

Name, Address
Year of Birth
Position(s) Held
with Registrant
Term and Length Served* Principal Occupation(s)
During Past 5 Years
Number of Portfolios Overseen in the Fund Complex** Other Directorships Held During Past 5 Years
28 
 

 

Tobias Caldwell

c/o Mutual Fund Series Trust

36 N. New York Avenue, Huntington, NY 11743

Year of Birth: 1967

Lead Trustee, Chairman of the Audit Committee and Nominating Committee Since 6/2006

Manager of Genovese Family Enterprises LLC & affiliates, the Genovese family office, since 1999; Managing Member of Bear Properties, LLC, a real estate management firm, since 2006; Managing Member of PTL Real Estate LLC, from 2000 until 2019.

 

53

Trustee of Variable Insurance Trust since 2010; Chairman of the Board of Mutual Fund and Variable Insurance Trust since 2016; Chairman of the Board of Strategy Shares since 2016; Trustee of IDX Funds Trust since 2016; Chairman of the Board of AlphaCentric Prime Meridian Income Fund since 2018

 

Tiberiu Weisz

c/o Mutual Fund Series Trust

36 N. New York Avenue, Huntington, NY 11743

Year of Birth: 1949

 

Trustee, Chairman of the Special Committee Since 6/2006 Attorney since 1982. 37 Trustee of Variable Insurance Trust since 2010

Stephen P. Lachenauer

c/o Mutual Fund Series Trust

36 N. New York Avenue, Huntington, NY 11743

Year of Birth: 1967

Trustee Since 4/2022

Attorney, private practice

 

53 Trustee and Chair of the Audit and Risk and Compliance Committees since 2016, and Chair of the Investment Committee since November 2020, Mutual Fund and Variable Insurance Trust; Trustee and Chair of the Audit and Risk and Compliance Committees since 2016, and Chair of the Investment Committee since November 2020, Strategy Shares; Chairman of the Board, TCG Financial Series Trusts I-X since 2015; Trustee and Chair of the Audit and Risk and Compliance Committees since 2018, and Chair of the Investment Committee since November 2020, AlphaCentric Prime Meridian Income Fund.

 

Interested Trustee*** and Officers

 

Name, Address,
Year of Birth
Position(s) Held
with Registrant
Term and Length Served* Principal Occupation(s)
During Past 5 Years
Number of Portfolios Overseen In The Fund Complex**

Other Directorships Held

During Past 5 Years

29 
 

 

 

Jerry Szilagyi

53 Palmeras St. Suite 601

San Juan, PR 00901

Year of Birth:  1962

 

Chairman of the Board

 

Trustee since 7/2006; President 2/2012-3/2022

 

President of the Trust, 2/2012—4/2022; President, Rational Advisors, Inc., 1/2016 - present; Chief Executive Officer, Catalyst Capital Advisors LLC, 1/2006- present; Member, AlphaCentric Advisors LLC, 2/2014 to Present; Managing Member, MFund Distributors LLC, 10/2012-present; Managing Member, MFund Services LLC, 1/2012 – Present; CEO, Catalyst International Advisors LLC, 11/2019 to present; CEO, Insights Media LLC, 11/2019 to present; CEO, MFund Management LLC, 11/2019 to present.

 

37

 

Variable Insurance Trust since 2010

 

Michael Schoonover

53 Palmeras St. Suite 601

San Juan, PR 00901

Year of Birth: 1983

 

President

 

Since 3/2022

 

Vice President of the Trust, 2018--2022; Chief Operating Officer, Catalyst Capital Advisors LLC and Rational Advisors, Inc., June 2017 to present; Portfolio Manager, Catalyst Capital Advisors LLC 12/2013 to 5/2021; Portfolio Manager, Rational Advisors, Inc. 1/2016 to 5/2018; President, MFund Distributors LLC, 1/2020 to present; COO, Catalyst International Advisors LLC, 11/2019 to present; COO, Insights Media LLC, 11/2019 to present; COO, MFund Management LLC, 11/2019 to present; COO, AlphaCentric Advisors LLC, since 1/2021.

 

N/A

 

N/A

 

Alex Merino

53 Palmeras St. Suite 601

San Juan, PR 00901

Year of Birth: 1985

 

 

Vice President

 

Since 3/2022

 

Investment Operations Manager, MFund Management LLC, 1/2022 to present; Investment Operations Analyst, MFund Management LLC, 9/2020 to 12/2021; Tax Senior Associate, PwC Asset & Wealth Management NY Metro, 7/2016-6/2019.

 

 

N/A

 

N/A

 

Erik Naviloff

4221 North 203rd Street, Suite 100, Elkhorn, Nebraska, 68022

Year of Birth:  1968

 

 

Treasurer

 

 

 

Since 4/2012

 

 

Vice President – Fund Administration, Ultimus Fund Solutions, LLC, since 2011.

 

 

N/A

 

N/A

30 
 

 

Brian Curley

4221 North 203rd Street, Suite 100, Elkhorn, Nebraska, 68022

Year of Birth:  1970

 

Assistant

Treasurer

Since 11/2013

Vice President – Fund Administration, Ultimus Fund Solutions, LLC since 1/2015.

 

N/A N/A

Sam Singh

4221 North 203rd Street, Suite 100, Elkhorn, Nebraska, 68022

Year of Birth:  1976

 

Assistant

Treasurer

Since 2/2015

Vice President – Fund Administration, Ultimus Fund Solutions, LLC since 1/2015.

 

N/A N/A

Frederick J. Schmidt

36 N. New York Avenue

Huntington, NY 11743

Year of Birth: 1959

 

Chief Compliance Officer Since 5/2015 Director of Compliance Services, MFund Services LLC since 5/2015. N/A N/A

Jennifer A. Bailey

36 N. New York Avenue

Huntington, NY

11743

Year of Birth: 1968

Secretary Since 4/2014

Director of Legal Services, MFund Services LLC, since 2012.    

 

N/A N/A

* The term of office of each Trustee is indefinite.

** The ‘Fund Complex’ includes the Trust, Variable Insurance Trust, Mutual Fund and Variable Insurance Trust, Strategy Shares, and AlphaCentric Prime Meridian Income Fund, each a registered investment company.

***The Trustee who is an “interested person” of the Trust as defined in the 1940 Act is an interested person by virtue of being an officer of the advisor to certain series of the Trust.

 

Leadership Structure. The Trust is led by Jerry Szilagyi, who has served as the Chairman of the Board since 2010. Mr. Szilagyi is an interested person by virtue of his controlling interest in the Advisor and AlphaCentric Advisors LLC, an investment adviser to other certain series of the Trust. The Board is comprised of Mr. Szilagyi, an Interested Trustee, and Tobias Caldwell, Tiberiu Weisz and Stephen Lachenauer, each an Independent Trustee. Mr. Caldwell serves as the Lead Independent Trustee. The Lead Independent Trustee serves as a key point person for dealings between management and the Independent Trustees and assists in setting the agendas for Board meetings. The Independent Trustees meet in executive session at each Board meeting. Under the Trust’s bylaws and governance guidelines, the Chairman of the Board is responsible for (a) chairing Board meetings, (b) setting the agendas for these meetings and (c) providing information to Board members in advance of each Board meeting and between Board meetings. The Board believes this is the most appropriate leadership structure for the Trust given Mr. Szilagyi’s background in the investment management industry and his experience in providing both advisory and administrative services to other mutual funds. Additionally, as the Managing Member of MFund Services LLC, which provides management and administrative services to the Fund, Mr. Szilagyi is well positioned and informed regarding issues requiring the attention of the Board, and as the leader of the Board, can ensure such issues are included in the Board’s agenda for meetings and that appropriate time is allocated to discuss such issues and take any necessary actions.

Risk Oversight. In its risk oversight role, the Board oversees risk management, and the full Board engages in discussions of risk management and receives reports on investment and compliance risk at quarterly meetings

31 
 

and on an ad hoc basis, when and if necessary. The Board, directly or through its Audit Committee and Risk and Compliance Committee, reviews reports from among others, the advisors, sub-advisors, the Trust’s Chief Compliance Officer, the Trust’s independent registered public accounting firm, and the Independent Trustees’ counsel, as appropriate, regarding risks faced by the Trust and the Fund and the risk management programs of the Trust, the advisors and certain service providers. The full Board regularly engages in discussions of risk management and receives compliance reports that inform its oversight of risk management from the Trust’s Chief Compliance Officer at quarterly meetings and on an ad hoc basis, when and if necessary. The Trust’s Chief Compliance Officer also meets at least quarterly in executive session with the Independent Trustees. The actual day-to-day risk management with respect to each Fund resides with the Advisor and other service providers to the Fund. Although the risk management policies of the Advisor and the service providers are designed to be effective, those policies and their implementation vary among service providers and over time, and there is no guarantee that they will be effective. Generally, the Board believes that its oversight of material risks is adequately maintained through the risk-reporting chain where the Chief Compliance Officer is the primary recipient and communicator of such risk-related information.

The Board also considers liquidity risk management issues as part of its general oversight responsibilities and oversees each Fund’s liquidity risk through, among other things, receiving periodic reporting and presentations by the Liquidity Risk Management (“LRM”) Program Administrator that address liquidity matters. As required by Rule 22e-4 under the 1940 Act, the Board, including a majority of the Independent Trustees, has approved the Trust’s LRM Program, which is reasonably designed to assess and manage the Trust’s liquidity risk, and has appointed the LRM Program Administrator that is responsible for administering the LRM Program. The Board also reviews, no less frequently than annually, a written report prepared by the LRM Program Administrator that addresses, among other items, the operation of the program and assesses its adequacy and effectiveness of implementation.

Audit Committee. Mr. Caldwell, Mr. Weisz and Mr. Lachenauer serve on the Board’s Audit Committee. The Board’s Audit Committee is a standing independent committee with a separate chair.  The primary function of the Audit Committee is to assist the full Board in fulfilling its oversight responsibilities to the shareholders and the investment community relating to fund accounting, reporting practices and the quality and integrity of the financial reports. To satisfy these responsibilities, the Audit Committee reviews with the independent auditors, the audit plan and results and recommendations following independent audits, reviews the performance of the independent auditors and recommends engagement or discharge of the auditors to the full Board, reviews the independence of the independent auditors, reviews the adequacy of the Funds’ internal controls and prepares and submits Audit Committee meeting minutes and supporting documentation to the full Board. During the fiscal year ended June 30, 2022, the Audit Committee met 5 times.

 

Risk and Compliance Committee. Mr. Caldwell, Mr. Weisz and Mr. Lachenauer serve on the Board’s Risk and Compliance Committee. The Risk and Compliance Committee is a standing independent committee with a separate chair. The primary function of the Risk and Compliance Committee is to assist the full Board in fulfilling its oversight responsibilities to the shareholders and the investment community relating to the adequacy and effectiveness of the Trust’s compliance program and to oversee the Trust’s Chief Compliance Officer. The Risk and Compliance Committee meets as often as necessary, and no less than quarterly. During the fiscal year ended June 30, 2022, the Risk and Compliance Committee met 4 times.

 

Nominating Committee. Mr. Caldwell, Mr. Weisz and Mr. Lachenauer serve on the Board’s Nominating Committee. The Board’s Nominating Committee is a standing independent committee with a separate chair.  The primary functions of the Nominating Committee are to assist the Board in carrying out its responsibilities relating to (i) the identification and selection of qualified individuals to become Board members and members of Board committees and (ii) the development, adoption and periodic monitoring and updating of criteria and characteristics relating to the consideration, nomination and selection of interested and non-interested trustees. The Nominating Committee meets as often as necessary, and no less than annually. During the fiscal year ended June 30, 2022, the Nominating Committee met 1 time.

 

Special Committee. Mr. Caldwell, Mr. Weisz and Mr. Lachenauer serve on a Special Committee responsible for reviewing the allegations contained in any class action lawsuit filed against the Trust, demand for books and

32 
 

records served upon the Trust, or any derivative lawsuit that may be filed against the Trust. The Special Committee is also responsible for taking such other actions that may be referred to it from time to time by the Board. The Special Committee met as needed during the fiscal year ended June 30, 2022.

 

Background and Qualifications of the Trustees. Mr. Szilagyi is the managing member of the Advisor, an original sponsor of the Trust. Mr. Szilagyi is the Managing Member of AlphaCentric Advisors, LLC, an investment advisor to certain series of the Trust. Mr. Szilagyi is also the President of Rational Advisors, Inc., an investment advisor to other series in the Fund Complex, and is President of MFund Services LLC, which provides management and administrative services to the Trust. Mr. Szilagyi has many years of experience managing mutual funds and providing administrative services to other mutual funds. His experience in the investment management industry makes him uniquely qualified to serve as the Trust’s Chairman.

Mr. Caldwell is the manager of the Genovese family office, and a managing member of a real estate management firm. Mr. Caldwell’s experience in the investment and real estate and investment industries provides the Board with an additional perspective and understanding of investment strategies used by advisors to the funds. Mr. Caldwell also serves on the boards of other mutual fund trusts.

 

Mr. Weisz is an attorney and provides the Board with general insight regarding their duties and standards of care.

 

Mr. Lachenauer has been an attorney in private practice for over fifteen years, providing advice and counsel to small businesses and individuals on real estate, commercial contracts, general business and financial matters. Mr. Lachenauer’s previous experience at large law firms and as an attorney at a large investment bank provides the Board with knowledge of financial and investment regulatory matters. Mr. Lachenauer also serves on the boards of other registered investment companies in the Fund Complex.

 

 

Share Ownership in the Funds

Fund Shares Owned by Trustees as of December 31, 2021

 

Name of Trustee Mr. Caldwell Mr. Weisz Mr. Lachenauer Mr. Szilagyi
Dollar Range of Equity Securities in Insider Income Fund None None None Over $100,000
Dollar Range of Equity Securities in the High Income Fund None None None $50,001-$100,000
Dollar Range of Equity Securities in the Total Return Income Fund None None None Over $100,000
Dollar Range of Equity Securities in Global Balanced Fund None None None Over $100,000
Dollar Range of Equity Securities in Floating Rate Income Fund None None None Over $100,000
Dollar Range of Equity Securities in Enhanced Income Strategy Fund None None None Over $100,000
Aggregated Dollar Range of Equity Securities in all Registered Investment Companies overseen by Trustee in the Trust Over $100,000 None None Over $100,000

 

Compensation of the Board of Trustees

The Independent Trustees are paid a quarterly retainer and receive compensation for each special in-person meeting attended. The fees paid to the Independent Trustees for their attendance at a meeting are shared equally by the Funds of the Trust. The Lead Independent Trustee of the Trust and the Chairmen of the Trust’s Audit Committee and Risk and Compliance Committee each receives an additional quarterly retainer.

33 
 

 

The following table describes the compensation paid to the Trustees during the fiscal year ended June 30, 2022. The Trust has no retirement or pension plans.

 

Compensation Table
Name of Person, Position(s) Mr. Caldwell Mr. Weisz Mr. Lachenauer Mr. Szilagyi**
Aggregate Compensation from the Insider Income Fund $5,132 $3,816 $1,013 $0
Aggregate Compensation from the High Income Fund $5,132 $3,816 $1,013 $0
Aggregate Compensation from the Total Return Income Fund $5,132 $3,816 $1,013 $0
Aggregate Compensation from the Global Balanced Fund $5,132 $3,816 $1,013 $0
Aggregate Compensation from the Floating Rate Income Fund $5,132 $3,816 $1,013 $0
Aggregate Compensation from the Enhanced Income Strategy Fund $5,132 $3,816 $1,013 $0
Estimated Annual Benefits Upon Retirement $0 $0 $0 $0
Total Compensation from Fund and Fund Complex* $263,650 $145,500 $113,150 $0

 

* The ‘Fund Complex’ includes the Trust, Variable Insurance Trust, Mutual Fund and Variable Insurance Trust, Strategy Shares and AlphaCentric Prime Meridian Income Fund, each a registered open-end investment company.

** Mr. Szilagyi is compensated by Catalyst for advisory services and MFund Services LLC for administrative support services to the Trust. Please see the “Transfer Agent, Fund Accounting and Administrator” section for more details.

 

PRINCIPAL SHAREHOLDERS

 

Persons controlling a Fund can determine the outcome of any proposal submitted to the shareholders for approval, including changes to a Fund's fundamental policies or the terms of the advisory agreement with the advisor. Persons owning 25% or more of the outstanding shares of a Fund (or a class of shares of a Fund) may be deemed to control the Fund (or class of the Fund). Persons owning 5% or more of the outstanding shares of the Fund (or a class of shares of the Fund) may be deemed principal shareholders of the Fund (or class of the Fund). Below are the beneficial and/or record holders of 5% or more of each Fund.

 

Insider Income Fund Class A Shares

 

Shareholders are known by the Trust to own of record 5% or more of the outstanding shares of the Insider Income Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

Charles Schwab & Co., Inc.

211 Main Street

San Francisco, CA 94105

53,246.4310 9.97%

LPL Financial

4707 Executive Drive

San Diego, CA 92121

156,449.1470 29.28%*
34 
 

 

Constellation Trust Co. Cust FBO/ Ronald Dean Hansen IRA

21200 Silver Cloud Dr.

Diamond Bar, CA 91765

26,844.5060 5.02%

*May be deemed to control Class A shares of the Fund because it holds more than 25% of the outstanding Class A shares.

 

As of October 3, 2022, securities of the Insider Income Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

Insider Income Fund Class C Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Insider Income Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

Cetera Investments Svcs.

(FBO)Summit Motor Sports

2ER-15352-12

3160 Mcilhattan Rd.

Bozeman MT 59715

52,523.3650 13.94%

LPL Financial

4707 Executive Drive

San Diego, CA 92121

158,690.5340 42.13%*

Charles Schwab & Co., Inc.

211 Main Street

San Francisco, CA 94105

50,640.8860 13.44%

*May be deemed to control Class C shares of the Fund because it holds more than 25% of the outstanding Class C shares.

 

As of October 3, 2022, securities of the Insider Income Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

Insider Income Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Insider Income Fund Class I shares on October 3 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

1,856,770.4180 20.32%

Charles Schwab & Co., Inc.

211 Main Street

San Francisco, CA 94105

1,821,127.4760 19.93%
35 
 

 

TD Ameritrade Inc.

P.O. Box 2226

Omaha, NE 68103

471,756.3070 5.16%

 

As of October 3, 2022, securities of the Insider Income Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class I shares of the Fund.

 

High Income Fund Class A Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the High Income Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

PERSHING LLC

P. O. BOX 2052

JERSEY CITY, NJ 07303-9998

145,740.3080 6.20%

 

As of October 3, 2022, securities of the High Income Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

High Income Fund Class C Shares

 

Shareholders are known by the Trust to own of record 5% or more of the outstanding shares of the High Income Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

PERSHING LLC

P. O. BOX 2052

JERSEY CITY, NJ 07303-9998

126,666.6670 18.51%

LPL Financial

4707 Executive Drive

San Diego, CA 92121

44,771.5110 6.54%

Raymond James/Omnibus

For Mutual Funds House Acct Firm 92500015 Attn: Courtney Waller

880 Carillon Parkway

Saint Petersburg, FL 33716

45,013.2030 6.58%

 

As of October 3, 2022, securities of the High Income Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

High Income Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the High Income Fund Class I shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below:

 

36 
 

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

477,031.9200 24.38%

Charles Schwab & Co., Inc.

211 Main Street

San Francisco, CA 94105

189,569.6950 9.69%

Raymond James/Omnibus

For Mutual Funds House Acct Firm 92500015 Attn: Courtney Waller

880 Carillon Parkway

Saint Petersburg, FL 33716

136,060.6400 6.95%

 

 

As of October 3, 2022, securities of the High Income Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class I shares of the Fund.

 

Total Return Income Fund Class A Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Total Return Income Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

98,373.5750 6.24%

UBS Financial Services

1000 Harbor Blvd.

Weehawken, NJ 07086-6761

113,576.9230 7.21%

 

As of October 3, 2022, securities of the Total Return Income Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

Total Return Income Fund Class C Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Total Return Income Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

69,730.6590 9.29%
37 
 

 

Raymond James/Omnibus

For Mutual Funds House Acct Firm 92500015 Attn: Courtney Waller

880 Carillon Parkway

Saint Petersburg, FL 33716

41,403.0660 5.52%

 

As of October 3, 2022, securities of the Total Return Income Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

 

Total Return Income Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Total Return Income Fund Class I shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

Charles Schwab & Co., Inc.

211 Main Street

San Francisco, CA 94105

627,951.8830 39.33%*

*May be deemed to control Class I shares of the Fund because it holds more than 25% of the outstanding Class I shares

 

As of October 3, 2022, securities of the Total Return Income Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class I shares of the Fund.

 

Global Balanced Fund Class A Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Global Balanced Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

38,118.2160 18.49%

Charles Schwab & Co.

Inc/Special Custody A/C

FBO Customers Attn Mutual Funds

101 Montgomery St

San Francisco, CA 94104

22,791.1250 11.06%

 

As of October 3, 2022, securities of the Global Balanced Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

Global Balanced Fund Class C Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Global Balanced Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

38 
 

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

27,753.6840 5.24%

Raymond James

Attn: Courtney Waller

880 Carillon Parkway

Saint Petersburg, FL 33716

318,677.1620 60.22%*

*May be deemed to control Class C shares of the Fund because it holds more than 25% of the outstanding Class C shares

 

As of October 3, 2022, securities of the Global Balanced Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

Global Balanced Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Global Balanced Fund Class I shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

59,114.2580 7.90%

Raymond James

Attn: Courtney Waller

880 Carillon Parkway

Saint Petersburg, FL 33716

 

 

 

204,975.2240

27.38%*

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

226,275.5400 30.22%*

Isobel L Szilagyi & June A Szilagyi CI TTEES of the Jerry J Szilagyi 2015 Family Trust

US DTD 12-29-2015

5 Abbington Dr.

Huntington, NY 11743

82,701.3280 11.05%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

38,571.8290 5.15%

*May be deemed to control Class I shares of the Fund because it holds more than 25% of the outstanding Class I shares.

 

As of October 3 2022, securities of the Global Balanced Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 7.57% of the outstanding Class I shares of the Fund.

 

39 
 

Floating Rate Income Fund Class A Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Floating Rate Income Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

 

 

408,310.7150

14.21%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

349,459.7290 12.16%

TD Ameritrade Inc.

P.O. Box 2226

Omaha, NE 68103

961,050.0450 33.44%*

*May be deemed to control Class A shares of the Fund because it holds more than 25% of the outstanding Class A shares.

 

As of October 3, 2022, securities of the Floating Rate Income Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

 

Floating Rate Income Fund Class C Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Floating Rate Income Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

RAYMOND JAMES/OMNIBUS

FOR MUTUAL FUNDS

HOUSE ACCT FIRM 92500015

ATTN: COURTNEY WALLER

880 CARILLON PARKWAY

SAINT PETERSBURG, FL 33716

1,023,846.7290 42.54%*

LPL Financial

4707 Executive Drive

San Diego, CA 92121

 

 

581,152.0930

24.14%

*May be deemed to control Class C shares of the Fund because it holds more than 25% of the outstanding Class C shares.

 

As October 3, 2022, securities of the Floating Rate Income Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

 

40 
 

Floating Rate Income Fund Class C-1 Shares

 

No shareholders known by the Trust owned of record 5% or more of the outstanding shares of the Floating Rate Income Fund Class C-1 shares on October 3, 2022.

 

Floating Rate Income Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Floating Rate Income Fund Class I shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

4,988,211.8630 23.78%

RAYMOND JAMES/OMNIBUS

FOR MUTUAL FUNDS

HOUSE ACCT FIRM 92500015

ATTN: COURTNEY WALLER

880 CARILLON PARKWAY

SAINT PETERSBURG, FL 33716

3,646,212.3290 17.38%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

1,656,369.7950 7.90%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

1,818,952.9470 8.67%

 

As of October 3, 2022, securities of the Floating Rate Income Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class I shares of the Fund.

 

Enhanced Income Strategy Fund Class A Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Enhanced Income Strategy Fund Class A shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

301,049.1180 8.76%

TD Ameritrade Inc.

P.O. Box 2226

Omaha, NE 68103

206,082.3630 5.99%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

821,551.6820

 

 

23.90%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

206,081.1740 5.99%
41 
 

*May be deemed to control Class A shares of the Fund because it holds more than 25% of the outstanding Class A shares.

 

As of October 3, 2022, securities of the Enhanced Income Strategy Fund Class A shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class A shares of the Fund.

 

Enhanced Income Strategy Fund Class C Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Enhanced Income Strategy Fund Class C shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL Financial

4707 Executive Drive

San Diego, CA 92121

893,932.3840 35.17%*

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

165,197.9290

 

 

6.50%

*May be deemed to control Class C shares of the Fund because it holds more than 25% of the outstanding Class C shares.

 

As October 3, 2022, securities of the Enhanced Income Strategy Fund Class C shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class C shares of the Fund.

 

Enhanced Income Strategy Fund Class I Shares

 

Shareholders known by the Trust to own of record 5% or more of the outstanding shares of the Enhanced Income Strategy Fund Class I shares on October 3, 2022 and the percentage of the outstanding shares owned on that date are listed below.

 

Name and Address
of Beneficial or Record Owner
Number of Record
and Beneficial (Shares)
Percent (%) of Class

LPL FINANCIAL/A/C 1000-0005 LPL FINANCIAL

4707 EXECUTIVE DRIVE

SAN DIEGO CA 92121-3091

12,118,609.9350 25.13%*

TD Ameritrade Inc.

P.O. Box 2226

Omaha, NE 68103

3,473,986.9920 7.20%

Charles Schwab & Co.

211 Main Street

San Francisco, CA 94105

8,805,626.3020 18.26%

SEI Private Trust Company/c/o ID 337

Attn: Mutual Funds

One Freedom Valley Drive

Oaks, PA 19456

2,498,837.2440 5.18%
42 
 

*May be deemed to control Class I shares of the Fund because it holds more than 25% of the outstanding Class I shares.

 

As of October 3, 2022, securities of the Enhanced Income Strategy Fund Class I shares owned by all officers and trustees, including beneficial ownership, as a group represented less than 1% of the outstanding Class I shares of the Fund.

 

ADVISOR AND SUB-ADVISORS

 

Catalyst Capital Advisors LLC has been retained by the Trust, on behalf of the Funds, under a Management Agreement to act as each Fund’s advisor, subject to the oversight of the Board. Catalyst Capital Advisors was organized under the laws of New York on January 24, 2006. The Advisor oversees the day-to-day investment decisions for the Funds and continuously reviews, supervises and administers each Fund’s investment program. The address of the Advisor is 53 Palmeras St. Suite 601, San Juan, PR 00901. Jerry Szilagyi is the controlling member of the Advisor. The Advisor is under common control with AlphaCentric Advisors LLC and Rational Advisors, Inc., the investment advisers of other funds in the same group of investment companies also known as a “Fund Complex”, and is also under common control with MFund Services LLC, a provider of management, legal administration and compliance services to the Funds and each other fund in the Fund Complex.

 

The Management Agreement provides that the Advisor will provide each Fund with investment advice and supervision and will continuously furnish an investment program for each Fund consistent with the investment objectives and policies of the Fund. The Advisor is responsible for the payment of the salaries and expenses of all of its personnel, office rent and the expenses of providing investment advisory and related clerical expenses.

 

Under the terms of the Management Agreement, the Advisor manages the investment of the assets of each Fund in conformity with the investment objectives and policies of that Fund. It is the responsibility of the Advisor to make investment decisions for the applicable Fund and to provide continuous supervision of the investment portfolios of the Fund.

 

For its services under the Management Agreement, each Fund pays the Advisor a monthly management fee based on its average daily net assets at the annual rates set forth below:

 

  Contractual Advisory Fee
Insider Income Fund 0.75%
High Income Fund 1.00%
Total Return Income Fund 1.00%
Global Balanced Fund 1.00%
Floating Rate Income Fund 1.00%
Enhanced Income Strategy Fund 1.50%

The Advisor pays expenses incurred by it in connection with acting as advisor, other than costs (including taxes and brokerage commissions, borrowing costs, costs of investing in underlying funds and extraordinary expenses, if any) of securities purchased for the Funds and other expenses paid by the Funds as detailed in each Fund’s Management Agreement. The Advisor pays for all employees, office space and facilities required by it to provide services under the Management Agreement, except for specific items of expense referred to below.

 

Except for the expenses described above that have been assumed by the Advisor, all expenses incurred in administration of the Funds will be charged to a particular Fund, including investment management fees; fees and expenses of the Board; interest charges; taxes; brokerage commissions; expenses of valuing assets; expenses of continuing registration and qualification of the Funds and the shares under federal and state law; share

43 
 

issuance expenses; fees and disbursements of independent accountants and legal counsel; fees and expenses of custodians, including sub-custodians and securities depositories, transfer agents and shareholder account servicing organizations; expenses of preparing, printing and mailing prospectuses, reports, proxies, notices and statements sent to shareholders; expenses of shareholder meetings; costs of investing in underlying funds; and insurance premiums. The Funds are also liable for nonrecurring expenses, including litigation to which it may from time to time be a party. Expenses incurred for the operation of a particular Fund, including the expenses of communications with its shareholders, are paid by that Fund.

 

The Advisor has contractually agreed to waive fees and/or reimburse expenses but only to the extent necessary to maintain the Funds’ total annual operating expenses (excluding brokerage costs; borrowing costs, such as (a) interest and (b) dividends on securities sold short; taxes; costs of investing in acquired funds, and extraordinary expenses, such as regulatory inquiry and litigation expenses) at the levels set forth in the table below through October 31, 2023.

 

  Expense Limitation*
Insider Income Fund

Class A – 1.00%

Class C – 1.75%

Class I – 0.75%

High Income Fund

Class A – 1.48%

Class C – 2.23%

Class I – 1.23%

Total Return Income Fund

Class A – 1.58%

Class C – 2.33%

Class I – 1.33%

Global Balanced Fund

Class A – 1.22%

Class C – 1.97%

Class I – 0.97%

Floating Rate Income Fund

Class A – 1.15%

Class C – 1.90%

Class C-1 – 1.90%

Class I – 0.90%

Enhanced Income Strategy Fund

Class A – 1.75%

Class C – 2.50%

Class I – 1.50%

* Applicable to all classes of shares unless otherwise noted.

 

Each waiver or reimbursement by the Advisor is subject to repayment by the Fund within the three years following the date on which that particular expense is incurred, if the Fund is able to make the repayment within the lesser of the expense limitation in place at the time of waiver/reimbursement and the expense limitation in place at the time of recapture.

 

The Management Agreement with each Fund was in effect for an initial two year term and continues from year to year as long as its continuation is approved at least annually by the Board, including a majority of the Trustees who are not “interested persons,” or by the shareholders of the applicable Fund. Each Management Agreement may be terminated at any time upon 60 days’ written notice by the relevant Fund or by a majority vote of the outstanding shares or 90 days’ written notice by the Advisor and will terminate automatically upon assignment. A discussion of the matters considered by the Board in connection with the renewal of the Management Agreement for each Fund can be found in the Fund’s Annual Report to Shareholders for the fiscal year ended June 30, 2022.

 

Each Management Agreement provides that the Advisor shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust in connection with the performance of its duties, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the part of the Advisor in the performance of its duties, or from reckless disregard of its duties and obligations thereunder.

 

44 
 

The table below provides information about the advisory fees paid to the Advisor of each Fund for each of the last three fiscal years ended June 30:

 

Fund   2020 2021 2022
Insider Income Fund Total Advisory Fee $366,118 $550,315 $830,622
Waiver $209,122 $272,702 $372,543
Net Advisory Fee $156,996 $277,613 $458,079
High Income Fund Total Advisory Fee $189,987 $203,846 $250,075
Waiver $111,113 $111,458 $117,270
Net Advisory Fee $78,874 $92,388 $132,805
Total Return Income Fund Total Advisory Fee $165,391 $158,157 $208,416
Waiver $88,817 $92,056 $83,714
Net Advisory Fee $76,574 $66,101 $124,702
Global Balanced Fund Total Advisory Fee $234,019 $216,168 $190,426
Waiver $170,253 $169,008 $161,770
Net Advisory Fee $63,766 $47,160 $28,656
Floating Rate Income   Total Advisory Fee $839,077 $1,225,786 $2,084,613
Waiver $427,070 $535,848 $785,104
Net Advisory Fee $412,007 $689,938 $1,299,509
Enhanced Income Strategy Fund Total Advisory Fee $1,194,141 $3,377,461 $7,074,950
Waiver $283,996 $646,409 $1,120,683
Net Advisory Fee $910,145 $2,731,052 $5,954,267

 

Sub-Investment Advisor – High Income Fund and Total Return Income Fund

SMH Capital Advisors, LLC (“SMHCA”), an investment advisory firm founded in 1997, has been retained to act as the sub-advisor to the High Income Fund and Total Return Income Fund under an Investment Sub-Advisory Agreement (“Sub-Advisory Agreement”) with the Advisor. SMHCA also provides investment advisory services to high net worth individuals, pension and profit sharing plans and charitable organizations.

As compensation for the sub-advisory services it provides to the High Income Fund and Total Return Income Fund, the Advisor pays SMHCA 50% of the net advisory fees earned by the Advisor from each Fund. For this purpose, “net advisory fees” mean advisory fees collected from the High Income Fund and Total Return Income Fund (net of fee waivers due to expense caps) less any revenue sharing and asset-based fees paid to broker-dealers or custodians with assets in the High Income Fund and Total Return Income Fund. The fee paid to SMHCA by the Advisor is paid from the Advisor’s management fee and is not an additional cost to the High Income Fund and Total Return Income Fund. The Sub-Advisory Agreement was effective for an initial two year period and continues in effect for successive twelve-month periods, provided that the Board annually approves it for continuance. A discussion of the matters considered by the Board in connection with the renewal of the Sub-Advisory Agreement is in the Funds’ Annual Report to Shareholders for the fiscal year ended June 30, 2022. For the previous three fiscal years ended June 30, SMHCA received the following amounts in sub-advisory fees for its services to the High Income and Total Return Income Funds:

 

 

  Fiscal Year Ended June 30, 2022 Fiscal Year Ended June 30, 2021 Fiscal Year Ended June 30, 2020
High Income Fund $66,403 $46,194 $39,437
Total Return Income Fund $62,351 $33,051 $38,287
45 
 

 

Sub-Investment Advisor – Global Balanced Fund

Managed Asset Portfolios, LLC (“MAP”), an investment advisory firm founded in 2000, has been retained to act as the sub-advisor to the Global Balanced Fund under an Investment Sub-Advisory Agreement (“Sub-Advisory Agreement”) with the Advisor. MAP is controlled by Michael Dzialo, MAP’s President and Managing Member. MAP also provides investment advisory services to high net worth individuals, institutions, pension and profit sharing plans and charitable organizations.

As compensation for the sub-advisory services it provides to the Fund, the Advisor will pay MAP 50% of the net advisory fees earned by the Advisor from the Fund. For this purpose, “net advisory fees” mean advisory fees collected from the Fund (net of fee waivers due to expense caps) less any revenue sharing and asset-based fees paid to broker-dealers or custodians with assets in the Fund. The fee paid to MAP by the Advisor will be paid from the Advisor’s management fee and is not an additional cost to the Fund. The Sub-Advisory Agreement was effective for an initial two year period and continues in effect for successive twelve-month periods, provided that the Board annually approves it for continuance. A discussion of the matters considered by the Board in connection with the renewal of the Sub-Advisory Agreement is in the Fund’s Annual Report to Shareholders for the fiscal year ended June 30, 2022. For the fiscal years ended June 30, 2020, June 30, 2021, and June 30, 2022, MAP received $31,883, $23,580, and $14,328, respectively, in sub-advisory fees for its services to the Global Balanced Fund.

 

Sub-Investment Advisor - Floating Rate Income Fund

CIFC Investment Management LLC (“CIFC”), a member of an investment advisory firm founded in 2005, has been retained to act as the sub-advisor to the Fund under an Investment Sub-Advisory Agreement (“Sub-Advisory Agreement”) with the Advisor. CIFC is a registered investment adviser specializing in U.S. corporate and structured credit strategies that, together with its affiliates, has approximately $40 billion of assets under management as of June 30, 2022. CIFC is privately held and is a wholly owned indirect subsidiary of CIFC LLC.

 

As compensation for the sub-advisory services it provides to the Fund, the Advisor pays CIFC 50% of the net advisory fees earned by the Advisor from the Fund. For this purpose, “net advisory fees” mean advisory fees collected from the Fund (net of fee waivers due to expense caps) less any revenue sharing and asset-based fees paid to broker-dealers or other intermediaries with assets in the Fund. The fee paid to CIFC by the Advisor will be paid from the Advisor’s management fee and is not an additional cost to the Fund. The Sub-Advisory Agreement was effective for an initial two year period and continues in effect for successive twelve-month periods, provided that the Board annually approves it for continuance. A discussion of the matters considered by the Board in connection with the renewal of the Sub-Advisory Agreement for the Floating Rate Income Fund is included in the Fund’s Annual Report to Shareholders for the fiscal year ended June 30, 2022. For the fiscal years ended June 30, 2020, June 30, 2021, and June 30, 2022, CIFC received $206,004, $344,969, and $649,754, respectively in sub-advisory fees for its services to the Floating Rate Income Fund.

 

Sub-Investment Advisor – Enhanced Income Strategy Fund

Wynkoop, LLC (“Wynkoop”), an investment advisory firm founded in 2009, has been retained to act as the sub-advisor to the Fund under an Investment Sub-Advisory Agreement (“Sub-Advisory Agreement”) with the Advisor. Wynkoop is wholly owned by Brandon D. Jundt. Wynkoop also provides investment advisory services to privately offered funds.

As compensation for the sub-advisory services it provides to the Fund, the Advisor pays Wynkoop 50% of the net advisory fees earned by the Advisor from the Fund. For this purpose, “net advisory fees” mean advisory fees collected from the Fund (net of fee waivers due to expense caps) less any revenue sharing and asset-based fees paid to broker-dealers or custodians with assets in the Fund. The fee paid to Wynkoop by the Advisor is paid from the Advisor’s management fee and is not an additional cost to the Fund. The Sub-Advisory Agreement was effective for an initial two year period and continues in effect for successive twelve-month periods, provided

46 
 

that the Board annually approves it for continuance. A discussion of the matters considered by the Board in connection with the renewal of the Sub-Advisory Agreement is available in the Fund’s Annual Report to Shareholders for the fiscal year ended June 30, 2022. For the fiscal years ended June 30, 2020, June 30, 2021, and June 30, 2022, Wynkoop received $455,073, $1,365,526, and $2,977,134, respectively, in sub-advisory fees for services to the Enhanced Income Strategy Fund.

 

Portfolio Managers –Insider Income Fund

Subject to the oversight and approval of the Advisor, David Miller is the senior portfolio manager responsible for the day-to-day management of the Insider Income Fund’s portfolio, and Charles Ashley is co-portfolio manager for the Insider Income Fund. Mr. Miller’s compensation from the Advisor is based on a percentage of the overall profits of the Advisor. He is also entitled to a portion of the proceeds if the Advisor sells all or a portion of the Advisor’s business. They also participate in a pension plan. Mr. Ashley’s compensation from the Advisor is a fixed base salary and a discretionary bonus at the Advisor’s discretion.

Portfolio Managers – High Income Fund and Total Return Income Fund

Subject to the oversight and approval of the Advisor, Dwayne Moyers and Daniel Rudnitsky, as portfolio managers, have sole responsibility for the day-to-day management of the portfolios of the High Income Fund and Total Return Fund. Messrs. Moyer and Rudnitsky’s compensation is based on a salary plus a bonus based on the overall profits of SMHCA. They are also contractually entitled to a portion of the proceeds if SMHCA sells all or a portion of its business.

 

Portfolio Managers – Global Balanced Fund

Subject to the oversight and approval of the Advisor, Michael Dzialo, Peter Swan and Karen Culver, as portfolio managers, have primary responsibility for the day-to-day management of the Global Balanced Fund’s portfolio. Mr. Dzialo’s compensation is based on a salary plus the overall profits of MAP. He is also the majority owner of MAP and therefore benefits from any increase in value of the firm. Mr. Swan’s compensation is based on a salary plus a percentage of the profits from MAP’s mutual fund business. He also holds an ownership stake in the firm and therefore benefits proportionately from any increase in the value of the firm. Ms. Culver’s compensation is based on a salary plus a percentage of the profits from MAP’s mutual fund business. She also holds an ownership stake in the firm and therefore benefits proportionately from any increase in the value of the firm.

 

Portfolio Manager –Floating Rate Income Fund

Subject to the oversight and approval of the Advisor, Stan Sokolowski, Senior Portfolio Manager, Managing Director and Deputy Chief Investment Officer at CIFC serves as the Fund's portfolio manager responsible for the day-to-day management of the Floating Rate Income Fund’s portfolio. The portfolio manager’s compensation from CIFC is based on a fixed salary plus a bonus based on his individual accomplishments and overall profitability of CIFC.

 

Portfolio Managers –Enhanced Income Strategy Fund

Subject to the oversight and approval of the Advisor, Leland Abrams and Jui Chiew Tan are primarily responsible for the day-to-day management of the Enhanced Income Strategy Fund’s portfolio. Mr. Abrams is the lead portfolio manager of the Fund.  Mr. Abrams’ compensation from Wynkoop is based on salary, revenue sharing and 401K match contributions. Mr. Tan’s compensation from Wynkoop is comprised of salary, 401K match contributions, and profit-sharing distributions based upon management’s discretion.   Additionally, both managers receive compensation directly from other managed funds based upon 20% of the overall profits of the related fund, subject to hurdle and high-water marks.  

 

47 
 

Portfolio Managers’ Other Accounts Managed — All Funds

As of June 30, 2022, the number of, and total assets in all registered investment companies, other pooled investment vehicles, and other accounts overseen by David Miller, Charles Ashley, Dwayne Moyers, Daniel Rudnitsky, Michael Dzialo, Peter Swan, Karen Culver, Stan Sokolowski, Leland Abrams and Jui Chiew Tan are as follows:

 

Name of Portfolio Manager Registered Investment Companies Other Pooled Investment Vehicles Managed Other Accounts Managed
Number

Total Assets

(millions)

Number

Total Assets

(millions)

Number

Total Assets

(millions)

David Miller 9 $1,504 Million 0 $0 0 $0
Charles Ashley 6 $170 Million 0 $0 0 $0
Dwayne Moyers 2 $36.7 million 1 $244.7 million 295 $74.6 million
Daniel Rudnitsky 2 $36.7 million 1 $244.7 million 295 $74.6 million
Michael Dzialo 2 $89.3 million 3 $46.8 million 1,916 $870.9 million
Peter Swan 2 $89.3 million 2 $46.8 million 1,916 $870.9 million
Karen Culver 2 $89.3 million 3 $46.8 million 1,916 $870.9 million
Stan Sokolowski 0 $0 million 12 $3.5 billion 0 $0 million
Leland Abrams 2 $598 million 2 $125 million 0 $0 million
Jui Chiew Tan 2 $598 million 1 $111 million 0 $0 million

 

The advisory fee for the registered investment companies, other pooled investment vehicles or other accounts managed by each of the portfolio managers listed above (other than Stan Sokolowski) are not based on the performance of the respective account. Stan Sokolowski manages a pooled investment vehicle with approximately $34 million in total assets with respect to which the advisory fee is based on the performance of the account.

 

The following table shows the dollar range of equity securities of the Funds beneficially owned by each portfolio manager as of June 30, 2022.

Name of Portfolio Manager Fund Name Dollar Range of Equity Securities in the Funds
David Miller Insider Income Fund None
48 
 

 

Charles Ashley Insider Income Fund $1 - $10,000

Dwayne Moyers

 

High Income Fund None
Total Return Income Fund None

Daniel Rudnitsky

 

High Income Fund None
Total Return Income Fund None
Michael Dzialo Global Balanced Fund $50,001 - $100,000
Peter Swan Global Balanced Fund None
Karen Culver Global Balanced Fund None
Stan Sokolowski Floating Rate Income Fund None
Leland Abrams Enhanced Income Strategy Fund $100,001 - $500,000
Jui Chiew Tan Enhanced Income Strategy Fund $100,001 - $500,000

 

Potential Conflicts of Interest – Advisor and Sub-Advisors

 

Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other accounts. The management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of each account. The management of multiple funds and accounts also may give rise to potential conflicts of interest if the funds and accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his time and investment ideas across multiple funds and accounts.

 

With respect to securities transactions for a Fund, the Advisor or sub-advisor determines which broker to use to execute each order, consistent with the duty to seek best execution of the transaction.  The portfolio managers may execute transactions for another fund or account that may adversely impact the value of securities held by the Funds. Securities selected for funds or accounts other than the Funds may outperform the securities selected for the Funds.

 

The appearance of a conflict of interest may arise where the Advisor or a sub-advisor has an incentive, such as a performance-based management fee. The management of personal accounts may give rise to potential conflicts of interest; there is no assurance that the Funds’ code of ethics will adequately address such conflicts.  One of a portfolio manager’s numerous responsibilities is to assist in the sale of Fund shares.  Because each portfolio manager’s compensation is indirectly linked to the sale of Fund shares, the portfolio manager’s may have an incentive to devote time to marketing efforts designed to increase sales of Fund shares.

 

Although the portfolio managers generally do not trade securities in their own personal accounts, each of the Funds has adopted a code of ethics that, among other things, permits personal trading by employees under conditions where it has been determined that such trades would not adversely impact client accounts. Nevertheless, the management of personal accounts may give rise to potential conflicts of interest, and there is no assurance that these codes of ethics will adequately address such conflicts. 

 

49 
 

The Funds may invest in affiliated funds advised by the Advisor. The Advisor is subject to conflicts of interest in allocating the Funds’ assets among the affiliated funds. The Advisor will receive more revenue when it selects an affiliated fund rather than an unaffiliated fund for inclusion in a Fund’s portfolio. This conflict may provide an incentive for the Advisor to invest Fund assets in affiliated funds that perform less well than unaffiliated funds. The Advisor may have an incentive to allocate the Funds’ assets to those affiliated funds for which the net advisory fees payable to the Advisor are higher than the fees payable by other affiliated funds.

 

The Advisor, each sub-advisor, and the Funds have adopted certain compliance procedures which are designed to address these types of conflicts.  However, there is no guarantee that such procedures will detect each and every situation in which a conflict arises.

 

CODE OF ETHICS

 

The Advisor, SMHCA, MAP, CIFC, Wynkoop, Northern Lights Distributors, LLC and the Trust have adopted codes of ethics under Rule 17j-1(c) of the 1940 Act.  The purpose of each code is to avoid potential conflicts of interest and to prevent fraud, deception or misconduct with respect to the Funds.  Such codes of ethics permit personnel covered by the codes to invest in securities that may be purchased by the Funds, subject to the restrictions of the code. The codes are filed as exhibits to the Trust’s registration statement.

 

 

TRANSFER AGENT, FUND ACCOUNTING AGENT AND ADMINISTRATOR

Ultimus Fund Solutions, LLC (“Ultimus”), which has its principal office at 225 Pictoria Drive, Suite 450, Cincinnati, Ohio 45246, serves as administrator, fund accountant and transfer agent for the Funds pursuant to the Fund Services Agreement (the “Agreement”) with the Trust and subject to the supervision of the Board. Ultimus is primarily in the business of providing administrative, fund accounting and transfer agent services to retail and institutional mutual funds. Ultimus is an affiliate of the distributor.

Ultimus may also provide persons to serve as officers of the Funds. Such officers may be directors, officers or employees of Ultimus or its affiliates.

The Agreement will remain in effect for an initial term of three years from the 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 Ultimus 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 Ultimus. The Agreement provides that Ultimus shall be without liability for any action reasonably taken or omitted pursuant to the Agreement.

Under the Agreement, Ultimus 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 Fund 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 calculate 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 the Fund to calculate its daily net asset value; (9) assisting in and monitoring the preparation, filing, printing and where applicable, dissemination of periodic reports to the Board, shareholders and the SEC, notices pursuant to Rule 24f-2, proxy materials and reports to the SEC on Forms N-CEN, N-CSR, N-PORT and N-PX; (10) coordinating the Trust's audits and examinations by assisting the 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 facilitate such registration or qualification; (12) monitoring sales of shares and ensuring that the shares are properly and duly registered with the SEC; (13) monitoring the calculation of performance data for the Funds; (14) preparing, or causing to be prepared, expense and financial reports; (15) preparing authorization for the payment of Trust expenses and paying, from Trust

50 
 

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 the Funds 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 Ultimus); 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.

Ultimus 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 each Fund’s listing of portfolio securities and general ledger reports; (iv) reconciliation of accounting records; (v) calculation of yield and total return for each Fund; (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 Advisor; and (vii) monitoring and evaluation of daily income and expense accruals, and sales and redemptions of shares of the Funds.

Ultimus also acts as transfer, dividend disbursing, and shareholder servicing agent for the Funds pursuant to the Agreement. Under the Agreement, Ultimus 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 these services, each of the Funds pays Ultimus an annual asset-based fee of 0.13% of net assets up to $50 million, with lower fees at higher asset levels, plus reimbursement of out-of-pocket expenses.

Prior to November 15, 2021, Gemini Fund Services, LLC (“GFS”), an affiliate of Ultimus, provided administrator, fund accountant and transfer agent services to the Funds. The Fund paid the following fees for these services for the fiscal years ended June 30, 2020, June 30, 2021, and June 30, 2022:

Fund

 

Fiscal Year Ended June 30, 2020

 

Fiscal Year Ended June 30, 2021

 

Fiscal Year Ended June 30, 2022

Insider Income Fund $36,098 $56,654 $64,585
High Income Fund $32,202 $36,133 $33,978
Total Return Income Fund $29,229 $28,810 $31,753
Global Balanced $33,486 $34,358 $28,521
Floating Rate Income Fund $77,432 $115,551 $148,949
Enhanced Income Strategy Fund $103,708 $234,600 $334,803

 

 

MFund Services LLC (“MFund”) provides the Funds with various management and legal administrative services. For these services, the Funds pay MFund an annual asset-based fee in accordance with the schedule set forth below applied at the Fund family level (i.e., all the Funds in the Trust advised by Catalyst Capital Advisors LLC):

 

0.10% of net assets up to $50 million;

0.07% of net assets from $50 million to $100 million;

0.05% of net assets from $100 million to $250 million;

0.04% of net assets from $250 million to $500 million;

0.03% of net assets from $500 million to $1 billion;

0.02% of net assets from $1 billion to $5 billion;

0.01% of assets from $5 billion and above

 

 

In addition, the Funds reimburse MFund for any reasonable out-of-pocket expenses incurred in the performance of its duties under the Management Services Agreement. Jerry Szilagyi is the controlling member

51 
 

of MFund Services, the controlling member of Catalyst Capital Advisors LLC, and a Trustee of the Trust. For the last three fiscal years ended June 30, the Funds paid MFund the following fees for its management services:

 

Fund Fiscal Year Ended June 30, 2020 Fiscal Year Ended June 30, 2021 Fiscal Year Ended June 30, 2022
Insider Income Fund $16,388 $23,344 $30,908
High Income Fund $9,440 $10,096 $9,596
Total Return Income Fund $8,868 $9,255 $8,863
Global Balanced Fund $10,467 $10,404 $8,423
Floating Rate Income Fund $24,648 $35,637 $53,814
Enhanced Income Strategy Fund $23,643 $61,279 $119,261

 

 

COMPLIANCE SERVICES

 

MFund provides the Chief Compliance Officer and certain compliance related services to the Trust pursuant to a Compliance Services Agreement. During the last three fiscal years ended June 30, the Funds paid MFund Services the following amounts for compliance services:

Fund

 

Fiscal Year Ended June 30, 2020

 

Fiscal Year Ended June 30, 2021

 

Fiscal Year Ended June 30, 2022

Insider Income Fund $6,512 $7,556 $8,266
High Income Fund $8,264 $8,368 $8,441
Total Return Income Fund $8,296 $8,264 $8,318
Global Balanced Fund $8,700 $8,445 $8,421
Floating Rate Income Fund $12,086 $13,337 $15,034
Enhanced Income Strategy Fund $14,568 $14,230 $21,605

 

 

CUSTODIAN

 

Pursuant to a Custody Agreement between the Trust and U.S. Bank National Association (the “Custodian”), 1555 N. Rivercenter Drive, Suite 302, Milwaukee, WI 53212, the Custodian serves as the custodian of the Funds. The Custodian has custody of all securities and cash of the Fund. The Custodian, among other things, attends to the collection of principal and income and payment for and collection of proceeds of securities bought and sold by the Fund. The Custodian also serves as custodian to the Subsidiary.

 

 

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Funds’ independent registered public accounting firm is BBD, LLP, 1835 Market Street, 3rd Floor, Philadelphia, PA 19103. Shareholders will receive annual financial statements, together with a report of independent accountants, and semiannual unaudited financial statements of the Funds. BBD, LLP will report on the Funds’ annual financial statements, review certain regulatory reports and the Funds’ income tax returns, and perform other professional accounting, auditing, tax and advisory services when engaged to do so by the Funds.

 

 

52 
 

COUNSEL

 

Thompson Hine LLP, 41 South High Street, Suite 1700, Columbus, OH 43215, serves as counsel for the Trust.

 

 

DISTRIBUTOR

 

Northern Lights Distributors, LLC, located at 4221 North 203rd Street, Suite 100, Elkhorn, NE 68022 (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 Fund 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 a Fund at any time, without the payment of any penalty, by vote of a majority of the entire Board or by vote of a majority of the outstanding shares of a Fund 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 a Fund. The Underwriting Agreement will automatically terminate in the event of its assignment.

 

12b-1 Plans

 

The Funds have adopted Distribution and Shareholder Servicing Plans pursuant to Rule 12b-1 under the 1940 Act (the “Plans”). Rule 12b-1 provides that any payments made by a Fund in connection with the distribution of its shares may be made only pursuant to a written plan describing all material aspects of the proposed financing of the distribution and also requires that all agreements with any person relating to the implementation of a plan must be in writing. Under each Fund’s Plan related to the Class A Shares, the Funds incur an annual fee of up to 0.50% of the average daily net assets of the respective Fund’s Class A Shares (the “Class A 12b-1 Fee”). Class A Shares of the Funds are currently incurring an annual fee of up to 0.25% of its average daily net assets. If authorized by the Board and upon notice to shareholders, the Funds may increase the percentage paid under the Plan up to the Class A 12b-1 Fee amount. Under each Fund’s Plan related to the Class C Shares, the Funds incur an annual fee of up to 1.00% of the average daily net assets of the respective Fund’s Class C Shares (the “Class C 12b-1 Fee”). Under the Plan related to the Class C-1 Shares of the Floating Rate Income Fund, the Fund incurs an annual fee of up to 1.00% of the average daily net assets of the Fund’s Class C-1 Shares (the “Class C-1 12b-1 Fee”) (the Class A 12b-1 Fee, Class C 12b-1 Fee, and Class C-1 12b-1 Fee are collectively referred to as the “12b-1 Fees”).

 

The 12b-1 Fees may be used to pay a fee on a quarterly basis to broker-dealers, including the Distributor and affiliates of the Distributor, the Advisor, banks and savings and loan institutions and their affiliates and associated broker-dealers that have entered into Service Agreements with the Distributor (“Service Organizations”) of annual amounts of up to 0.25% of the average net asset value of all shares of the respective Fund owned by shareholders with whom the Service Organization has a servicing relationship. The 12b-1 Fees may also be used to reimburse parties for shareholder services and distribution related expenses.

Each Fund’s Plan continues in effect from year to year, provided that each such continuance is approved at least annually by a vote of the Board, including a majority of the trustees who are not “interested persons” of the Trust and have no direct or indirect financial interest in the operation of the Plan or in any agreements entered into in connection with the Plan (the “Qualified Trustees”). Each Fund’s Plan may be terminated at any time, without penalty, by vote of a majority of the Qualified Trustees of a Fund or by vote of a majority of the

53 
 

outstanding shares of the Fund. Any amendment to a Plan to increase materially the amount the Fund is authorized to pay thereunder would require approval by a majority of the outstanding shares of the respective Fund. Other material amendments to a Fund’s Plan would be required to be approved by vote of the Board, including a majority of the Qualified Trustees. The Distributor may at its own discretion waive a portion of its fees from time to time, although such waiver is not required.

 

Dealers who are holders or dealers of record for accounts in one or more of the Funds may receive payments from 12b-1 Fees. A dealer’s marketing support services may include business planning assistance, educating dealer personnel about the Funds and shareholder financial planning needs, placement on the dealer’s preferred or recommended fund list, and access to sales meetings, sales representatives and management representatives of the dealer. Dealers are compensated differently depending upon, among other factors, the level and/or type of marketing support provided by the dealer. From time to time, the Advisor or a sub-advisor, at its expense, may provide additional compensation to dealers that sell or arrange for the sale of shares of a Fund. Such compensation provided by the Advisor or a sub-advisor may include financial assistance to dealers that enable the Advisor or sub-advisor to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other dealer-sponsored events. Other compensation may be offered to the extent not prohibited by state laws or any self-regulatory agency, such as the FINRA. The Advisor or a sub-advisor may make payments for events they deem appropriate, subject to applicable law. These payments may vary depending upon the nature of the event.

 

The table below states the amounts paid by each Fund’s Class A and Class C shares under the distribution plan for the fiscal year ended June 30, 2022. There were no Class C-1 shares outstanding during the fiscal year ended June 30, 2022.

 

Fund Class A Shares Class C Shares
Insider Income Fund $13,851 $40,020
High Income Fund $23,114 $38,986
Total Return Income Fund $17,466 $50,824
Global Balanced Fund $6,656 $63,202
Floating Rate Income Fund $55,731 $184,681
Enhanced Income Strategy Fund $110,482 $272,782

 

The table below states the principal types of activities for which each Fund made payments under the distribution plan for the fiscal year ended June 30, 2022.

 

Fund Advertising & Sales Literature Printing & Mailing of Prospectuses Compensation to Underwriters Compensation to Broker Dealers  Compensation to sales-personnel Interest, Carrying
or other Financial Charges

 

 

 

 

 

Other - Marketing

 

Other-

Accrued and Unpaid Expenses

Insider Income Fund

Class A

 

 

 

-

 

 

 

-

 

 

 

-

$10,098

 

 

 

-

 

 

 

-

 

 

 

$792

 

 

 

$2,961

Class C - - -

$31,976

- - - $8,044

High Income Fund

Class A

 

 

 

-

 

 

 

-

 

 

 

-

$13,945

 

 

 

-

 

 

 

-

 

 

 

$177

$8,992

 

Class C - - -

$40,620

- - - $(1,634)

 

54 
 

 

Total Return Income Fund

Class A

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

$9,966

 

 

 

 

-

 

 

 

 

-

 

 

 

 

$149

$7,351
Class C - - - $53,835 - - - $(3,011)

Global Balanced Fund

Class A

 

 

 

-

 

 

 

-

 

 

 

-

$6,809

 

 

 

-

 

 

 

-

 

 

 

$136

$(289)
Class C - - - $52,005 - - - $11,197

Floating Rate Income Fund

Class A

 

 

 

 

-

 

 

 

 

-

 

 

 

 

-

$70,050

 

 

 

 

-

 

 

 

 

-

 

 

 

 

$45,418

$(59,737)
Class C - - - $137,847 - - $5,000 $41,834

Enhanced Income Strategy Fund

Class A

 

 

 

-

 

 

 

 

-

 

 

 

 

-

$108,171

 

 

 

 

-

 

 

 

 

-

 

 

 

 

$3,480

$(1,169)
Class C - - - $219,892 - - - $52,890

 

 

Distribution Agent. Alt Fund Distributors LLC (“Distribution Agent”), located at 140 East 45th Street, Suite 15B, New York, NY 10017, an affiliate of the Advisor, provides marketing and other services intended to result in the sale of Fund shares pursuant to the Wholesale and Distribution Agent Agreement between the Trust, Advisor, Distributor and Distribution Agent. For such services, Distribution Agent is entitled to receive 0.005% on the sale of Fund shares from the Advisor, a portion of which may be offset by dealer reallowances, and 12b-1 fees. For the fiscal year ended June 30, 2022, the Distribution Agent received the amounts set forth below:

 

 

  Net Underwriting
  Discounts and
  Commissions
Insider Income Fund $11,551
High Income Fund $300
Total Return Income Fund $3,663
Global Balanced Fund $310
Floating Rate Income Fund $70,713
Enhanced Income Strategy Fund $361,302

 

ADDITIONAL COMPENSATION TO FINANCIAL INTERMEDIARIES

 

The Funds may directly enter into agreements with “financial intermediaries” pursuant to which a Fund will pay the financial intermediary for services such as networking or sub-transfer agency, including the

55 
 

maintenance of “street name” or omnibus accounts and related sub-accounting, record-keeping and administrative services provided to such accounts. Payments made pursuant to such agreements are generally based on either: (1) a percentage of the average daily net assets of clients serviced by such financial intermediary, or (2) the number of accounts serviced by such financial intermediary. Any payments made pursuant to such agreements are in addition to, rather than in lieu of, Rule 12b-1 or shareholder service fees the financial intermediary may also be receiving. From time to time, the Advisor or its affiliates may pay a portion of the fees for networking or sub-transfer agency at its or their own expense and out of its or their legitimate profits. These payments may be material to financial intermediaries relative to other compensation paid by the Funds and/or the Underwriter, the Advisor and their affiliates. The payments described above may differ and may vary from amounts paid to the Funds’ transfer agent or other service providers for providing similar services to other accounts. The financial intermediaries are not audited by the Funds, the Advisor or their service providers to determine whether such intermediaries are providing the services for which they are receiving such payments.

The Advisor or affiliates of the Advisor may also, at their own expense and out of their own legitimate profits, provide additional cash payments to financial intermediaries who sell shares of the Fund. These additional cash payments are payments over and above sales commissions or reallowances, distribution fees or servicing fees (including networking, administration and sub-transfer agency fees) payable to a financial intermediary which are disclosed elsewhere in the prospectus or this SAI. These additional cash payments are generally made to financial intermediaries that provide sub- accounting, sub-transfer agency, shareholder or administrative services or marketing support. Marketing support may include: (i) access to sales meetings or conferences, sales representatives and financial intermediary management representatives; (ii) inclusion of the Funds on a sales list, including a preferred or select sales list, or other sales programs to which financial intermediaries provide more marketing support than to other sales programs on which the Advisor or its affiliates may not need to make additional cash payments to be included; (iii) promotion of the sale of the Funds’ shares in communications with a financial intermediary’s customers, sales representatives or management representatives; and/or (iv) other specified services intended to assist in the distribution and marketing of the Funds’ shares. These additional cash payments also may be made as an expense reimbursement in cases where the financial intermediary provides shareholder services to Fund shareholders. The Advisor and its affiliates may also pay cash compensation in the form of finders’ fees or referral fees that vary depending on the dollar amount of shares sold.

The amount and value of additional cash payments vary for each financial intermediary. The availability of these additional cash payments, the varying fee structure within a particular additional cash payment arrangement and the basis for and manner in which a financial intermediary compensates its sales representatives may create a financial incentive for a particular financial intermediary and its sales representatives to recommend the Funds’ shares over the shares of other mutual funds based, at least in part, on the level of compensation paid. A financial intermediary and its sales representatives may have similar financial incentives to recommend a particular class of the Funds’ shares over other classes of the Fund’s shares. You should consult with your financial advisor and review carefully any disclosure by the financial firm as to compensation received by your financial advisor.

Although the Funds may use financial firms that sell its shares to effect portfolio transactions for the Funds, the Funds and the Advisor will not consider the sale of Fund shares as a factor when choosing financial firms to effect those transactions.

SECURITIES LENDING TRANSACTIONS

The dollar amounts of income and fees and compensation paid to all service providers related to the High Income Fund’s securities lending activities during the most recent fiscal year were as follows:

Gross income from securities lending activities
(including income from cash collateral reinvestment)
$41,876
Fees and/or compensation for securities lending activities and related services  
56 
 

 

Fees paid to securities lending agent from a revenue split $(6,179)
Fees paid for any cash collateral management service (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split $(1,951)
Administrative fees not included in revenue split  
Indemnification fees not included in revenue split  
Rebate (paid to borrower) $(9,028)
Other fees not included in revenue split  
Aggregate fees/compensation for securities lending activities $(17,158)
Net income from securities lending activities $24,718

 

The dollar amounts of income and fees and compensation paid to all service providers related to the Total Return Income Fund’s securities lending activities during the most recent fiscal year were as follows:

Gross income from securities lending activities
(including income from cash collateral reinvestment)
$35,440
Fees and/or compensation for securities lending activities and related services  
Fees paid to securities lending agent from a revenue split $(4,582)
Fees paid for any cash collateral management service (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split $(1,737)
Administrative fees not included in revenue split  
Indemnification fees not included in revenue split  
Rebate (paid to borrower) $(10,799)
Other fees not included in revenue split  
Aggregate fees/compensation for securities lending activities $(17,118
Net income from securities lending activities $18,322

 

PROXY VOTING POLICY

 

The Board has delegated responsibilities for decisions regarding proxy voting for securities held by the Funds to the Advisor or sub-advisor, as follows:

Fund Responsible Party
Insider Income Fund Catalyst
High Income Fund SMHCA
Total Return Income Fund SMHCA
Global Balanced Fund MAP
57 
 

 

Floating Rate Income Fund CIFC
Enhanced Income Strategy Fund Wynkoop

The proxy voting delegates may further delegate such proxy voting to a sub-advisor or a third party proxy voting service provider. The proxy voting delegates will vote such proxies in accordance with their proxy policies and procedures. In some instances, the proxy voting delegates may be asked to cast a proxy vote that presents a conflict between its interests and the interests of a Fund’s shareholders. In such a case, the Trust’s policy requires that the proxy voting delegate abstain from making a voting decision and to forward all necessary proxy voting materials to the Trust to enable the Board to make a voting decision. When the Board is required to make a proxy voting decision, only the Trustees without a conflict of interest with regard to the security in question or the matter to be voted upon shall be permitted to participate in the decision of how a Fund’s vote will be cast. Each proxy voting delegate has developed a detailed proxy voting policy that has been approved by the Board. Copies of the proxy voting policies are attached hereto as Appendix B through Appendix G.

Information on how the Funds voted proxies relating to portfolio securities is available without charge, upon request, by calling 1-866-447-4228 or on the SEC's Internet site at www.sec.gov. In addition, a copy of the Funds' proxy voting policies and procedures is also available by calling 1-866-447-4228 and will be sent within three business days of receipt of a request.

 

PORTFOLIO TURNOVER

 

Turnover rates are primarily a function of the Funds’ response to market conditions. The portfolio turnover rate of the Funds for the last two fiscal years ended June 30 were as follows:

 

Fund Fiscal Year Ended June 30, 2021 Fiscal Year Ended June 30, 2022
Insider Income Fund 89% 70%
High Income Fund 51% 42%
Total Return Income Fund 42% 26%
Global Balanced Fund 18% 25%
Floating Rate Income Fund 180% 95%
Enhanced Income Strategy Fund 58% 57%

 

 

 

PORTFOLIO TRANSACTIONS

 

Purchases and sales of securities on a securities exchange are effected by brokers, and the Funds pay a brokerage commission for this service. In transactions on stock exchanges, these commissions are negotiated. In the over-the-counter market, securities (e.g., debt securities) are normally traded on a "net" basis with dealers acting as principal for their own accounts without a stated commission, although the price of the securities usually includes a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount.

 

The primary consideration in placing portfolio security transactions with broker-dealers for execution is to obtain and maintain the availability of execution at the most favorable prices and in the most effective manner possible. The Advisor and Sub-Advisors attempt to achieve this result by selecting broker-dealers to execute portfolio transactions on behalf of each Fund on the basis of the broker-dealers' professional capability, the value and quality of their brokerage services and the level of their brokerage commissions.

58 
 

 

Although commissions paid on every transaction will, in the judgment of the Advisor or sub-advisors, be reasonable in relation to the value of the brokerage services provided, under each Management Agreement and as permitted by Section 28(e) of the Securities Exchange Act of 1934, the Advisor or sub-advisor may cause a Fund to pay a commission to broker-dealers who provide brokerage and research services to the Advisor or sub-advisor for effecting a securities transaction for a Fund. Such commission may exceed the amount other broker-dealers would have charged for the transaction, if the Advisor or sub-advisor determines in good faith that the greater commission is reasonable relative to the value of the brokerage and the research and investment information services provided by the executing broker-dealer viewed in terms of either a particular transaction or the Advisor’s or sub-advisor’s overall responsibilities to the Funds and to their other clients. Such research and investment information services may include advice as to the value of securities, the advisability of investing in, purchasing or selling securities, the availability of securities or of purchasers or sellers of securities, furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts, and effecting securities transactions and performing functions incidental thereto such as clearance and settlement.

 

Research provided by brokers is used for the benefit of all of the clients of the Advisor or sub-advisor and not solely or necessarily for the benefit of the Funds. The Advisor's or sub-advisor’s investment management personnel attempt to evaluate the quality of research provided by brokers. Results of this effort are sometimes used by the Advisor or sub-advisor as a consideration in the selection of brokers to execute portfolio transactions.

 

The investment advisory fees that the Funds pay to the Advisor or sub-advisor will not be reduced as a consequence of the Advisor's or sub-advisor’s receipt of brokerage and research services. To the extent a Fund's portfolio transactions are used to obtain such services, the brokerage commissions paid by the Fund will exceed those that might otherwise be paid, by an amount, which cannot be presently determined. Such services would be useful and of value to the Advisor or sub-advisor in serving both the Funds and other clients and, conversely, such services obtained by the placement of brokerage business of other clients would be useful to the Advisor or sub-advisor in carrying out its obligations to the Funds.

 

Certain investments may be appropriate for the Funds and also for other clients advised by the Advisor or sub-advisor. Investment decisions for the Funds and other clients are made with a view to achieving their respective investment objectives and after consideration of such factors as their current holdings, availability of cash for investment and the size of their investments generally. To the extent possible, Fund transactions are traded separately from trades of other clients advised by the Advisor or sub-advisor. Occasionally, a particular security may be bought or sold for one or more clients in different amounts. In such event, and to the extent permitted by applicable law and regulations, such transactions with respect to the Advisor or sub-advisor, will be allocated among the clients in a manner believed to be equitable to each. Ordinarily, such allocation will be made on the basis of the weighted average price of such transactions effected during a trading day.

Each Fund has no obligation to deal with any broker or dealer in the execution of its transactions. However, each Fund may place a significant portion of its transactions, both in stocks and options, with affiliates of the Advisor or sub-advisor. As the level of option writing or stock trading increases, the level of commissions paid by each Fund to the affiliates increases. Such transactions will be executed at competitive commission rates through the affiliated broker’s clearing broker. Because the affiliates receive compensation based on the amount of transactions completed, there could be an incentive on the part of the Advisor or sub-advisor to effect as many transactions as possible, thereby maximizing the commissions and premiums it receives. In connection with the execution of transactions, subject to its policy of best execution, a Fund may pay higher brokerage commissions to the affiliate than it might pay to unaffiliated broker-dealers.

 

In order for the affiliated broker to effect any portfolio transactions for the Funds on an exchange, the commissions, fees or other remuneration received by the affiliated broker must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. This standard would allow the affiliated broker to receive no more than the remuneration that would be expected to be received by an unaffiliated broker in a commensurate arms-length transaction.

 

59 
 

Under the 1940 Act, persons affiliated with the Advisor, a sub-advisor, the Distributor, or an affiliate of the Advisor, a sub-advisor, or the Distributor, may be prohibited from dealing with the Funds as a principal in the purchase and sale of securities.

 

The Management Agreement and each Sub-Advisory Agreement provides that affiliates of the Advisor or the sub-advisors, as applicable, may receive brokerage commissions in connection with effecting such transactions for the Funds. In determining the commissions to be paid to an affiliated broker, it is the policy of the Trust that such commissions will, in the judgment of the Board, be (a) at least as favorable to a Fund as those which would be charged by other qualified brokers having comparable execution capability and (b) at least as favorable to a Fund as commissions contemporaneously charged by the affiliated broker on comparable transactions for its most favored unaffiliated customers, except for customers of the affiliated broker considered by a majority of the Independent Trustees not to be comparable to the Fund. The Independent Trustees from time to time review, among other things, information relating to the commissions charged by an affiliated broker to a Fund and its other customers, and rates and other information concerning the commissions charged by other qualified brokers.

 

The Management Agreement, the Distribution Agreement, and the Sub-Advisory Agreements do not provide for a reduction of the Distributor's, Advisor’s or a sub-advisor’s fee by the amount of any profits earned by an affiliated broker from brokerage commissions generated from portfolio transactions of the Funds. While other brokerage business may be given from time to time to other firms, the affiliated brokers will not receive reciprocal brokerage business as a result of the brokerage business placed by the Funds with others.

 

A Fund will not acquire portfolio securities issued by, or enter into repurchase agreements or reverse repurchase agreements with, the Advisor, the sub-advisors, the Distributor or their affiliates.

 

The Funds paid the following amounts in commissions on the purchase and sale of securities for the last three fiscal years ended June 30. No commissions were paid to the Distributor or any affiliate of the Advisor, a sub-advisor, or the Distributor.

 

Fund Fiscal Year Ended June 30, 2022 Fiscal Year Ended June 30, 2021 Fiscal Year Ended June 30, 2020
Insider Income Fund - - $383
High Income Fund $393 - $186
Total Return Income Fund $1,133 - $4,106
Global Balanced Fund $2,953 $1,315 $6,318
Floating Rate Income Fund - - -
Enhanced Income Strategy Fund $24,200 $16,000 -

 

 

Purchase and Redemption of Shares

 

Fund shares may be purchased from investment dealers who have sales agreements with the Distributor or from the Distributor directly. As described in the Prospectus, the Funds provide you with alternative ways of purchasing Fund shares based upon your individual investment needs and preferences by offering Class A shares as described below.

 

Class A Shares

 

You may purchase Class A shares at a public offering price equal to the applicable net asset value per share plus an up-front sales charge imposed at the time of purchase as set forth in the Prospectus. Set forth below is an example of the method of computing the offering price of the Class A shares of the Funds.

 

60 
 

Shares may be purchased at the public offering price through any securities dealer having a sales agreement with the Distributor. Shares may also be purchased through banks and certain other financial institutions that have agency agreements with the Distributor. These financial institutions will receive transaction fees that are the same as the commissions to dealers and may charge their customers service fees relating to investments in a Fund. Purchase requests should be addressed to the dealer or agent from which this Prospectus was received which has a sales agreement with the Distributor. Such dealer or agent may place a telephone order with the Distributor for the purchase of Fund shares. It is a dealer’s or broker’s responsibility to promptly forward payment and registration instructions (or completed applications) to the Transfer Agent for shares being purchased in order for investors to receive the next determined net asset value (or public offering price). Reference should be made to the wire order to ensure proper settlement of the trade. Payment for redemptions of shares purchased by telephone should be processed within three business days. Payment must be received within seven days of the order or the trade may be canceled, and the dealer or broker placing the trade will be liable for any losses.

 

Class C-1 Shares

 

You may purchase Class C-1 shares at a public offering price equal to the applicable net asset value per share as set forth in the Prospectus. Set forth below is an example of the method of computing the offering price of the Class C-1 shares of the Floating Rate Income Fund.

 

Shares may be purchased at the public offering price through any securities dealer having a sales agreement with the Distributor. Shares may also be purchased through banks and certain other financial institutions that have agency agreements with the Distributor. These financial institutions will receive transaction fees that are the same as the commissions to dealers and may charge their customers service fees relating to investments in the Floating Rate Income Fund. Purchase requests should be addressed to the dealer or agent from which this Prospectus was received which has a sales agreement with the Distributor. Such dealer or agent may place a telephone order with the Distributor for the purchase of Fund shares. It is a dealer’s or broker’s responsibility to promptly forward payment and registration instructions (or completed applications) to the Transfer Agent for shares being purchased in order for investors to receive the next determined net asset value (or public offering price). Reference should be made to the wire order to ensure proper settlement of the trade. Payment for redemptions of shares purchased by telephone should be processed within three business days. Payment must be received within seven days of the order or the trade may be canceled, and the dealer or broker placing the trade will be liable for any losses.

 

18f-1 Election

 

The Trust has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which the Trust is obligated during any 90-day period to redeem shares for any one shareholder of record solely in cash up to the lesser of $250,000 or 1% of the NAV of a Fund at the beginning of such period. The Trust has made this election to permit certain funds of the Trust to deliver, in lieu of cash, readily marketable securities from its portfolio should a redemption exceed such limitations. The securities delivered will be selected at the sole discretion of such Fund, will not necessarily be representative of the entire portfolio and may be securities, which a Fund would otherwise sell. The redeeming shareholder will usually incur brokerage costs in converting the securities to cash. The method of valuing securities used to make the redemptions in kind will be the same as the method of valuing portfolio securities and such valuation will be made as of the same time the redemption price is determined. However, the Board determined that, until otherwise approved by the Board, all redemptions in the Funds be made in cash only. If the Board determines to allow the Funds to redeem in kind in the future, the Funds will provide shareholders with notice of such change to the redemption policy.

 

 

Reduction of Up-Front Sales Charge on Class A Shares

 

Letters of Intent

 

An investor may qualify for a reduced sales charge on Class A shares immediately by stating his or her intention to invest in Class A shares of one or more of the Funds, during a 13-month period, an amount that would qualify for a reduced sales charge shown in the Funds’ Prospectus under “How to Buy Shares — Class A

61 
 

Shares” and by signing a non-binding Letter of Intent, which may be signed at any time within 90 days after the first investment to be included under the Letter of Intent. After signing the Letter of Intent, each investment in Class A shares made by an investor will be entitled to the sales charge applicable to the total investment indicated in the Letter of Intent. If an investor does not complete the purchases under the Letter of Intent within the 13-month period, the sales charge will be adjusted upward, corresponding to the amount actually purchased. When an investor signs a Letter of Intent, Class A shares of a Fund with a value of up to 5% of the amount specified in the Letter of Intent will be restricted. If the total purchases of Class A shares made by an investor under the Letter of Intent, less redemptions, prior to the expiration of the 13-month period equals or exceeds the amount specified in the Letter of Intent, the restriction on the shares will be removed. In addition, if the total purchases of Class A shares exceed the amount specified and qualify for a further quantity discount, the Distributor will make a retroactive price adjustment and will apply the adjustment to purchase additional Class A shares at the then current applicable offering price. If an investor does not complete purchases under a Letter of Intent, the sales charge is adjusted upward, and, if after written notice to the investor, he or she does not pay the increased sales charge, sufficient Class A restricted shares will be redeemed at the current net asset value to pay such charge.

Rights of Accumulation

 

A right of accumulation ("ROA") permits an investor to aggregate shares (of any class) owned by the investor, his spouse, children and grandchildren under 21 (collectively, the "Investor") in some or all of the Funds to reach a breakpoint discount. This includes accounts held with other financial institutions and accounts established for a single trust estate or single fiduciary account, including a qualified retirement plan such as an IRA, 401(k) or 403(b) plan (some restrictions may apply). The value of shares eligible for a cumulative quantity discount equals the cumulative cost of the shares purchased (not including reinvested dividends) or the current account market value; whichever is greater. The current market value of the shares is determined by multiplying the number of shares by the previous day’s NAV.

 

For example, if an investor owned Class C shares of the Insider Income Fund worth $40,000 at the current NAV and purchased an additional $10,000 of Class A shares of the Enhanced Income Strategy Fund, the sales charge for the $10,000 purchase would be at the rate applicable to a single $50,000 purchase.

 

To qualify for a ROA on a purchase of Class A shares through a broker-dealer, when each purchase is made, the individual investor or the broker-dealer must provide the respective Fund with sufficient information to verify that the purchase qualifies for the discount.

 

Investments of $1 Million or More

 

For each Fund, with respect to Class A shares, if you invest $1 million or more, either as a lump sum or through our rights of accumulation quantity discount or letter of intent programs, you can buy Class A shares without an initial sales charge. However, you may be subject to a 1% CDSC on shares redeemed within two years of purchase (excluding shares purchased with reinvested dividends and/or distributions).

 

 

Waivers of Up-Front Sales Charge on Class A Shares

 

The Prospectus describes the classes of persons that may purchase shares without an up-front sales charge. The elimination of the up-front sales charge for redemptions by certain classes of persons is provided because of anticipated economies of scale and sales related efforts.

 

To qualify for a waiver of the up-front sales charge on a purchase of Class A shares through a broker-dealer, when each purchase is made, the individual investor or the broker-dealer must provide the respective Fund with sufficient information to verify that the purchase qualifies for the discount.

 

The Funds make available, free of charge, more information about sales charge reductions and waivers through the prospectus.

 

62 
 

Exchange Privilege

 

As described in the Funds’ Prospectus under “How To Buy Shares—Exchange Privilege,” each Fund offers an exchange privilege pursuant to which a shareholder in a Fund may exchange some or all of his shares in any of the funds in the Trust, in the same class shares of another fund in the Catalyst Family of Funds at net asset value. The exchange privilege may be changed or discontinued upon 60 days’ written notice to shareholders and is available only to shareholders where such exchanges may be legally made. A shareholder considering an exchange should obtain and read the prospectus of the funds and consider the differences between it and the Fund before making an exchange. For further information on how to exercise the exchange privilege, contact the Transfer Agent.

 

 

WAIVERS OF DEFERRED SALES CHARGE ON CLASS C-1 SHARES

 

Certain intermediaries may provide for waivers, with respect to the CDSC assessed on certain sales of Class C-1 shares, which are described in Appendix A to the Prospectus, entitled “Intermediary-Specific Charge Reductions and Waivers.” Class C-1 Shares are sold without an initial front-end sales charge, but a deferred sales charge of 1.00% applies, however, if Class C-1 Shares are sold within 12 months of purchase. The deferred sales charge on Class C-1 Shares may be waived for:

 

• Certain post-retirement withdrawals from an IRA or other retirement plan if you are over 70 1/2;

 

• Redemptions by certain eligible 401(a) and 401(k) plans and certain retirement plan rollovers;

 

• Redemptions where your dealer of record notifies the Distributor, prior to the time of investment, that the dealer waives the 1.00% advance payment otherwise payable to such dealer;

 

• Withdrawals resulting from shareholder death or disability provided that the redemption is requested within one year of death or disability; and

 

• Withdrawals through the Systematic Withdrawal Plan.

 

 

SALES CHARGE WAIVERS AND REDUCTIONS AVAILABLE THROUGH

CERTAIN FINANCIAL INTERMEDIARIES

 

The availability of certain sales charge waivers and discounts may depend on whether you purchase your shares directly from the Funds or through a financial intermediary. Intermediaries may impose different sales charges and may have different policies and procedures regarding the availability of sales load and waivers or reductions. Such intermediary-specific sales charge variations are described in Appendix A to the Prospectus, titled “Intermediary-Specific Sales Charge Reductions and Waivers.” Appendix A is incorporated by reference into (or legally considered part of) the Prospectus.

 

In all instances, it is the shareholder’s responsibility to notify the Fund or the shareholder’s financial intermediary at the time of purchase of any relationship or other facts qualifying the shareholder for sales charge reductions or waivers. For reductions and waivers not available through a particular intermediary, shareholders will have to purchase Fund shares directly from the Fund or through another intermediary to receive these reductions or waivers.

 

NET ASSET VALUE

 

For each Fund, NAV per share is determined by dividing the total value of that Fund's assets, less any liabilities, by the number of shares of that Fund outstanding.

 

The net asset value per share of each Fund is determined by the Administrator as of the close of regular trading on the New York Stock Exchange (normally 4:00 p.m., Eastern Time) on each day when the New York

63 
 

Stock Exchange is open for trading. The New York Stock Exchange is 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, as observed.

 

Assets for which market quotations are available are valued, by independent pricing services, as follows.

 

•       Exchange-traded domestic equity securities are generally valued at the last sales price on a national securities exchange (except the NASDAQ Stock Market). Domestic equity securities traded on the NASDAQ Stock Market are generally valued at the NASDAQ Official Closing Price (NOCP) on the date of valuation. Domestic equity securities that are not traded on an exchange are generally valued at the last sales price. Exchange-traded foreign equity securities are generally valued, in the appropriate currency, at the last quoted sales price on the relevant exchange. Foreign equity securities that are not exchange-traded are generally valued, in the appropriate currency, at the last sales price. Rights and warrants are valued at the last sales price on a national securities exchange.

 

•       Debt securities, including foreign debt securities, are valued by an approved independent pricing service. Debt securities with remaining maturities of 60 days or less may be valued at amortized cost unless it is determined that amortized cost does not represent fair value (e.g., securities that are not expected to mature at par). Debt securities with remaining maturities of 60 days or less that are not valued based on amortized cost are valued based on prices provided by approved independent pricing services.

 

•       Shares of ETFs and closed-end registered investment companies are valued in the same manner as other equity securities. Mutual funds are valued at their net asset values.

 

•       Foreign currencies are valued at the last quoted foreign exchange London close quotation from an approved independent pricing service. The value of assets and liabilities denominated in currencies other than the U.S. dollar are translated into their U.S. dollar equivalent values at such last foreign exchange quotation.

 

•       Exchange-listed swaps and total return swaps on exchange-listed securities are generally valued at the last quoted sales price. Other swaps are valued by an approved independent pricing service. If no valuation is available from an approved independent pricing service, then at the price received from the broker-dealer/counterparty that issued the swap.

 

•       Exchange-traded options are generally valued at the closing price or last sale price on the primary exchange for that option as recorded by an approved independent pricing service. Exchange-traded options that are part of a straddle are valued at the mean price provided by an approved independent pricing service. Over-the-counter index options and other derivative contracts (other than swaps as set forth above) on securities, currencies and other financial instruments are generally valued at mean prices provided by an approved independent pricing service. In the absence of such a value, such derivatives contracts are valued at the marked-to-market price (or the evaluated price if a marked-to-market price is not available) provided by the broker-dealer with which the option was traded (which may also be the counterparty).

 

•       Futures contracts are valued at their settlement price on the exchange on which they are traded. If settlement price is not available, the contracts are priced at the last trade price prior to the close. If the settlement price or last trade price is not available, then at the mean of the quoted bid and asked prices on such exchange.

 

•       Foreign currency forward contracts are valued by an approved independent pricing service at the current day's interpolated foreign exchange rate, as calculated using the current day's spot rate and the prevailing forward rates, and converted to U.S. dollars at the exchange rate of such currencies against the U.S. dollar, as of the close of regular trading on the London Stock Exchange (usually 11:00 a.m. Eastern Time).

 

When approved by the Board, certain securities may be valued on the basis of valuations provided by an independent pricing service when such prices the Board believes reflect the fair value of such securities. These securities would normally be those, which have no available recent market value, have few outstanding shares and therefore infrequent trades, or for which there is a lack of consensus on the value, with quoted prices

64 
 

covering a wide range. The lack of consensus would result from relatively unusual circumstances such as no trading in the security for long periods of time, or a company's involvement in merger or acquisition activity, with widely varying valuations placed on the company's assets or stock. Prices provided by an independent pricing service may be determined without exclusive reliance on quoted prices and may take into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data.

 

In the absence of an ascertainable market value, assets are valued at their fair value as determined by the Advisor using methods and procedures reviewed and approved by the Board.

 

 

TAX INFORMATION

 

Each Fund intends to qualify as a regulated investment company, or “RIC,” under the Internal Revenue Code of 1986, as amended (the “Code”). Qualification generally will relieve a Fund of liability for federal income taxes. If for any taxable year the Fund does not qualify for the special tax treatment afforded regulated investment companies, all of its taxable income will be subject to federal tax at regular corporate rates (without any deduction for distributions to its shareholders). In such event, dividend distributions would be taxable to shareholders to the extent of the Fund’s earnings and profits, and would be eligible for the dividends-received deduction for corporations.

Each Fund’s net realized capital gains from securities transactions will be distributed only after reducing such gains by the amount of any available capital loss carryforwards. Capital losses incurred in tax years may now be carried forward indefinitely and retain the character of the original loss. Capital loss carryforwards are available to offset future realized capital gains. To the extent that these carryforwards are used to offset future capital gains it is probable that the amount offset will not be distributed to shareholders.

 

As of June 30, 2022, the Funds below had capital loss carry forwards for federal income tax purposes available to offset future capital gains as follows:

 

    Short-Term     Long-Term     Total      Utilized
Insider Income Fund     -       -       -     $547,719
Global Balanced Fund     -       -       -     -
Floating Rate Income Fund     $3,014,722       $7,132,849       $10,147,571     $184,913
High Income Fund     -       $29,765,682       $29,765,682     -
Total Return Income Fund     $67,611       $17,564,537       $17,632,148     -
Enhanced Income Strategy Fund     $3,617,000       $2,883,726       $6,500,726     -

 

 

Certain U.S. shareholders, including individuals and estates and trusts, are subject to an additional 3.8% Medicare tax on all or a portion of their “net investment income,” which should include dividends from the Funds and net gains from the disposition of shares of the Funds. U.S. shareholders are urged to consult their own tax advisors regarding the implications of the additional Medicare tax resulting from an investment in the Funds.

 

65 
 

 

INVESTMENTS IN FOREIGN SECURITIES

 

The Funds may be subject to foreign withholding taxes on income from certain foreign securities. This, in turn, could reduce a Fund's income dividends paid to you.

 

Pass-Through of Foreign Tax Credits. A Fund may be subject to certain taxes imposed by the countries in which it invests or operates. If a Fund qualifies as a regulated investment company and if more than 50% of the value of the Fund’s total assets at the close of any taxable year consists of stocks or securities of foreign corporations, that Fund may elect, for U.S. federal income tax purposes, to treat any foreign taxes paid by the Fund that qualify as income or similar taxes under U.S. income tax principles as having been paid by the Fund’s shareholders. It is not likely that the Funds will be able to do so. For any year for which a Fund makes such an election, each shareholder will be required to include in its gross income an amount equal to its allocable share of such taxes paid by the Fund and the shareholders will be entitled, subject to certain limitations, to credit their portions of these amounts against their U.S. federal income tax liability, if any, or to deduct their portions from their U.S. taxable income, if any. No deduction for foreign taxes may be claimed by individuals who do not itemize deductions. In any year in which it elects to “pass through” foreign taxes to shareholders, the Fund will notify shareholders within 60 days after the close of the Fund’s taxable year of the amount of such taxes and the sources of its income. Furthermore, the amount of the foreign tax credit that is available may be limited to the extent that dividends from a foreign corporation qualify for the lower tax rate on “qualified dividend income.”

 

Effect of Foreign Debt Investments and Hedging on Distributions. Under the Code, gains or losses attributable to fluctuations in exchange rates, which occur between the time a Fund accrues receivables or liabilities denominated in a foreign currency, and the time the Fund actually collects such receivables or pays such liabilities, generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of certain options and futures contracts, gains or losses attributable to fluctuations in the value of foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains when distributed are taxable to you as ordinary income, and any losses reduce a Fund's ordinary income otherwise available for distribution to you. This treatment could increase or decrease a Fund's ordinary income distributions to you, and may cause some or all of the Fund's previously distributed income to be classified as a return of capital. A return of capital generally is not taxable to you, but reduces the tax basis of your shares in a Fund. Any return of capital in excess of your basis, however, is taxable as a capital gain.

 

PFIC securities. Each Fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (“PFICs”). In general, a foreign corporation is classified as a PFIC if at least one-half of its assets constitute investment-type assets, or 75% or more of its gross income is investment-type income. When investing in PFIC securities, each Fund may elect to mark-to-market a PFIC and recognize any gains at the end of its fiscal and excise (described above) tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that each Fund is required to distribute, even though it has not sold the securities. You should also be aware that distributions from a PFIC are generally not eligible for the reduced rate of tax on “qualified dividend income.” In the alternative, a Fund may elect to treat the PFIC as a “qualified electing fund” (a “QEF”), in which case the Fund would be required to include its share of the company’s income and net capital gains annually, regardless of whether it receives distributions from the company. The QEF and mark-to-market elections may require a Fund to sell securities it would have otherwise continued to hold in order to make distributions to shareholders to avoid any Fund-level tax. Income from investments in PFICs generally will not qualify for treatment as qualified dividend income.

 

BACKUP WITHHOLDING

 

The Funds may be required to withhold U.S. federal income tax at the fourth lowest tax rate applicable to unmarried individuals (currently 28%) of all reportable payments, including dividends, capital gain distributions and redemptions payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code

66 
 

generally are exempt from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability.

 

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 Fund and (b) certain capital gain distributions and the proceeds arising from the sale of Fund shares paid by the Fund.  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. A Fund 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.

 

 

FOREIGN SHAREHOLDERS

 

The United States imposes a withholding tax (at a 30% or lower treaty rate) on all Fund dividends of ordinary income. Capital gain dividends paid by a Fund from its net long-term capital gains and exempt-interest dividends are generally exempt from this withholding tax.

 

 

FINANCIAL STATEMENTS

 

The financial statements of each Fund and the independent registered public accounting firm’s report appearing in the Annual Report for the fiscal year ended June 30, 2022 are incorporated herein by reference. You can obtain the Annual and Semi-Annual Reports without charge by calling the Funds at 1-866-447-4228.

67 
 

Appendix A—Description of Commercial Paper and Bond Ratings

 

Description of Moody’s Investors Service, Inc. (“Moody’s”), Short-Term Debt Ratings

 

Prime-1. Issuers (or supporting institutions) rated Prime-1 (“P-1”) have a superior ability for repayment of senior short-term debt obligations. P-1 repayment ability will often be evidenced by many of the following characteristics: leading market positions in well-established industries; high rates of return on funds employed; conservative capitalization structure with moderate reliance on debt and ample asset protection; broad margins in earnings coverage of fixed financial charges and high internal cash generation; well-established access to a range of financial markets and assured sources of alternate liquidity.

 

Prime-2. Issuers (or supporting institutions) rated Prime-2 (“P-2”) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained.

 

Description of Standard & Poor’s Ratings Group (“Standard & Poor’s”), Commercial Paper Ratings

 

A. Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are delineated with the numbers 1, 2, and 3 to indicate the relative degree of safety. A-1. This designation indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) sign designation. A-2. Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high for issues designated A-1.

 

Description of Moody’s Long-Term Debt Ratings

 

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 edged.” Interest payments are protected by a large or by an exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such 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 fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risk appear somewhat larger than the Aaa securities; A. Bonds which are rated A possess many favorable investment attributes and are 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 some time 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. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well; 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 both 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 issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.

 

Note: Moody’s applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa to B. The modifier 1 indicates that the company ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the company ranks in the lower end of its generic rating category.

 

Description of Standard & Poor’s Corporate Debt Ratings

 

AAA. Debt rated AAA has the highest rating assigned by Standard & Poor’s. Capacity to pay interest and repay principal is extremely strong; AA. Debt Rated AA has a very strong capacity to pay interest and repay principal and differs from the higher rated 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 it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than

68 
 

in higher rated categories; BB, B, CCC, CC, C. Debt Rated BB, B, CCC, CC, and C is regarded, on 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 out-weighed 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 of 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 a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating; CCC. Debt rated CCC has a currently identifiable vulnerability to default and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating; 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; CI. The rating CI is reserved for income bonds on which no interest is being paid; D. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized.

 

 

69 
 

Appendix B

CATALYST CAPITAL ADVISORS LLC

PROXY VOTING POLICIES AND PROCEDURES

 

Pursuant to the recent adoption by the Securities and Exchange Commission (the “Commission”) of Rule 206(4)-6 (17 CFR 275.206(4)-6) and amendments to Rule 204-2 (17 CFR 275.204-2) under the Investment Advisors Act of 1940 (the “Act”), it is a fraudulent, deceptive, or manipulative act, practice or course of business, within the meaning of Section 206(4) of the Act, for an investment advisor to exercise voting authority with respect to client securities, unless (i) the advisor has adopted and implemented written policies and procedures that are reasonably designed to ensure that the advisor votes proxies in the best interests of its clients, (ii) the advisor describes its proxy voting procedures to its clients and provides copies on request, and (iii) the advisor discloses to clients how they may obtain information on how the advisor voted their proxies.

Day-to-day administration of proxy voting may be provided internally or by a third-party service provider, depending on client type, subject to the ultimate oversight of the Advisor. The Advisor shall supervise the relationships with its proxy voting services, ISS. ISS apprises the Advisor of shareholder meeting dates, and casts the actual proxy votes. ISS also provides research on proxy proposals and voting recommendations. ISS serves as the Advisor’s proxy voting record keepers and generate reports on how proxies were voted. The Advisor periodically reviews communications from ISS to determine whether ISS voted the correct amount of proxies, whether the votes were cast in a timely manner, and whether the vote was in accordance with the Policies or the Advisor’s specific instructions.

In order to fulfill its responsibilities under the Act, Rational Advisors, Inc. (hereinafter “we” or “our”) has adopted the following policies and procedures for proxy voting with regard to companies in investment portfolios of our clients.

KEY OBJECTIVES

The key objectives of these policies and procedures recognize that a company’s management is entrusted with the day-to-day operations and longer term strategic planning of the company, subject to the oversight of the company’s board of directors. While “ordinary business matters” are primarily the responsibility of management and should be approved solely by the corporation’s board of directors, these objectives also recognize that the company’s shareholders must have final say over how management and directors are performing, and how shareholders’ rights and ownership interests are handled, especially when matters could have substantial economic implications to the shareholders.

Therefore, we will pay particular attention to the following matters in exercising our proxy voting responsibilities as a fiduciary for our clients:

Accountability. Each company should have effective means in place to hold those entrusted with running a company’s business accountable for their actions. Management of a company should be accountable to its board of directors and the board should be accountable to shareholders.

Alignment of Management and Shareholder Interests. Each company should endeavor to align the interests of management and the board of directors with the interests of the company’s shareholders. For example, we generally believe that compensation should be designed to reward management for doing a good job of creating value for the shareholders of the company.

Transparency. Promotion of timely disclosure of important information about a company’s business operations and financial performance enables investors to evaluate the performance of a company and to make informed decisions about the purchase and sale of a company’s securities.

Climate Change:

Say on Climate (SoC) Management Proposals: Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:

70 
 
· The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards;
· Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);
· The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant);
· Whether the company has sought and received third-party approval that its targets are science-based;
· Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;
· Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
· Whether the company’s climate data has received third-party assurance;
· Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
· Whether there are specific industry decarbonization challenges; and
· The company’s related commitment, disclosure, and performance compared to its industry peers.

Say on Climate (SoC) Shareholder Proposals: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan. taking into account information such as the following:

· The completeness and rigor of the company’s climate-related disclosure;
· The company’s actual GHG emissions performance;
· Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and
· Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.

Climate Change/Greenhouse Gas (GHG) Emissions: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering:

· Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; ▪
· The company's level of disclosure compared to industry peers; and ▪
· Whether there are significant controversies, fines, penalties, or litigation associated with the company's climate change-related performance.

Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:

· The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities; ▪ The company's level of disclosure is comparable to that of industry peers; and ▪
· There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.

Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:

· Whether the company provides disclosure of year-over-year GHG emissions performance data;
· Whether company disclosure lags behind industry peers;
71 
 
· The company's actual GHG emissions performance
· The company's current GHG emission policies, oversight mechanisms, and related initiatives; and
· Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.

Energy Efficiency: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless:

· The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or
· The proponent requests adoption of specific energy efficiency goals within specific timelines.

Renewable Energy: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.

Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.

Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:

· The scope and structure of the proposal;
· The company's current level of disclosure on renewable energy use and GHG emissions; and
· The company's disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks.

DECISION METHODS

No set of proxy voting guidelines can anticipate all situations that may arise. In special cases, we may seek insight from our managers and analysts on how a particular proxy proposal may impact the financial prospects of a company, and vote accordingly.

We believe that we invest in companies with strong management. Therefore we will tend to vote proxies consistent with management’s recommendations. However, we will vote contrary to management’s recommendations if we believe those recommendations are not consistent with increasing shareholder value.

SUMMARY OF PROXY VOTING GUIDELINES

Election of the Board of Directors

We believe that good corporate governance generally starts with a board composed primarily of independent directors, unfettered by significant ties to management, all of whose members are elected annually. We also believe that turnover in board composition promotes independent board action, fresh approaches to governance, and generally has a positive impact on shareholder value. We will generally vote in favor of non-incumbent independent directors.

The election of a company’s board of directors is one of the most fundamental rights held by shareholders. Because a classified board structure prevents shareholders from electing a full slate of directors annually, we will generally support efforts to declassify boards or other measures that permit shareholders to remove a majority of directors at any time, and will generally oppose efforts to adopt classified board structures.

Approval of Independent Auditors

We believe that the relationship between a company and its auditors should be limited primarily to the audit engagement, although it may include certain closely related activities that do not raise an appearance of impaired independence.

72 
 

We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with a company to determine whether we believe independence has been, or could be, compromised.

Equity-based compensation plans

We believe that appropriately designed equity-based compensation plans, approved by shareholders, can be an effective way to align the interests of shareholders and the interests of directors, management, and employees by providing incentives to increase shareholder value. Conversely, we are opposed to plans that substantially dilute ownership interests in the company, provide participants with excessive awards, or have inherently objectionable structural features.

We will generally support measures intended to increase stock ownership by executives and the use of employee stock purchase plans to increase company stock ownership by employees. These may include:

1.       Requiring senior executives to hold stock in a company.

2.       Requiring stock acquired through option exercise to be held for a certain period of time.

These are guidelines, and we consider other factors, such as the nature of the industry and size of the company, when assessing a plan’s impact on ownership interests.

Corporate Structure

We view the exercise of shareholders’ rights, including the rights to act by written consent, to call special meetings and to remove directors, to be fundamental to good corporate governance.

Because classes of common stock with unequal voting rights limit the rights of certain shareholders, we generally believe that shareholders should have voting power equal to their equity interest in the company and should be able to approve or reject changes to a company’s by-laws by a simple majority vote.

We will generally support the ability of shareholders to cumulate their votes for the election of directors.

73 
 

 

(COVER PAGE)

 
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

T A B L E  O F  C O N T E N T S

 

 

 

Coverage 7
1.   Board of Directors 8
       
  Voting on Director Nominees in Uncontested Elections 8
    Independence 8
    ISS Classification of Directors – U.S. 9
    Composition 11
    Attendance 11
    Overboarded Directors 11
    Gender Diversity 11
    Racial and/or Ethnic Diversity 12
    Responsiveness 12
    Accountability 13
    Poison Pills 13
    Classified Board Structure 13
    Removal of Shareholder Discretion on Classified Boards 13
    Director Performance Evaluation 13
    Unilateral Bylaw/Charter Amendments and Problematic Capital Structures 13
    Unequal Voting Rights 14
    Problematic Capital Structure - Newly Public Companies 14
    Common Stock Capital Structure with Unequal Voting Rights 14
    Problematic Governance Structure - Newly Public Companies 15
    Management Proposals to Ratify Existing Charter or Bylaw Provisions 15
    Restricting Binding Shareholder Proposals 15
    Problematic Audit-Related Practices 15
    Problematic Compensation Practices 16
    Problematic Pledging of Company Stock 16
    Climate Accountability 16
    Governance Failures 17
  Voting on Director Nominees in Contested Elections 17
    Vote-No Campaigns 17
    Proxy Contests/Proxy Access 17
  Other Board-Related Proposals 18
    Adopt Anti-Hedging/Pledging/Speculative Investments Policy 18
    Board Refreshment 18
    Term/Tenure Limits 18
    Age Limits 18
    Board Size 18
    Classification/Declassification of the Board 18
    CEO Succession Planning 19
    Cumulative Voting 19
    Director and Officer Indemnification and Liability Protection 19
    Establish/Amend Nominee Qualifications 19
    Establish Other Board Committee Proposals 20
    Filling Vacancies/Removal of Directors 20
    Independent Board Chair 20
    Majority of Independent Directors/Establishment of Independent Committees 21
    Majority Vote Standard for the Election of Directors 21
    Proxy Access 21
    Require More Nominees than Open Seats 21
   
ISSGOVERNANCE.COM 2 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
    Shareholder Engagement Policy (Shareholder Advisory Committee) 22
       
2.   Audit-Related 23
       
    Auditor Indemnification and Limitation of Liability 23
    Auditor Ratification 23
    Shareholder Proposals Limiting Non-Audit Services 23
    Shareholder Proposals on Audit Firm Rotation 23
       
3.   Shareholder Rights & Defenses 25
       
    Advance Notice Requirements for Shareholder Proposals/Nominations 25
    Amend Bylaws without Shareholder Consent 25
    Control Share Acquisition Provisions 25
    Control Share Cash-Out Provisions 25
    Disgorgement Provisions 26
    Fair Price Provisions 26
    Freeze-Out Provisions 26
    Greenmail 26
    Shareholder Litigation Rights 26
    Federal Forum Selection Provisions 26
    Exclusive Forum Provisions for State Law Matters 27
    Fee shifting 27
    Net Operating Loss (NOL) Protective Amendments 27
  Poison Pills (Shareholder Rights Plans) 28
    Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy 28
    Management Proposals to Ratify a Poison Pill 28
    Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs) 28
    Proxy Voting Disclosure, Confidentiality, and Tabulation 29
    Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions 29
    Reimbursing Proxy Solicitation Expenses 29
    Reincorporation Proposals 30
    Shareholder Ability to Act by Written Consent 30
    Shareholder Ability to Call Special Meetings 30
    Stakeholder Provisions 31
    State Antitakeover Statutes 31
    Supermajority Vote Requirements 31
    Virtual Shareholder Meetings 31
       
4.   Capital/Restructuring 32
       
  Capital 32
    Adjustments to Par Value of Common Stock 32
    Common Stock Authorization 32
    General Authorization Requests 32
    Specific Authorization Requests 33
    Dual Class Structure 33
    Issue Stock for Use with Rights Plan 33
    Preemptive Rights 33
    Preferred Stock Authorization 33
    General Authorization Requests 33
    Recapitalization Plans 34
    Reverse Stock Splits 35
    Share Repurchase Programs 35
    Share Repurchase Programs Shareholder Proposals 35
    Stock Distributions: Splits and Dividends 35
   
ISSGOVERNANCE.COM 3 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
    Tracking Stock 35
  Restructuring 36
    Appraisal Rights 36
    Asset Purchases 36
    Asset Sales 36
    Bundled Proposals 36
    Conversion of Securities 36
    Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans 37
    Formation of Holding Company 37
    Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs) 37
    Joint Ventures 38
    Liquidations 38
    Mergers and Acquisitions 38
    Private Placements/Warrants/Convertible Debentures 39
    Reorganization/Restructuring Plan (Bankruptcy) 40
    Special Purpose Acquisition Corporations (SPACs) 40
    Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions 41
    Spin-offs 41
    Value Maximization Shareholder Proposals 41
       
5.   Compensation 42
       
  Executive Pay Evaluation 42
    Advisory Votes on Executive Compensation — Management Proposals (Say-on-Pay) 42
    Pay-for-Performance Evaluation 43
    Problematic Pay Practices 43
    Compensation Committee Communications and Responsiveness 44
    Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”) 45
    Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale 45
  Equity-Based and Other Incentive Plans 45
    Shareholder Value Transfer (SVT) 46
    Three-Year Burn Rate 47
    Egregious Factors 48
    Liberal Change in Control Definition 48
    Repricing Provisions 48
    Problematic Pay Practices or Significant Pay-for-Performance Disconnect 48
    Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) 48
    Specific Treatment of Certain Award Types in Equity Plan Evaluations 49
    Dividend Equivalent Rights 49
    Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs) 49
  Other Compensation Plans 49
    401(k) Employee Benefit Plans 49
    Employee Stock Ownership Plans (ESOPs) 50
    Employee Stock Purchase Plans — Qualified Plans 50
    Employee Stock Purchase Plans — Non-Qualified Plans 50
    Option Exchange Programs/Repricing Options 50
    Stock Plans in Lieu of Cash 51
    Transfer Stock Option (TSO) Programs 51
  Director Compensation 52
    Shareholder Ratification of Director Pay Programs 52
    Equity Plans for Non-Employee Directors 52
    Non-Employee Director Retirement Plans 52
  Shareholder Proposals on Compensation 53
   
ISSGOVERNANCE.COM 4 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
    Bonus Banking/Bonus Banking “Plus” 53
    Compensation Consultants — Disclosure of Board or Company’s Utilization 53
    Disclosure/Setting Levels or Types of Compensation for Executives and Directors 53
    Golden Coffins/Executive Death Benefits 53
    Hold Equity Past Retirement or for a Significant Period of Time 53
    Pay Disparity 54
    Pay for Performance/Performance-Based Awards 54
    Pay for Superior Performance 54
    Pre-Arranged Trading Plans (10b5-1 Plans) 55
    Prohibit Outside CEOs from Serving on Compensation Committees 55
    Recoupment of Incentive or Stock Compensation in Specified Circumstances 55
    Severance Agreements for Executives/Golden Parachutes 56
    Share Buyback Impact on Incentive Program Metrics 56
    Supplemental Executive Retirement Plans (SERPs) 56
    Tax Gross-Up Proposals 56
    Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity 56
       
6.   Routine/Miscellaneous 58
       
    Adjourn Meeting 58
    Amend Quorum Requirements 58
    Amend Minor Bylaws 58
    Change Company Name 58
    Change Date, Time, or Location of Annual Meeting 58
    Other Business 58
       
7.   Social and Environmental Issues 59
       
  Global Approach 59
  Endorsement of Principles 59
  Animal Welfare 59
    Animal Welfare Policies 59
    Animal Testing 60
    Animal Slaughter 60
  Consumer Issues 60
    Genetically Modified Ingredients 60
    Reports on Potentially Controversial Business/Financial Practices 60
    Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation 61
    Product Safety and Toxic/Hazardous Materials 61
    Tobacco-Related Proposals 61
  Climate Change 62
    Say on Climate (SoC) Management Proposals 62
    Say on Climate (SoC) Shareholder Proposals 62
    Climate Change/Greenhouse Gas (GHG) Emissions 63
    Energy Efficiency 63
    Renewable Energy 64
  Diversity 64
    Board Diversity 64
    Equality of Opportunity 64
    Gender Identity, Sexual Orientation, and Domestic Partner Benefits 65
    Gender, Race/Ethnicity Pay Gap 65
    Racial Equity and/or Civil Rights Audit Guidelines 65
  Environment and Sustainability 65
    Facility and Workplace Safety 65
   
ISSGOVERNANCE.COM 5 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
    General Environmental Proposals and Community Impact Assessments 66
    Hydraulic Fracturing 66
    Operations in Protected Areas 66
    Recycling 66
    Sustainability Reporting 67
    Water Issues 67
  General Corporate Issues 67
    Charitable Contributions 67
    Data Security, Privacy, and Internet Issues 67
    Environmental, Social, and Governance (ESG) Compensation-Related Proposals 67
  Human Rights, Human Capital Management, and International Operations 68
    Human Rights Proposals 68
    Mandatory Arbitration 68
    Operations in High Risk Markets 69
    Outsourcing/Offshoring 69
    Sexual Harassment 69
    Weapons and Military Sales 69
  Political Activities 70
    Lobbying 70
    Political Contributions 70
    Political Ties 70
       
8.   Mutual Fund Proxies 71
       
    Election of Directors 71
    Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes 71
    Converting Closed-end Fund to Open-end Fund 71
    Proxy Contests 71
    Investment Advisory Agreements 71
    Approving New Classes or Series of Shares 71
    Preferred Stock Proposals 72
    1940 Act Policies 72
    Changing a Fundamental Restriction to a Nonfundamental Restriction 72
    Change Fundamental Investment Objective to Nonfundamental 72
    Name Change Proposals 72
    Change in Fund’s Subclassification 72
    Business Development Companies — Authorization to Sell Shares of Common Stock at a Price below Net Asset Value 72
    Disposition of Assets/Termination/Liquidation 73
    Changes to the Charter Document 73
    Changing the Domicile of a Fund 73
    Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval 73
    Distribution Agreements 73
    Master-Feeder Structure 74
    Mergers 74
  Shareholder Proposals for Mutual Funds 74
    Establish Director Ownership Requirement 74
    Reimburse Shareholder for Expenses Incurred 74
    Terminate the Investment Advisor 74
   
ISSGOVERNANCE.COM 6 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Coverage

 

The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. - incorporated companies that are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.

 

Foreign-incorporated companies

 

In addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are applied to certain foreign-incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:

 

U.S. Domestic Issuers – which have a majority of outstanding shares held in the U.S. and meet other criteria, as determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.

 

Foreign Private Issuers (FPIs) – which are allowed to take exemptions from most disclosure requirements (e.g., they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines:

 

FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or

 

Guidelines for the market that is responsible for, or most relevant to, the item on the ballot.

 

U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.

 

An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.

 

In all cases – including with respect to other companies with cross-market features that may lead to ballot items related to multiple markets – items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated under the policy of the relevant market, regardless of the “assigned” primary market coverage. 

   
ISSGOVERNANCE.COM 7 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
1. Board of Directors

 

Voting on Director Nominees in Uncontested Elections

 

Four fundamental principles apply when determining votes on director nominees:

 

Independence: Boards should be sufficiently independent from management (and significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of directors.

 

Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to ensure consideration of a wide range of perspectives.

 

Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.

 

Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.

 

(LOGO) General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis):

 

Independence

 

Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-

 

Executive Directors per ISS’ Classification of Directors) when:

 

Independent directors comprise 50 percent or less of the board;

 

The non-independent director serves on the audit, compensation, or nominating committee;

 

The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or

 

The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.

 

 

1 A “new nominee” is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.

 

2 In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
   
ISSGOVERNANCE.COM 8 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

ISS Classification of Directors – U.S.

 

1. Executive Director

 

1.1. Current officer1 of the company or one of its affiliates2.

 

2. Non-Independent Non-Executive Director

 

Board Identification

 

2.1. Director identified as not independent by the board.

 

Controlling/Significant Shareholder

 

2.2. Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power is distributed among more than one member of a group).

 

Current Employment at Company or Related Company

 

2.3. Non-officer employee of the firm (including employee representatives).

 

2.4. Officer1, former officer, or general or limited partner of a joint venture or partnership with the company.

 

Former Employment

 

2.5. Former CEO of the company. 3, 4

 

2.6. Former non-CEO officer1 of the company or an affiliate2 within the past five years.

 

2.7. Former officer1 of an acquired company within the past five years.4

 

2.8. Officer1 of a former parent or predecessor firm at the time the company was sold or split off within the past five years.

 

2.9. Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an assessment of the interim officer’s employment agreement will be made.5

 

Family Members

 

2.10. Immediate family member6 of a current or former officer1 of the company or its affiliates2 within the last five years.

 

2.11. Immediate family member6 of a current employee of company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role).

 

Professional, Transactional, and Charitable Relationships

 

2.12. Director who (or whose immediate family member6) currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides the services.

 

2.13. Director who (or whose immediate family member6) currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement).

 

2.14. Director who (or whose immediate family member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments8 from the company or its affiliates2.

 

Other Relationships

 

2.15. Party to a voting agreement9 to vote in line with management on proposals being brought to shareholder vote.

 

2.16. Has (or an immediate family member6 has) an interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10

 

2.17. Founder11 of the company but not currently an employee.

 

2.18. Director with pay comparable to Named Executive Officers.

 

2.19. Any material12 relationship with the company.

 

3. Independent Director

 

3.1. No material12 connection to the company other than a board seat.
   
ISSGOVERNANCE.COM 9 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Footnotes:

 

1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material relationship with the company.” However, if the company provides explicit disclosure that the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an Independent Director.

 

2. “Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.

 

3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).

 

4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the existence of any other conflicting relationships or related party transactions.

 

5. ISS will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a formal search process was under way for a full-time officer at the time.

 

6. “Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of the company.

 

7. Professional services can be characterized as advisory in nature, generally involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal services, property management services, realtor services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services, IT tech support services, educational services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.

 

8. A material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).

 

9. Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.

 

10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).

 

11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the company, ISS may deem him or her an Independent Director.

 

12. For purposes of ISS’s director independence classification, “material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
   
ISSGOVERNANCE.COM 10 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Composition

 

Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:

 

Medical issues/illness;

 

Family emergencies; and

 

Missing only one meeting (when the total of all meetings is three or fewer).

 

In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.

 

If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.

 

Overboarded Directors: Generally vote against or withhold from individual directors who:

 

Sit on more than five public company boards; or

 

Are CEOs of public companies who sit on the boards of more than two public companies besides their own — withhold only at their outside boards4.

 

Gender Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board. An exception will be made if there was a woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.

 

 

3 Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.

 

4 Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
   
ISSGOVERNANCE.COM 11 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

This policy will also apply for companies not in the Russell 3000 and S&P1500 indices, effective for meetings on or after Feb. 1, 2023.

 

Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.

 

Responsiveness

 

Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:

 

The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:

 

Disclosed outreach efforts by the board to shareholders in the wake of the vote;

 

Rationale provided in the proxy statement for the level of implementation;

 

The subject matter of the proposal;

 

The level of support for and opposition to the resolution in past meetings;

 

Actions taken by the board in response to the majority vote and its engagement with shareholders;

 

The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and

 

Other factors as appropriate.

 

The board failed to act on takeover offers where the majority of shares are tendered;

 

At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote.

 

Vote case-by-case on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:

 

The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are:

 

The company’s response, including:

 

Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);

 

Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;

 

Disclosure of specific and meaningful actions taken to address shareholders’ concerns;

 

Other recent compensation actions taken by the company;

 

Whether the issues raised are recurring or isolated;

 

The company’s ownership structure; and

 

Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

 

 

5 Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic diversity.
   
ISSGOVERNANCE.COM 12 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast.

 

Accountability

 

Problematic Takeover Defenses/Governance Structure

 

Poison Pills: Vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:

 

The company has a poison pill that was not approved by shareholders6. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on the disclosed rationale for the adoption, and other factors as relevant (such as a commitment to put any renewal to a shareholder vote);

 

The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval; or

 

The pill, whether short-term7 or long-term, has a deadhand or slowhand feature.

 

Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.

 

Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.

 

Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:

 

A classified board structure;

 

A supermajority vote requirement;

 

Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;

 

The inability of shareholders to call special meetings;

 

The inability of shareholders to act by written consent;

 

A multi-class capital structure; and/or

 

A non-shareholder-approved poison pill.

 

Unilateral Bylaw/Charter Amendments and Problematic Capital Structures: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:

 

The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;

 

Disclosure by the company of any significant engagement with shareholders regarding the amendment;

 

 
6 Public shareholders only, approval prior to a company’s becoming public is insufficient.

 

7 If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
   
ISSGOVERNANCE.COM 13 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter;

 

The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;

 

The company’s ownership structure;

 

The company’s existing governance provisions;

 

The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and

 

Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.

 

Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:

 

Classified the board;

 

Adopted supermajority vote requirements to amend the bylaws or charter; or

 

Eliminated shareholders’ ability to amend bylaws.

 

Unequal Voting Rights

 

Problematic Capital Structure - Newly Public Companies: For 2022, for newly public companies8, generally vote against or withhold from the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. In assessing the reasonableness of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.

 

Continue to vote against or withhold from incumbent directors in subsequent years, unless the problematic capital structure is reversed, removed, or subject to a newly added reasonable sunset.

 

Common Stock Capital Structure with Unequal Voting Rights: Starting Feb 1, 2023, generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case), if the company employs a common stock structure with unequal voting rights9.

 

Exceptions to this policy will generally be limited to:

 

Newly-public companies8 with a sunset provision of no more than seven years from the date of going public;

 

Limited Partnerships and the Operating Partnership (OP) unit structure of REITs;

 

Situations where the unequal voting rights are considered de minimis; or

 

The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular binding vote on whether the capital structure should be maintained.

 

 

8 Newly-public companies generally include companies that emerge from bankruptcy, SPAC transactions, spin-offs, direct listings, and those who complete a traditional initial public offering.

 

9 This generally includes classes of common stock that have additional votes per share than other shares; classes of shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
   
ISSGOVERNANCE.COM 14 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Problematic Governance Structure - Newly Public Companies: For newly public companies8, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:

 

Supermajority vote requirements to amend the bylaws or charter;

 

A classified board structure; or

 

Other egregious provisions.

 

A reasonable sunset provision will be considered a mitigating factor.

 

Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.

 

Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:

 

The presence of a shareholder proposal addressing the same issue on the same ballot;

 

The board’s rationale for seeking ratification;

 

Disclosure of actions to be taken by the board should the ratification proposal fail;

 

Disclosure of shareholder engagement regarding the board’s ratification request;

 

The level of impairment to shareholders’ rights caused by the existing provision;

 

The history of management and shareholder proposals on the provision at the company’s past meetings;

 

Whether the current provision was adopted in response to the shareholder proposal;

 

The company’s ownership structure; and

 

Previous use of ratification proposals to exclude shareholder proposals.

 

Restrictions on Shareholders’ Rights

 

Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:

 

The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis.

 

Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.

 

Problematic Audit-Related Practices

 

Generally vote against or withhold from the members of the Audit Committee if:

 

The non-audit fees paid to the auditor are excessive;

 

The company receives an adverse opinion on the company’s financial statements from its auditor; or

 

There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
   
ISSGOVERNANCE.COM 15 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Vote case-by-case on members of the Audit Committee and potentially the full board if:

 

Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.

 

Problematic Compensation Practices

 

In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:

 

There is an unmitigated misalignment between CEO pay and company performance (pay for performance);

 

The company maintains significant problematic pay practices; or

 

The board exhibits a significant level of poor communication and responsiveness to shareholders.

 

Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:

 

The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or

 

The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.

 

Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.

 

Problematic Pledging of Company Stock:

 

Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company sto1ck by executives or directors raises concerns. The following factors will be considered:

 

The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;

 

The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;

 

Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;

 

Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and

 

Any other relevant factors.

 

Climate Accountability

 

For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.

 

 

10 For 2022, companies defined as “significant GHG emitters” will be those on the current Climate Action 100+ Focus Group list.
   
ISSGOVERNANCE.COM 16 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

For 2022, minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in compliance:

 

Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on Climate-related Financial Disclosures (TCFD), including:

 

Board governance measures;

 

Corporate strategy;

 

Risk management analyses; and

 

Metrics and targets.

 

Appropriate GHG emissions reduction targets.

 

For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets. Targets for Scope 3 emissions will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions. Expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase over time.

 

Governance Failures

 

Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:

 

Material failures of governance, stewardship, risk oversight11, or fiduciary responsibilities at the company;

 

Failure to replace management as appropriate; or

 

Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.

 

Voting on Director Nominees in Contested Elections

 

Vote-No Campaigns

  

General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.

 

Proxy Contests/Proxy Access

 

General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:

 

Long-term financial performance of the company relative to its industry;

 

Management’s track record;

 

Background to the contested election;

 

Nominee qualifications and any compensatory arrangements;

 

Strategic plan of dissident slate and quality of the critique against management;

 

Likelihood that the proposed goals and objectives can be achieved (both slates); and

 

 

11 Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.
   
ISSGOVERNANCE.COM 17 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Stock ownership positions.

 

In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).

 

Other Board-Related Proposals

 

Adopt Anti-Hedging/Pledging/Speculative Investments Policy

 

General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock will be considered.

 

Board Refreshment

 

Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity as needed.

 

Term/Tenure Limits

 

General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits, considering:

 

The rationale provided for adoption of the term/tenure limit;

 

The robustness of the company’s board evaluation process;

 

Whether the limit is of sufficient length to allow for a broad range of director tenures;

 

Whether the limit would disadvantage independent directors compared to non-independent directors; and

 

Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.

 

Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:

 

The scope of the shareholder proposal; and

 

Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.

 

Age Limits

  

General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.

 

Board Size

 

General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.

 

Vote against proposals that give management the ability to alter the size of the board outside of a specified range without shareholder approval.

 

Classification/Declassification of the Board

 

General Recommendation: Vote against proposals to classify (stagger) the board.
   
ISSGOVERNANCE.COM 18 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Vote for proposals to repeal classified boards and to elect all directors annually.

 

CEO Succession Planning

  

General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy, considering, at a minimum, the following factors:

 

The reasonableness/scope of the request; and

 

The company’s existing disclosure on its current CEO succession planning process.

 

Cumulative Voting

 

General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for shareholder proposals to restore or provide for cumulative voting, unless:

 

The company has proxy access12, thereby allowing shareholders to nominate directors to the company’s ballot; and

 

The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections.

 

Vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).

 

Director and Officer Indemnification and Liability Protection

  

General Recommendation: Vote case-by-case on proposals on director and officer indemnification and liability protection.

 

Vote against proposals that would:

 

Eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care.

 

Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than mere carelessness.

 

Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.

 

Vote for only those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was unsuccessful if both of the following apply:

 

If the director was found to have acted in good faith and in a manner that s/he reasonably believed was in the best interests of the company; and

 

If only the director’s legal expenses would be covered.

 

Establish/Amend Nominee Qualifications

 

General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.

 

 

12 A proxy access right that meets the recommended guidelines.
   
ISSGOVERNANCE.COM 19 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:

 

The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative to that of its peers;

 

The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is sought;

 

The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant related controversies; and

 

The scope and structure of the proposal.

 

Establish Other Board Committee Proposals

 

General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:

 

Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is sought;

 

Level of disclosure regarding the issue for which board oversight is sought;

 

Company performance related to the issue for which board oversight is sought;

 

Board committee structure compared to that of other companies in its industry sector; and

 

The scope and structure of the proposal.

 

Filling Vacancies/Removal of Directors

 

General Recommendation: Vote against proposals that provide that directors may be removed only for cause.

 

Vote for proposals to restore shareholders’ ability to remove directors with or without cause.

 

Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.

 

Vote for proposals that permit shareholders to elect directors to fill board vacancies.

 

Independent Board Chair

  

General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled by an independent director, taking into consideration the following:

 

The scope and rationale of the proposal;

 

The company’s current board leadership structure;

 

The company’s governance structure and practices;

 

Company performance; and

 

Any other relevant factors that may be applicable.

 

The following factors will increase the likelihood of a “for” recommendation:

 

A majority non-independent board and/or the presence of non-independent directors on key board committees;

 

A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;

 

The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;

 

Evidence that the board has failed to oversee and address material risks facing the company;

 

A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or

 

Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’ interests.
   
ISSGOVERNANCE.COM 20 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Majority of Independent Directors/Establishment of Independent Committees

  

(LOGO) General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)

 

Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors unless they currently meet that standard.

 

Majority Vote Standard for the Election of Directors

  

(LOGO) General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.

 

Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.

 

Companies are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.

 

Proxy Access

 

(LOGO) General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:

 

Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;

 

Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;

 

Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;

 

Cap: cap on nominees of generally twenty-five percent (25%) of the board.

 

Review for reasonableness any other restrictions on the right of proxy access.

 

Generally vote against proposals that are more restrictive than these guidelines.

 

Require More Nominees than Open Seats

 

(LOGO) General Recommendation: Vote against shareholder proposals that would require a company to nominate more candidates than the number of open board seats.
   
ISSGOVERNANCE.COM 21 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Shareholder Engagement Policy (Shareholder Advisory Committee)

  

(LOGO) General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:

 

Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information between shareholders and members of the board;

 

Effectively disclosed information with respect to this structure to its shareholders;

 

Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and

 

The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders.
   
ISSGOVERNANCE.COM 22 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
2. Audit - Related

 

Auditor Indemnification and Limitation of Liability

 

(IMAGE) General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability.

 

Factors to be assessed include, but are not limited to:

 

The terms of the auditor agreement—the degree to which these agreements impact shareholders’ rights;

 

The motivation and rationale for establishing the agreements;

 

The quality of the company’s disclosure; and

 

The company’s historical practices in the audit area.

 

Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.

 

Auditor Ratification

 

(IMAGE) General Recommendation: Vote for proposals to ratify auditors unless any of the following apply:

 

An auditor has a financial interest in or association with the company, and is therefore not independent;

 

There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of the company’s financial position;

 

Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP; or

 

Fees for non-audit services (“Other” fees) are excessive.

 

Non-audit fees are excessive if:

 

Non-audit (“other”) fees > audit fees + audit-related fees + tax compliance/preparation fees

 

Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.

 

In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.

 

Shareholder Proposals Limiting Non-Audit Services

  

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.

 

Shareholder Proposals on Audit Firm Rotation

 

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into account:

 

The tenure of the audit firm;
   
ISSGOVERNANCE.COM 23 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The length of rotation specified in the proposal;

 

Any significant audit-related issues at the company;

 

The number of Audit Committee meetings held each year;

 

The number of financial experts serving on the committee; and

 

Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive price.
   
ISSGOVERNANCE.COM 24 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
3. Shareholder Rights & Defenses

 

Advance Notice Requirements for Shareholder Proposals/Nominations

 

(IMAGE) General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.

 

To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which shareholders must file their proposals/nominations prior to the deadline.

 

In general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.

 

Amend Bylaws without Shareholder Consent

 

(IMAGE) General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws.

 

Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account the following:

 

Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);

 

The company’s ownership structure and historical voting turnout;

 

Whether the board could amend bylaws adopted by shareholders; and

 

Whether shareholders would retain the ability to ratify any board-initiated amendments.

 

Control Share Acquisition Provisions

 

(IMAGE) General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would enable the completion of a takeover that would be detrimental to shareholders.

 

Vote against proposals to amend the charter to include control share acquisition provisions.

 

Vote for proposals to restore voting rights to the control shares.

 

Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.

 

Control Share Cash-Out Provisions

 

(IMAGE) General Recommendation: Vote for proposals to opt out of control share cash-out statutes.

 

Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a 

   
ISSGOVERNANCE.COM 25 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.

 

Disgorgement Provisions

 

(IMAGE) General Recommendation: Vote for proposals to opt out of state disgorgement provisions.

 

Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back, to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24 months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.

 

Fair Price Provisions

  

(IMAGE) General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.

 

Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.

 

Freeze-Out Provisions

  

(IMAGE) General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.

 

Greenmail

 

(IMAGE) General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company’s ability to make greenmail payments.

 

Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.

 

Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.

 

Shareholder Litigation Rights

 

Federal Forum Selection Provisions

 

Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal securities law.

  

(IMAGE) General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.

 

Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.

   
ISSGOVERNANCE.COM 26 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Exclusive Forum Provisions for State Law Matters

 

Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).

 

(IMAGE) General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.

 

For states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:

 

The company’s stated rationale for adopting such a provision;

 

Disclosure of past harm from duplicative shareholder lawsuits in more than one forum;

 

The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and the definition of key terms; and

 

Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.

 

Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.

 

Fee shifting

 

Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the defendant corporation and its directors and officers.

 

(IMAGE) General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).

 

Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments policy.

 

Net Operating Loss (NOL) Protective Amendments

 

(IMAGE) General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.

 

Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:

 

The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);

 

The value of the NOLs;
   
ISSGOVERNANCE.COM 27 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon exhaustion or expiration of the NOL);

 

The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and

 

Any other factors that may be applicable.

 

Poison Pills (Shareholder Rights Plans)

 

Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy

 

(IMAGE) General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a shareholder rights plan if either:

 

Shareholders have approved the adoption of the plan; or

 

The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.

 

If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient implementation.

 

Management Proposals to Ratify a Poison Pill

 

(IMAGE) General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following attributes:

 

No lower than a 20 percent trigger, flip-in or flip-over;

 

A term of no more than three years;

 

No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill;

 

Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.

 

In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.

 

Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)

 

(IMAGE) General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.

 

Vote case-by-case on management proposals for poison pill ratification, considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:

 

The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);

 

The value of the NOLs;

 

Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or expiration of NOLs);
   
ISSGOVERNANCE.COM 28 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The company’s existing governance structure including: board independence, existing takeover defenses, track record of responsiveness to shareholders, and any other problematic governance concerns; and

 

Any other factors that may be applicable.

 

Proxy Voting Disclosure, Confidentiality, and Tabulation

 

(IMAGE) General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.

 

While a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:

 

The scope and structure of the proposal;

 

The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting;

 

The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness in the proxy voting process and maintains the integrity of vote results;

 

Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to management and shareholder proposals are consistent and clear;

 

Any recent controversies or concerns related to the company’s proxy voting mechanics;

 

Any unintended consequences resulting from implementation of the proposal; and

 

Any other factors that may be relevant.

 

Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions

 

(IMAGE) General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best practice.

 

In addition, voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:

 

The presence of a shareholder proposal addressing the same issue on the same ballot;

 

The board’s rationale for seeking ratification;

 

Disclosure of actions to be taken by the board should the ratification proposal fail;

 

Disclosure of shareholder engagement regarding the board’s ratification request;

 

The level of impairment to shareholders’ rights caused by the existing provision;

 

The history of management and shareholder proposals on the provision at the company’s past meetings;

 

Whether the current provision was adopted in response to the shareholder proposal;

 

The company’s ownership structure; and

 

Previous use of ratification proposals to exclude shareholder proposals.

 

Reimbursing Proxy Solicitation Expenses

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.

 

When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with the election.

 

Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one or more candidates in a contested election where the following apply:

   
ISSGOVERNANCE.COM 29 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The election of fewer than 50 percent of the directors to be elected is contested in the election;

 

One or more of the dissident’s candidates is elected;

 

Shareholders are not permitted to cumulate their votes for directors; and

 

The election occurred, and the expenses were incurred, after the adoption of this bylaw.

 

Reincorporation Proposals

  

(IMAGE) General Recommendation: Management or shareholder proposals to change a company’s state of incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:

 

Reasons for reincorporation;

 

Comparison of company’s governance practices and provisions prior to and following the reincorporation; and

 

Comparison of corporation laws of original state and destination state.

 

Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.

 

Shareholder Ability to Act by Written Consent

 

(IMAGE) General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit shareholders’ ability to act by written consent.

 

Generally vote for management and shareholder proposals that provide shareholders with the ability to act by written consent, taking into account the following factors:

 

Shareholders’ current right to act by written consent;

 

The consent threshold;

 

The inclusion of exclusionary or prohibitive language;

 

Investor ownership structure; and

 

Shareholder support of, and management’s response to, previous shareholder proposals.

 

Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover provisions:

 

An unfettered13 right for shareholders to call special meetings at a 10 percent threshold;

 

A majority vote standard in uncontested director elections;

 

No non-shareholder-approved pill; and

 

An annually elected board.

 

Shareholder Ability to Call Special Meetings

  

(IMAGE) General Recommendation: Vote against management or shareholder proposals to restrict or prohibit shareholders’ ability to call special meetings.

 

Generally vote for management or shareholder proposals that provide shareholders with the ability to call special meetings taking into account the following factors:

 

Shareholders’ current right to call special meetings;

 

Minimum ownership threshold necessary to call special meetings (10 percent preferred);

 

The inclusion of exclusionary or prohibitive language;

 

 
13 “Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
   
ISSGOVERNANCE.COM 30 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Investor ownership structure; and

 

Shareholder support of, and management’s response to, previous shareholder proposals.

 

Stakeholder Provisions

  

(IMAGE) General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.

 

State Antitakeover Statutes

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).

 

Supermajority Vote Requirements

 

(IMAGE) General Recommendation: Vote against proposals to require a supermajority shareholder vote.

 

Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:

 

Ownership structure;

 

Quorum requirements; and

 

Vote requirements.

 

Virtual Shareholder Meetings

 

(IMAGE) General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only14 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.

 

Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:

 

Scope and rationale of the proposal; and

 

Concerns identified with the company’s prior meeting practices.

 

 
14 Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using technology without a corresponding in-person meeting.
   
ISSGOVERNANCE.COM 31 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
4. Capital / Restructuring

 

Capital

 

Adjustments to Par Value of Common Stock

 

(IMAGE) General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.

 

Vote for management proposals to eliminate par value.

 

Common Stock Authorization

 

General Authorization Requests

  

(IMAGE) General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:

 

If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares.

 

If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares.

 

If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.

 

In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization.

 

Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:

 

The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights to other share classes;

 

On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization;

 

The company has a non-shareholder approved poison pill (including an NOL pill); or

 

The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval.

 

However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:

 

In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern;

 

The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or

 

A government body has in the past year required the company to increase its capital ratios.

 

For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.

   
ISSGOVERNANCE.COM 32 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Specific Authorization Requests

 

(IMAGE) General Recommendation: Generally vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:

 

twice the amount needed to support the transactions on the ballot, and

 

the allowable increase as calculated for general issuances above.

 

Dual Class Structure

 

(IMAGE) General Recommendation: Generally vote against proposals to create a new class of common stock unless:

 

The company discloses a compelling rationale for the dual-class capital structure, such as:

 

The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a going concern; or

 

The new class of shares will be transitory;

 

The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term and long term; and

 

The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.

 

Issue Stock for Use with Rights Plan

 

(IMAGE) General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).

 

Preemptive Rights

 

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:

 

The size of the company;

 

The shareholder base; and

 

The liquidity of the stock.

 

Preferred Stock Authorization

 

General Authorization Requests

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:

 

If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to 50% of current authorized shares.

 

If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares.

 

If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.

 

In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization.

 

If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a specific use for the shares.

 

Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:

   
ISSGOVERNANCE.COM 33 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;15

 

The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”);

 

The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders;

 

The stated intent of the increase in the general authorization is to allow the company to increase an existing designated class of supervoting preferred shares;

 

On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result in an excessive increase in the share authorization;

 

The company has a non-shareholder approved poison pill (including an NOL pill); or

 

The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below market value, or with problematic voting rights, without shareholder approval.

 

However, generally vote for proposed increases beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:

 

In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt about its ability to continue as a going concern;

 

The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the increase in authorized capital; or

 

A government body has in the past year required the company to increase its capital ratios.

 

For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.

 

Specific Authorization Requests

 

(IMAGE) General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:

 

twice the amount needed to support the transactions on the ballot, and

 

the allowable increase as calculated for general issuances above.

 

Recapitalization Plans

 

(IMAGE) General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into account the following:

 

More simplified capital structure;

 

Enhanced liquidity;

 

Fairness of conversion terms;

 

Impact on voting power and dividends;

 

Reasons for the reclassification;

 

15  To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan.

   
ISSGOVERNANCE.COM 34 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Conflicts of interest; and

 

Other alternatives considered.

 

Reverse Stock Splits

 

(IMAGE) General Recommendation: Vote for management proposals to implement a reverse stock split if:

 

The number of authorized shares will be proportionately reduced; or

 

The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.

 

Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:

 

Stock exchange notification to the company of a potential delisting;

 

Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional financing;

 

The company’s rationale; or

 

Other factors as applicable.

 

Share Repurchase Programs

  

(IMAGE) General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns regarding:

 

Greenmail,

 

The use of buybacks to inappropriately manipulate incentive compensation metrics,

 

Threats to the company’s long-term viability, or

 

Other company-specific factors as warranted.

 

Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.

 

Share Repurchase Programs Shareholder Proposals

 

(IMAGE) General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.

 

Stock Distributions: Splits and Dividends

 

(IMAGE) General Recommendation: Generally vote for management proposals to increase the common share authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.

 

Tracking Stock

 

(IMAGE) General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
   
ISSGOVERNANCE.COM 35 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Adverse governance changes;

 

Excessive increases in authorized capital stock;

 

Unfair method of distribution;

 

Diminution of voting rights;

 

Adverse conversion features;

 

Negative impact on stock option plans; and

 

Alternatives such as spin-off.

 

Restructuring

 

Appraisal Rights

 

(IMAGE) General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.

 

Asset Purchases

 

(IMAGE) General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:

 

Purchase price;

 

Fairness opinion;

 

Financial and strategic benefits;

 

How the deal was negotiated;

 

Conflicts of interest;

 

Other alternatives for the business;

 

Non-completion risk.

 

Asset Sales

 

(IMAGE) General Recommendation: Vote case-by-case on asset sales, considering the following factors:

 

Impact on the balance sheet/working capital;

 

Potential elimination of diseconomies;

 

Anticipated financial and operating benefits;

 

Anticipated use of funds;

 

Value received for the asset;

 

Fairness opinion;

 

How the deal was negotiated;

 

Conflicts of interest.

 

Bundled Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.

 

Conversion of Securities

 

(IMAGE) General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
   
ISSGOVERNANCE.COM 36 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.

 

Corporate Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:

 

Dilution to existing shareholders’ positions;

 

Terms of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties; exit strategy;

 

Financial issues - company’s financial situation; degree of need for capital; use of proceeds; effect of the financing on the company’s cost of capital;

 

Management’s efforts to pursue other alternatives;

 

Control issues - change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and

 

Conflict of interest - arm’s length transaction, managerial incentives.

 

Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.

 

Formation of Holding Company

 

(IMAGE) General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:

 

The reasons for the change;

 

Any financial or tax benefits;

 

Regulatory benefits;

 

Increases in capital structure; and

 

Changes to the articles of incorporation or bylaws of the company.

 

Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include either of the following:

 

Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or

 

Adverse changes in shareholder rights.

 

Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)

 

(IMAGE) General Recommendation: Vote case-by-case on going private transactions, taking into account the following:

 

Offer price/premium;

 

Fairness opinion;

 

How the deal was negotiated;

 

Conflicts of interest;

 

Other alternatives/offers considered; and

 

Non-completion risk.

 

Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:

   
ISSGOVERNANCE.COM 37 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market research of the stock);

 

Balanced interests of continuing vs. cashed-out shareholders, taking into account the following:

 

Are all shareholders able to participate in the transaction?

 

Will there be a liquid market for remaining shareholders following the transaction?

 

Does the company have strong corporate governance?

 

Will insiders reap the gains of control following the proposed transaction?

 

Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?

 

Joint Ventures

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:

  

Percentage of assets/business contributed;

 

Percentage ownership;

 

Financial and strategic benefits;

 

Governance structure;

 

Conflicts of interest;

 

Other alternatives; and

 

Non-completion risk.

 

Liquidations

 

(IMAGE) General Recommendation: Vote case-by-case on liquidations, taking into account the following:

 

Management’s efforts to pursue other alternatives;

 

Appraisal value of assets; and

 

The compensation plan for executives managing the liquidation.

 

Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.

 

Mergers and Acquisitions

  

(IMAGE) General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:

 

Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale.

 

Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.

 

Strategic rationale - Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.

 

Negotiations and process - Were the terms of the transaction negotiated at arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.

 

Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the
   
ISSGOVERNANCE.COM 38 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.

 

Governance - Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.

 

Private Placements/Warrants/Convertible Debentures

 

(IMAGE) General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:

 

Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event.

 

Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features, termination penalties, exit strategy):

 

The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement.

 

When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance.

 

Financial issues:

 

The company’s financial condition;

 

Degree of need for capital;

 

Use of proceeds;

 

Effect of the financing on the company’s cost of capital;

 

Current and proposed cash burn rate;

 

Going concern viability and the state of the capital and credit markets.

 

Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company.

 

Control issues:

 

Change in management;

 

Change in control;

 

Guaranteed board and committee seats;

 

Standstill provisions;

 

Voting agreements;

 

Veto power over certain corporate actions; and

 

Minority versus majority ownership and corresponding minority discount or majority control premium.
   
ISSGOVERNANCE.COM 39 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Conflicts of interest:

 

Conflicts of interest should be viewed from the perspective of the company and the investor.

 

Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder interests?

 

Market reaction:

 

The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.

 

Vote for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.

 

Reorganization/Restructuring Plan (Bankruptcy)

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:

 

Estimated value and financial prospects of the reorganized company;

 

Percentage ownership of current shareholders in the reorganized company;

 

Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an Official Equity Committee);

 

The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);

 

Existence of a superior alternative to the plan of reorganization; and

 

Governance of the reorganized company.

 

Special Purpose Acquisition Corporations (SPACs)

 

(IMAGE) General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:

 

Valuation - Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity.

 

Market reaction - How has the market responded to the proposed deal? A negative market reaction may be a cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.

 

Deal timing - A main driver for most transactions is that the SPAC charter typically requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.

 

Negotiations and process - What was the process undertaken to identify potential target companies within specified industry or location specified in charter? Consider the background of the sponsors.

 

Conflicts of interest - How are sponsors benefiting from the transaction compared to IPO shareholders? Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within the 18-24-month timeframe.

 

Voting agreements - Are the sponsors entering into enter into any voting agreements/tender offers with shareholders who are likely to vote against the proposed merger or exercise conversion rights?

 

Governance - What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?
   
ISSGOVERNANCE.COM 40 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Special Purpose Acquisition Corporations (SPACs) - Proposals for Extensions

 

(IMAGE) General Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests.

 

Length of request: Typically, extension requests range from two to six months, depending on the progression of the SPAC’s acquistion process.

 

Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but needs additional time to consummate or hold the shareholder meeting.

 

Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the “equity kicker” is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting.

 

Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension requests.

 

Spin-offs

 

(IMAGE) General Recommendation: Vote case-by-case on spin-offs, considering:

 

Tax and regulatory advantages;

 

Planned use of the sale proceeds;

 

Valuation of spinoff;

 

Fairness opinion;

 

Benefits to the parent company;

 

Conflicts of interest;

 

Managerial incentives;

 

Corporate governance changes;

 

Changes in the capital structure.

 

Value Maximization Shareholder Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:

 

Hiring a financial advisor to explore strategic alternatives;

 

Selling the company; or

 

Liquidating the company and distributing the proceeds to shareholders.

 

These proposals should be evaluated based on the following factors:

 

Prolonged poor performance with no turnaround in sight;

 

Signs of entrenched board and management (such as the adoption of takeover defenses);

 

Strategic plan in place for improving value;

 

Likelihood of receiving reasonable value in a sale or dissolution; and

 

The company actively exploring its strategic options, including retaining a financial advisor.
   
ISSGOVERNANCE.COM 41 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
5. Compensation

 

Executive Pay Evaluation

 

Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:

 

1. Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;

 

2. Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;

 

3. Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);

 

4. Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;

 

5. Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.

 

Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay)

 

(GRAPHIC) General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.

 

Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:

 

There is an unmitigated misalignment between CEO pay and company performance (pay for performance);

 

The company maintains significant problematic pay practices;

 

The board exhibits a significant level of poor communication and responsiveness to shareholders.

 

Vote against or withhold from the members of the Compensation Committee and potentially the full board if:

 

There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;

 

The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast;

 

The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or

 

The situation is egregious.

 

   
ISSGOVERNANCE.COM 42 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

 

Primary Evaluation Factors for Executive Pay

 

Pay-for-Performance Evaluation

 

ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices16, this analysis considers the following:

 

1. Peer Group17 Alignment:

 

The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within a peer group, each measured over a three-year period.

 

The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period.

 

The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.

 

2. Absolute Alignment18 – the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.

 

If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:

 

The ratio of performance- to time-based incentive awards;

 

The overall ratio of performance-based compensation to fixed or discretionary pay;

 

The rigor of performance goals;

 

The complexity and risks around pay program design;

 

The transparency and clarity of disclosure;

 

The company’s peer group benchmarking practices;

 

Financial/operational results, both absolute and relative to peers;

 

Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);

 

Realizable pay19 compared to grant pay; and

 

Any other factors deemed relevant.

 

Problematic Pay Practices

 

The focus is on executive compensation practices that contravene the global pay principles, including:

 

Problematic practices related to non-performance-based compensation elements;

 

 
16 The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.

 

17 The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.

 

18 Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.

 

19 ISS research reports include realizable pay for S&P1500 companies.

 

   
ISSGOVERNANCE.COM 43 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Incentives that may motivate excessive risk-taking or present a windfall risk; and

 

Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements.

 

Problematic Pay Practices related to Non-Performance-Based Compensation Elements

 

Pay elements that are not directly based on performance are generally evaluated case-by-case considering the context of a company’s overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS’ U.S. Compensation Policies FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:

 

Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);

 

Extraordinary perquisites or tax gross-ups;

 

New or materially amended agreements that provide for:

 

Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus);

 

CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or “modified single” triggers) or in connection with a problematic Good Reason definition;

 

CIC excise tax gross-up entitlements (including “modified” gross-ups);

 

Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;

 

Liberal CIC definition combined with any single-trigger CIC benefits;

 

Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI’s executives is not possible;

 

Any other provision or practice deemed to be egregious and present a significant risk to investors.

 

Options Backdating

 

The following factors should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:

 

Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;

 

Duration of options backdating;

 

Size of restatement due to options backdating;

 

Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and

 

Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants in the future.

 

Compensation Committee Communications and Responsiveness

 

Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:

 

Failure to respond to majority-supported shareholder proposals on executive pay topics; or

 

Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:

 

Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);
   
ISSGOVERNANCE.COM 44 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

 

Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;

 

Disclosure of specific and meaningful actions taken to address shareholders’ concerns;

 

Other recent compensation actions taken by the company;

 

Whether the issues raised are recurring or isolated;

 

The company’s ownership structure; and

 

Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.

 

Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)

 

(GRAPHIC) General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.

 

Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale

 

(GRAPHIC) General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.

 

Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing of issue(s):

 

Single- or modified-single-trigger cash severance;

 

Single-trigger acceleration of unvested equity awards;

 

Full acceleration of equity awards granted shortly before the change in control;

 

Acceleration of performance awards above the target level of performance without compelling rationale;

 

Excessive cash severance (generally >3x base salary and bonus);

 

Excise tax gross-ups triggered and payable;

 

Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or

 

Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or

 

The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory vote.

 

Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However, the presence of multiple legacy problematic features will also be closely scrutinized.

 

In cases where the golden parachute vote is incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.

 

Equity-Based and Other Incentive Plans

 

Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.

   
ISSGOVERNANCE.COM 45 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
(GRAPHIC) General Recommendation: Vote case-by-case on certain equity-based compensation plans20 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan Scorecard” (EPSC) approach with three pillars:

 

Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:

 

SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and

 

SVT based only on new shares requested plus shares remaining for future grants.

 

Plan Features:

 

Quality of disclosure around vesting upon a change in control (CIC);

 

Discretionary vesting authority;

 

Liberal share recycling on various award types;

 

Lack of minimum vesting period for grants made under the plan;

 

Dividends payable prior to award vesting.

 

Grant Practices:

 

The company’s three-year burn rate relative to its industry/market cap peers;

 

Vesting requirements in CEO’s recent equity grants (3-year look-back);

 

The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);

 

The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;

 

Whether the company maintains a sufficient claw-back policy;

 

Whether the company maintains sufficient post-exercise/vesting share-holding requirements.

 

Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or if any of the following egregious factors (“overriding factors”) apply:

 

Awards may vest in connection with a liberal change-of-control definition;

 

The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies);

 

The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;

 

The plan is excessively dilutive to shareholders’ holdings;

 

The plan contains an evergreen (automatic share replenishment) feature; or

 

Any other plan features are determined to have a significant negative impact on shareholder interests.

 

Further Information on certain EPSC Factors:

 

Shareholder Value Transfer (SVT)

 

The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new

 

 
20 Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case.
   
ISSGOVERNANCE.COM 46 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

shares proposed, shares available under existing plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.

 

For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging the company-specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.21

 

Three-Year Burn Rate

 

For meetings held prior to February 1, 2023, burn-rate benchmarks (utilized in Equity Plan Scorecard evaluations) are calculated as the greater of: (1) the mean (μ) plus one standard deviation (σ) of the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P500), and non-Russell 3000 index; and (2) two percent of weighted common shares outstanding. In addition, year-over-year burn-rate benchmark changes will be limited to a maximum of two (2) percentage points plus or minus the prior year’s burn-rate benchmark. See the U.S. Equity Compensation Plans FAQ for the benchmarks.

 

For meetings held prior to February 1, 2023, a company’s adjusted burn rate is calculated as follows:

 

Burn Rate = (# of appreciation awards granted + # of full value awards granted * Volatility Multiplier) / Weighted average common shares outstanding

 

The Volatility Multiplier is used to provide more equivalent valuation between stock options and full value shares, based on the company’s historical stock price volatility.

 

Effective for meetings held on or after February 1, 2023, a “Value-Adjusted Burn Rate” will instead be used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks will be calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.

 

The Value-Adjusted Burn Rate will be calculated as follows:

 

Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted average common shares * stock price).

 

 
21 For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with other factors.
   
ISSGOVERNANCE.COM 47 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Egregious Factors

 

Liberal Change in Control Definition

 

Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.

 

Repricing Provisions

 

Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder approval. “Repricing” typically includes the ability to do any of the following:

 

Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;

 

Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise price of the original options or SARs;

 

Cancel underwater options in exchange for stock awards; or

 

Provide cash buyouts of underwater options.

 

While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.

 

Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity plan.

 

Vote against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.

 

Problematic Pay Practices or Significant Pay-for-Performance Disconnect

 

If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.

 

ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting against the equity plan may include, but are not limited to:

 

Severity of the pay-for-performance misalignment;

 

Whether problematic equity grant practices are driving the misalignment; and/or

 

Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs.

 

Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))

 

(GRAPHIC) General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.

 

Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:

 

Addresses administrative features only; or
   
ISSGOVERNANCE.COM 48 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below).

 

Vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:

 

Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of independent directors, per ISS’ Classification of Directors.

 

Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.

 

Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:

 

If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments.

 

If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments.

 

If there is no request for additional shares and the amendments do not include a term extension or addition of full value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes.

 

In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.

 

Specific Treatment of Certain Award Types in Equity Plan Evaluations

 

Dividend Equivalent Rights

 

Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should be captured.

 

Operating Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)

 

For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.

 

Other Compensation Plans

 

401(k) Employee Benefit Plans

 

(GRAPHIC) General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.
   
ISSGOVERNANCE.COM 49 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Employee Stock Ownership Plans (ESOPs)

 

(GRAPHIC) General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).

 

Employee Stock Purchase Plans—Qualified Plans

 

(GRAPHIC) General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:

 

Purchase price is at least 85 percent of fair market value;

 

Offering period is 27 months or less; and

 

The number of shares allocated to the plan is 10 percent or less of the outstanding shares.

 

Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.

 

Employee Stock Purchase Plans—Non-Qualified Plans

 

(GRAPHIC) General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:

 

Broad-based participation;

 

Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;

 

Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20 percent from market value; and

 

No discount on the stock price on the date of purchase when there is a company matching contribution.

 

Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.

 

Option Exchange Programs/Repricing Options

 

(GRAPHIC) General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration:

 

Historic trading patterns—the stock price should not be so volatile that the options are likely to be back “in-the-money” over the near term;

 

Rationale for the re-pricing—was the stock price decline beyond management’s control?;

 

Is this a value-for-value exchange?;

 

Are surrendered stock options added back to the plan reserve?;

 

Timing—repricing should occur at least one year out from any precipitous drop in company’s stock price;

 

Option vesting—does the new option vest immediately or is there a black-out period?;

 

Term of the option—the term should remain the same as that of the replaced option;

 

Exercise price—should be set at fair market or a premium to market;

 

Participants—executive officers and directors must be excluded.

 

If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity plans and its three-year average burn rate.

 

In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to

   
ISSGOVERNANCE.COM 50 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.

 

Vote for shareholder proposals to put option repricings to a shareholder vote.

 

Stock Plans in Lieu of Cash

 

(GRAPHIC) General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.

 

Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.

 

Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make any adjustments to carve out the in-lieu-of cash compensation.

 

Transfer Stock Option (TSO) Programs

 

(GRAPHIC) General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.

 

Vote case-by-case on one-time transfers. Vote for if:

 

Executive officers and non-employee directors are excluded from participating;

 

Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and

 

There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.

 

Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.

 

Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:

 

Eligibility;

 

Vesting;

 

Bid-price;

 

Term of options;

 

Cost of the program and impact of the TSOs on company’s total option expense; and

 

Option repricing policy.

 

Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment shall be transferable.

   
ISSGOVERNANCE.COM 51 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Director Compensation

 

Shareholder Ratification of Director Pay Programs

 

(GRAPHIC) General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

 

If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and

 

An assessment of the following qualitative factors:

 

The relative magnitude of director compensation as compared to companies of a similar profile;

 

The presence of problematic pay practices relating to director compensation;

 

Director stock ownership guidelines and holding requirements;

 

Equity award vesting schedules;

 

The mix of cash and equity-based compensation;

 

Meaningful limits on director compensation;

 

The availability of retirement benefits or perquisites; and

 

The quality of disclosure surrounding director compensation.

 

Equity Plans for Non-Employee Directors

 

(GRAPHIC) General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:

 

The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;

 

The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and

 

The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).

 

On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:

 

The relative magnitude of director compensation as compared to companies of a similar profile;

 

The presence of problematic pay practices relating to director compensation;

 

Director stock ownership guidelines and holding requirements;

 

Equity award vesting schedules;

 

The mix of cash and equity-based compensation;

 

Meaningful limits on director compensation;

 

The availability of retirement benefits or perquisites; and

 

The quality of disclosure surrounding director compensation.

 

Non-Employee Director Retirement Plans

 

(GRAPHIC) General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
   
ISSGOVERNANCE.COM 52 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Shareholder Proposals on Compensation

 

Bonus Banking/Bonus Banking “Plus”

 

(GRAPHIC) General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:

 

The company’s past practices regarding equity and cash compensation;

 

Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at least 50 percent for full tenure); and

 

Whether the company has a rigorous claw-back policy in place.

 

Compensation Consultants—Disclosure of Board or Company’s Utilization

 

(GRAPHIC) General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.

 

Disclosure/Setting Levels or Types of Compensation for Executives and Directors

 

(GRAPHIC) General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.

 

Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.

 

Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.

 

Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.

 

Golden Coffins/Executive Death Benefits

 

(GRAPHIC) General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible.

 

Hold Equity Past Retirement or for a Significant Period of Time

 

(GRAPHIC) General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account:

 

The percentage/ratio of net shares required to be retained;

 

The time period required to retain the shares;

 

Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness of such requirements;
   
ISSGOVERNANCE.COM 53 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Whether the company has any other policies aimed at mitigating risk taking by executives;

 

Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding period/retention ratio or the company’s existing requirements; and

 

Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.

 

Pay Disparity

 

(GRAPHIC) General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees. The following factors will be considered:

 

The company’s current level of disclosure of its executive compensation setting process, including how the company considers pay disparity;

 

If any problematic pay practices or pay-for-performance concerns have been identified at the company; and

 

The level of shareholder support for the company’s pay programs.

 

Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.

 

Pay for Performance/Performance-Based Awards

 

(GRAPHIC) General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:

 

First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards.

 

Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test.

 

In general, vote for the shareholder proposal if the company does not meet both of the above two steps.

 

Pay for Superior Performance

 

(GRAPHIC) General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:

 

Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group median;

 

Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity awards;

 

Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan;
   
ISSGOVERNANCE.COM 54 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Establish performance targets for each plan financial metric relative to the performance of the company’s peer companies;

 

Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s performance on its selected financial performance metrics exceeds peer group median performance.

 

Consider the following factors in evaluating this proposal:

 

What aspects of the company’s annual and long-term equity incentive programs are performance driven?

 

If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates disclosed to shareholders or are they benchmarked against a disclosed peer group?

 

Can shareholders assess the correlation between pay and performance based on the current disclosure?

 

What type of industry and stage of business cycle does the company belong to?

 

Pre-Arranged Trading Plans (10b5-1 Plans)

 

(GRAPHIC) General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:

 

Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K;

 

Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board;

 

Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan;

 

Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;

 

An executive may not trade in company stock outside the 10b5-1 Plan;

 

Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive.

 

Prohibit Outside CEOs from Serving on Compensation Committees

 

(GRAPHIC) General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.

 

Recoupment of Incentive or Stock Compensation in Specified Circumstances

 

(GRAPHIC) General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.

 

In considering whether to support such shareholder proposals, ISS will take into consideration the following factors:

 

If the company has adopted a formal recoupment policy;

 

The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock compensation;
   
ISSGOVERNANCE.COM 55 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Whether the company has chronic restatement history or material financial problems;

 

Whether the company’s policy substantially addresses the concerns raised by the proponent;

 

Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or

 

Any other relevant factors.

 

Severance Agreements for Executives/Golden Parachutes

 

(GRAPHIC) General Recommendation: Vote for shareholder proposals requiring that golden parachutes or executive severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts.

 

Vote case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:

 

The triggering mechanism should be beyond the control of management;

 

The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the five years prior to the year in which the change of control occurs);

 

Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure.

 

Share Buyback Impact on Incentive Program Metrics

 

(GRAPHIC) General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following factors:

 

The frequency and timing of the company’s share buybacks;

 

The use of per-share metrics in incentive plans;

 

The effect of recent buybacks on incentive metric results and payouts; and

 

Whether there is any indication of metric result manipulation.

 

Supplemental Executive Retirement Plans (SERPs)

 

(GRAPHIC) General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.

 

Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.

 

Tax Gross-Up Proposals

 

(GRAPHIC) General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.

 

Termination of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity

 

(GRAPHIC) General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
   
ISSGOVERNANCE.COM 56 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

The following factors will be considered:

 

The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e., vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.);

 

Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.

 

Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).

   
ISSGOVERNANCE.COM 57 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
6. Routine/Miscellaneous

 

Adjourn Meeting

 

(IMAGE) General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an annual or special meeting absent compelling reasons to support the proposal.

 

Vote for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”

 

Amend Quorum Requirements

 

(IMAGE) General Recommendation: Vote against proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal.

 

Amend Minor Bylaws

 

(IMAGE) General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or corrections).

 

Change Company Name

 

(IMAGE) General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that the change would adversely impact shareholder value.

 

Change Date, Time, or Location of Annual Meeting

 

(IMAGE) General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting unless the proposed change is unreasonable.

 

Vote against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling or location is unreasonable.

 

Other Business

 

(IMAGE) General Recommendation: Vote against proposals to approve other business when it appears as a voting item.
   
ISSGOVERNANCE.COM 58 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
7. Social and Environmental Issues

 

Global Approach

 

Issues covered under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.

 

(IMAGE) General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors will be considered:

 

If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation;

 

If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;

 

Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;

 

The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;

 

Whether there are significant controversies, fines, penalties, or litigation associated with the company’s environmental or social practices;

 

If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and

 

If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.

 

Endorsement of Principles

 

(IMAGE) General Recommendation: Generally vote against proposals seeking a company’s endorsement of principles that support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company.

 

Animal Welfare

 

Animal Welfare Policies

 

(IMAGE) General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related risks, unless:

 

The company has already published a set of animal welfare standards and monitors compliance;

 

The company’s standards are comparable to industry peers; and

 

There are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers’ treatment of animals.
   
ISSGOVERNANCE.COM 59 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Animal Testing

 

(IMAGE) General Recommendation: Generally vote against proposals to phase out the use of animals in product testing, unless:

 

The company is conducting animal testing programs that are unnecessary or not required by regulation;

 

The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or

 

There are recent, significant fines or litigation related to the company’s treatment of animals.

 

Animal Slaughter

 

(IMAGE) General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.

 

Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.

 

Consumer Issues

 

Genetically Modified Ingredients

 

(IMAGE) General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.

 

Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:

 

The potential impact of such labeling on the company’s business;

 

The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares with industry peer disclosure; and

 

Company’s current disclosure on the feasibility of GE product labeling.

 

Generally vote against proposals seeking a report on the social, health, and environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.

 

Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.

 

Reports on Potentially Controversial Business/Financial Practices

 

(IMAGE) General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account:

 

Whether the company has adequately disclosed mechanisms in place to prevent abuses;

 

Whether the company has adequately disclosed the financial risks of the products/practices in question;

 

Whether the company has been subject to violations of related laws or serious controversies; and

 

Peer companies’ policies/practices in this area.
   
ISSGOVERNANCE.COM 60 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation

 

(IMAGE) General Recommendation: Generally vote against proposals requesting that companies implement specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.

 

Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:

 

The potential for reputational, market, and regulatory risk exposure;

 

Existing disclosure of relevant policies;

 

Deviation from established industry norms;

 

Relevant company initiatives to provide research and/or products to disadvantaged consumers;

 

Whether the proposal focuses on specific products or geographic regions;

 

The potential burden and scope of the requested report;

 

Recent significant controversies, litigation, or fines at the company.

 

Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless such information is already publicly disclosed.

 

Generally vote against proposals requesting that companies adopt specific policies to encourage or constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.

 

Product Safety and Toxic/Hazardous Materials

 

(IMAGE) General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless:

 

The company already discloses similar information through existing reports such as a supplier code of conduct and/or a sustainability report;

 

The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and

 

The company has not been recently involved in relevant significant controversies, fines, or litigation.

 

Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:

 

The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms;

 

Current regulations in the markets in which the company operates; and

 

Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.

 

Generally vote against resolutions requiring that a company reformulate its products.

 

Tobacco-Related Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products, considering:

 

Recent related fines, controversies, or significant litigation;

 

Whether the company complies with relevant laws and regulations on the marketing of tobacco;
   
ISSGOVERNANCE.COM 61 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
Whether the company’s advertising restrictions deviate from those of industry peers;

 

Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and

 

Whether restrictions on marketing to youth extend to foreign countries.

 

Vote case-by-case on proposals regarding second-hand smoke, considering;

 

Whether the company complies with all laws and regulations;

 

The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and

 

The risk of any health-related liabilities.

 

Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.

 

Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.

 

Climate Change

 

Say on Climate (SoC) Management Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan22, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:

 

The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other market standards;

 

Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);

 

The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if relevant);

 

Whether the company has sought and received third-party approval that its targets are science-based;

 

Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1, 2, and 3) by 2050;

 

Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;

 

Whether the company’s climate data has received third-party assurance;

 

Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;

 

Whether there are specific industry decarbonization challenges; and

 

The company’s related commitment, disclosure, and performance compared to its industry peers.

 

Say on Climate (SoC) Shareholder Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the following:

 

 
22 Variations of this request also include climate transition related ambitions, or commitment to reporting on the implementation of a climate plan.
   
ISSGOVERNANCE.COM 62 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The completeness and rigor of the company’s climate-related disclosure;

 

The company’s actual GHG emissions performance;

 

Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to its GHG emissions; and

 

Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.

 

Climate Change/Greenhouse Gas (GHG) Emissions

 

(IMAGE) General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering:

 

Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;

 

The company’s level of disclosure compared to industry peers; and

 

Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance.

 

Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:

 

The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;

 

The company’s level of disclosure is comparable to that of industry peers; and

 

There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.

 

Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:

 

Whether the company provides disclosure of year-over-year GHG emissions performance data;

 

Whether company disclosure lags behind industry peers;

 

The company’s actual GHG emissions performance;

 

The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and

 

Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.

 

Energy Efficiency

 

(IMAGE) General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency policies, unless:

 

The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or

 

The proponent requests adoption of specific energy efficiency goals within specific timelines.
   
ISSGOVERNANCE.COM 63 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Renewable Energy

 

(IMAGE) General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.

 

Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s evaluation of the feasibility and financial impact that such programs may have on the company.

 

Generally vote against proposals that call for the adoption of renewable energy goals, taking into account:

 

The scope and structure of the proposal;

 

The company’s current level of disclosure on renewable energy use and GHG emissions; and

 

The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate change risks.

 

Diversity

 

Board Diversity

 

(IMAGE) General Recommendation: Generally vote for requests for reports on a company’s efforts to diversify the board, unless:

 

The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and

 

The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.

 

Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:

 

The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;

 

The level of gender and racial minority representation that exists at the company’s industry peers;

 

The company’s established process for addressing gender and racial minority board representation;

 

Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;

 

The independence of the company’s nominating committee;

 

Whether the company uses an outside search firm to identify potential director nominees; and

 

Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.

 

Equality of Opportunity

 

General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless:

 

The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner;

 

The company already publicly discloses comprehensive workforce diversity data; and

 

The company has no recent significant EEO-related violations or litigation.

 

Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant burden on the company.

   
ISSGOVERNANCE.COM 64 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Gender Identity, Sexual Orientation, and Domestic Partner Benefits

 

(IMAGE) General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.

 

Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be left to the discretion of the company.

 

Gender, Race/Ethnicity Pay Gap

 

(IMAGE) General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/ ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account:

 

The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy on fair and equitable compensation practices;

 

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues;

 

The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry peers; and

 

Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.

 

Racial Equity and/or Civil Rights Audit Guidelines

 

(IMAGE) General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity and/or civil rights audit, taking into account:

 

The company’s established process or framework for addressing racial inequity and discrimination internally;

 

Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed to internal policy review;

 

Whether the company has engaged with impacted communities, stakeholders, and civil rights experts,

 

The company’s track record in recent years of racial justice measures and outreach externally;

 

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity or discrimination; and

 

Whether the company’s actions are aligned with market norms on civil rights, and racial or ethnic diversity.

 

Environment and Sustainability

 

Facility and Workplace Safety

 

(IMAGE) General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident risk reduction efforts, taking into account:

 

The company’s current level of disclosure of its workplace health and safety performance data, health and safety management policies, initiatives, and oversight mechanisms;

 

The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks;

 

Recent significant controversies, fines, or violations related to workplace health and safety; and

 

The company’s workplace health and safety performance relative to industry peers.
   
ISSGOVERNANCE.COM 65 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:

 

The company’s compliance with applicable regulations and guidelines;

 

The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring; and

 

The existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations and/or facilities.

 

General Environmental Proposals and Community Impact Assessments

 

(IMAGE) General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community) social and/or environmental impact of company operations, considering:

 

Current disclosure of applicable policies and risk assessment report(s) and risk management procedures;

 

The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;

 

The nature, purpose, and scope of the company’s operations in the specific region(s);

 

The degree to which company policies and procedures are consistent with industry norms; and

 

The scope of the resolution.

 

Hydraulic Fracturing

 

(IMAGE) General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:

 

The company’s current level of disclosure of relevant policies and oversight mechanisms;

 

The company’s current level of such disclosure relative to its industry peers;

 

Potential relevant local, state, or national regulatory developments; and

 

Controversies, fines, or litigation related to the company’s hydraulic fracturing operations.

 

Operations in Protected Areas

 

(IMAGE) General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of company operations in protected regions, unless:

 

Operations in the specified regions are not permitted by current laws or regulations;

 

The company does not currently have operations or plans to develop operations in these protected regions; or

 

The company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers.

 

Recycling

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new recycling program, taking into account:

 

The nature of the company’s business;

 

The current level of disclosure of the company’s existing related programs;

 

The timetable and methods of program implementation prescribed by the proposal;

 

The company’s ability to address the issues raised in the proposal; and

 

How the company’s recycling programs compare to similar programs of its industry peers.
   
ISSGOVERNANCE.COM 66 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Sustainability Reporting

 

(IMAGE) General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:

 

The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or

 

The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.

 

Water Issues

 

(IMAGE) General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on, water-related risks and concerns, taking into account:

 

The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;

 

Whether or not the company’s existing water-related policies and practices are consistent with relevant internationally recognized standards and national/local regulations;

 

The potential financial impact or risk to the company associated with water-related concerns or issues; and

 

Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.

 

General Corporate Issues

 

Charitable Contributions

 

(IMAGE) General Recommendation: Vote against proposals restricting a company from making charitable contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in the best interests of the company.

 

Data Security, Privacy, and Internet Issues

 

(IMAGE) General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures, considering:

 

The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information access and management, and Internet censorship;

 

Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of information on the Internet;

 

The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other telecommunications;

 

Applicable market-specific laws or regulations that may be imposed on the company; and

 

Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.

 

Environmental, Social, and Governance (ESG) Compensation-Related Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria, considering:

 

The scope and prescriptive nature of the proposal;

 

Whether the company has significant and/or persistent controversies or regulatory violations regarding social and/or environmental issues;

 

Whether the company has management systems and oversight mechanisms in place regarding its social and environmental performance;
   
ISSGOVERNANCE.COM 67 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and

 

The company’s current level of disclosure regarding its environmental and social performance.

 

Human Rights, Human Capital Management, and International Operations

 

Human Rights Proposals

 

(IMAGE) General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies unless such information is already publicly disclosed.

 

Vote case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies, considering:

 

The degree to which existing relevant policies and practices are disclosed;

 

Whether or not existing relevant policies are consistent with internationally recognized standards;

 

Whether company facilities and those of its suppliers are monitored and how;

 

Company participation in fair labor organizations or other internationally recognized human rights initiatives;

 

Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;

 

Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;

 

The scope of the request; and

 

Deviation from industry sector peer company standards and practices.

 

Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering:

 

The degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms;

 

The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns;

 

Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and

 

Whether the proposal is unduly burdensome or overly prescriptive.

 

Mandatory Arbitration

 

(IMAGE) General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account:

 

The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace claims;

 

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of mandatory arbitration agreements on workplace claims; and

 

The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared to its peers.
   
ISSGOVERNANCE.COM 68 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Operations in High Risk Markets

 

(IMAGE) General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:

 

The nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption;

 

Current disclosure of applicable risk assessment(s) and risk management procedures;

 

Compliance with U.S. sanctions and laws;

 

Consideration of other international policies, standards, and laws; and

 

Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its operations in “high-risk” markets.

 

Outsourcing/Offshoring

 

(IMAGE) General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:

 

Controversies surrounding operations in the relevant market(s);

 

The value of the requested report to shareholders;

 

The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and

 

The company’s existing human rights standards relative to industry peers.

 

Sexual Harassment

 

(IMAGE) General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account:

 

The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;

 

Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual harassment issues; and

 

The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.

 

Weapons and Military Sales

 

(IMAGE) General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.

 

Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business.

   
ISSGOVERNANCE.COM 69 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Political Activities

 

Lobbying

 

(IMAGE) General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:

 

The company’s current disclosure of relevant lobbying policies, and management and board oversight;

 

The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and

 

Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.

 

Political Contributions

 

(IMAGE) General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s political contributions and trade association spending policies and activities, considering:

 

The company’s policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;

 

The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and

 

Recent significant controversies, fines, or litigation related to the company’s political contributions or political activities.

 

Vote against proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.

 

Vote against proposals to publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.

 

Political Ties

 

(IMAGE) General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in the workplace, so long as:

 

There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or trade association spending; and

 

The company has procedures in place to ensure that employee contributions to company-sponsored political action committees (PACs) are strictly voluntary and prohibit coercion.

 

Vote against proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders.

   
ISSGOVERNANCE.COM 70 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
8. Mutual Fund Proxies

 

Election of Directors

 

(IMAGE) General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.

 

Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes

 

(IMAGE) General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.

 

Converting Closed-end Fund to Open-end Fund

 

(IMAGE) General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:

 

Past performance as a closed-end fund;

 

Market in which the fund invests;

 

Measures taken by the board to address the discount; and

 

Past shareholder activism, board activity, and votes on related proposals.

 

Proxy Contests

 

(IMAGE) General Recommendation: Vote case-by-case on proxy contests, considering the following factors:

 

Past performance relative to its peers;

 

Market in which the fund invests;

 

Measures taken by the board to address the issues;

 

Past shareholder activism, board activity, and votes on related proposals;

 

Strategy of the incumbents versus the dissidents;

 

Independence of directors;

 

Experience and skills of director candidates;

 

Governance profile of the company;

 

Evidence of management entrenchment.

 

Investment Advisory Agreements

 

(IMAGE) General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:

 

Proposed and current fee schedules;

 

Fund category/investment objective;

 

Performance benchmarks;

 

Share price performance as compared with peers;

 

Resulting fees relative to peers;

 

Assignments (where the advisor undergoes a change of control).

 

Approving New Classes or Series of Shares

 

(IMAGE) General Recommendation: Vote for the establishment of new classes or series of shares.
   
ISSGOVERNANCE.COM 71 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Preferred Stock Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering the following factors:

 

Stated specific financing purpose;

 

Possible dilution for common shares;

 

Whether the shares can be used for antitakeover purposes.

 

1940 Act Policies

 

(IMAGE) General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:

 

Potential competitiveness;

 

Regulatory developments;

 

Current and potential returns; and

 

Current and potential risk.

 

Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the current SEC interpretation.

 

Changing a Fundamental Restriction to a Nonfundamental Restriction

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:

 

The fund’s target investments;

 

The reasons given by the fund for the change; and

 

The projected impact of the change on the portfolio.

 

Change Fundamental Investment Objective to Nonfundamental

 

(IMAGE) General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to non-fundamental.

 

Name Change Proposals

 

(IMAGE) General Recommendation: Vote case-by-case on name change proposals, considering the following factors:

 

Political/economic changes in the target market;

 

Consolidation in the target market; and

 

Current asset composition.

 

Change in Fund’s Subclassification

 

(IMAGE) General Recommendation: Vote case-by-case on changes in a fund’s sub-classification, considering the following factors:

 

Potential competitiveness;

 

Current and potential returns;

 

Risk of concentration;

 

Consolidation in target industry.

 

Business Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset Value

 

(IMAGE) General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if:

 

The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders approve the underlying proposal, as required under the Investment Company Act of 1940;

 

The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and
   
ISSGOVERNANCE.COM 72 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   
The company has demonstrated responsible past use of share issuances by either:

 

Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or

 

Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts to NAV and economic dilution to existing non-participating shareholders.

 

Disposition of Assets/Termination/Liquidation

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors:

 

Strategies employed to salvage the company;

 

The fund’s past performance;

 

The terms of the liquidation.

 

Changes to the Charter Document

 

(IMAGE) General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:

 

The degree of change implied by the proposal;

 

The efficiencies that could result;

 

The state of incorporation;

 

Regulatory standards and implications.

 

Vote against any of the following changes:

 

Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;

 

Removal of shareholder approval requirement for amendments to the new declaration of trust;

 

Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be modified by the investment manager and the trust management, as permitted by the 1940 Act;

 

Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales charges and redemption fees that may be imposed upon redemption of a fund’s shares;

 

Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements;

 

Removal of shareholder approval requirement to change the domicile of the fund.

 

Changing the Domicile of a Fund

 

(IMAGE) General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:

 

Regulations of both states;

 

Required fundamental policies of both states;

 

The increased flexibility available.

 

Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval

 

(IMAGE) General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.

 

Distribution Agreements

 

(IMAGE) General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:

 

Fees charged to comparably sized funds with similar objectives;

 

The proposed distributor’s reputation and past performance;

 

The competitiveness of the fund in the industry;

 

The terms of the agreement.
   
ISSGOVERNANCE.COM 73 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

Master-Feeder Structure

 

(IMAGE) General Recommendation: Vote for the establishment of a master-feeder structure.

 

Mergers

 

(IMAGE) General Recommendation: Vote case-by-case on merger proposals, considering the following factors:

 

Resulting fee structure;

 

Performance of both funds;

 

Continuity of management personnel;

 

Changes in corporate governance and their impact on shareholder rights.

 

Shareholder Proposals for Mutual Funds

 

Establish Director Ownership Requirement

 

(IMAGE) General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.

 

Reimburse Shareholder for Expenses Incurred

 

(IMAGE) General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.

 

Terminate the Investment Advisor

 

(IMAGE) General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the following factors:

 

Performance of the fund’s Net Asset Value (NAV);

 

The fund’s history of shareholder relations;

 

The performance of other funds under the advisor’s management.
   
ISSGOVERNANCE.COM 74 of 75
UNITED STATES
PROXY VOTING GUIDELINES
 (ISS LOGO)
   

We empower investors and companies to build
for long-term and sustainable growth by providing
high-quality data, analytics, and insight.

 

 

 

G E T  S T A R T E D  W I T H  I S S  S O L U T I O N S

 

 

Email [email protected] or visit issgovernance.com for more information.

 

 

 

 

 

Founded in 1985, the Institutional Shareholder Services group of companies (“ISS”) is the world’s leading provider of corporate governance and responsible investment solutions alongside fund intelligence and services, events, and editorial content for institutional investors, globally. ISS’ solutions include objective governance research and recommendations; responsible investment data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities Class Action Services, LLC); reliable global governance data and modeling tools; asset management intelligence, portfolio execution and monitoring, fund services, and media. Clients rely on ISS’ expertise to help them make informed investment decisions.

 

This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.

 

The Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.

 

The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.

 

ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.

 

Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

 

© 2021 | Institutional Shareholder Services and/or its affiliates

   
ISSGOVERNANCE.COM 75 of 75

Appendix C

SMH CAPITAL ADVISORS, INC.

PROXY VOTING POLICIES AND PROCEDURES

 

Proxy Voting Policies

 

Under normal circumstances, a client is responsible for voting proxies for securities held for a client account. Under normal circumstances, if a client does not vote the proxies then SMH Capital Advisors may exercise its right to vote the securities if allowed by the advisory agreement. If SMHCA votes the securities, the SMHCA will consider only those factors that relate to a client investment, including how the vote will economically impact and affect the value of the client’s investment.

 

Proxy votes generally will be cast in favor of proposals that maintain or strengthen the shared interest of shareholders and management, increase shareholder value, maintain or increase shareholder influence over the issuer’s board of directors and management, and maintain or increase the rights of shareholders; proxy votes generally will be cast against proposals having the opposite effect. In voting on each and every issue, SMHCA and its employees will vote in a prudent and diligent fashion and only after a careful evaluation of the issue presented on the ballot.

 

In the event that a proxy involves a tender offer for the company consent to a change in bond indenture covenants, votes to restructure debt obligations of the company, or a tender offer for bonds held, the SMHCA intends to exercise its right to vote unless specifically prohibited by client advisory agreement.

 

 

Proxy Voting Procedures

 

In the event that SMH Capital Advisors exercises its right to vote a proxy, all proxies and ballots will be logged in upon receipt and the materials will be forwarded to the appropriate parties.

 

Prior to voting, the investment advisor representative will verify that he or she has the authority to vote, and if so, will determine whether his or her voting is subject to guidelines issued by the client (or in the case of an employee benefit plan, the plan’s trustee or other fiduciaries). The investment advisor representative will promptly vote proxies received in the manner consistent with the Proxy Voting Policies and Procedures stated above and guidelines (if any) issued by client (or in the case of an employee benefits plan, the plan’s trustee or other fiduciaries). The investment advisor representative will keep records on how he or she voted on each issue. The proxy will then be filed in the proper client’s file and becomes a permanent part of the records of SMHCA.

 

 

76 
 

 

Appendix D

Managed Asset Portfolios, LLC

PROXY VOTING POLICIES AND PROCEDURES

 

 

 

APPENDIX II PROXY VOTING

Amended: January 01, 2022

 

POLICY

 

Managed Asset Portfolios, LLC (hereinafter “the Adviser” or “MAP”) acts as discretionary investment adviser to high-net-worth individuals and institutional accounts (“clients”). Our policy is to exercise voting authority with respect to clients’ securities only if a client has authorized us to exercise such discretion pursuant to the client’s advisory contract or otherwise in writing. Clients may instruct MAP that they will vote proxies for the securities in their account. Unless otherwise requested by the client in writing, Adviser shall have the authority to vote proxies on all securities held in client accounts.

 

Our policy is to vote proxies in the best interests of clients. In pursuing this policy, we vote in a manner that is intended to maximize the value of client’s assets. Our investment strategies are predicated on the belief that the quality of management is often the key to ultimate success or failure of a business.

 

PHILOSOPHY

 

These guidelines are intended to provide an overview of how we may vote on particular corporate governance issues.

 

77 
 

Our high-level principle guidelines:

 

1.      MAP holds directors accountable - as our elected representatives, one of the most impactful votes we can cast is to support or withhold our support for those nominated to represent our clients.
2.      We do not like to micromanage, but when directors are not representing our clients not only will we vote against or withhold support, but we will support shareholder proposals that we believe may lead to long-term value creation.
3.      MAP generally likes more transparency - except in extraordinary circumstances, we believe access to more information, of higher quality, helps us make better investment decisions.
4. MAP expects the companies we invest in to enact strong corporate controls and to conduct business in an ethical manner.

 

OUR APPROACH TO ENGAGEMENT AND PROXY VOTING

 

In addition to proxy voting, we view constructive engagement with boards and management teams as an important part of our approach to investment stewardship. When appropriate, we will directly engage with companies on corporate governance matters to discuss specific concerns we may have. We believe companies need to maintain good communications with shareholders through open dialogue during conference calls, investor relations calls, and investor days.

 

INTERNATIONAL VOTING

 

MAP considers corporate governance as part of our investment approach. MAP seeks to vote all

U.S. proxies. Proxies for companies outside the U.S. are also voted, provided there is sufficient time and information available. We may not exercise our voting authority if voting would impose costs on Managed Asset Portfolios, including opportunity costs. We have therefore drafted our guidelines to be globally applicable, but acknowledge there may be variations in practice among local laws and regulations.

 

The procedures and guidelines described below are intended to implement this proxy voting policy.

 

PROCEDURES

 

Managed Asset Portfolios has contracted Broadridge to implement these custom proxy voting guidelines and to refer back to MAP on certain case-by-case agenda items, as needed. It is the responsibility and obligation of MAP employees to monitor and report any conflicts that have

78 
 

arisen between clients and the firm that could affect the proxy voting process, including (a) significant client relationships; (b) other potential material business relationships; and (c) material personal and family relationships.

 

Our Operations Team, utilizing alerts set up with Broadridge’s ProxyEdge product, is responsible for monitoring corporate actions and ensuring that all proxies are received and forwarded to the Portfolio Management Team. It is here that the ProxyEdge product provides MAP with a platform that enables the firm to manage voting mechanisms more efficiently and improve record retention. From there, the Portfolio Management Team must hold a meeting to discuss the matter in a timely manner and do any necessary research on the issue. The decision as to how to vote is communicated to the Operations Team who then enter the vote into ProxyEdge. In some circumstances, the Portfolio Management Team may become aware that an issuer subject to a vote intends to file or has filed additional soliciting materials setting forth the issuer’s views regarding the vote. These materials may or may not reasonably be expected to affect the Portfolio Management Team’s voting determination and they may become available after or around the same time that the Portfolio Management Team’s votes have been cast but before the submission deadline for proxies to be voted at the shareholder meeting. In the event this occurs sufficiently in advance of the submission deadline and such information would reasonably be expected to affect MAP’s vote, the Portfolio Management Team would consider such information prior to exercising voting authority. Managed Asset Portfolio is not responsible for voting proxies it does not receive, but will make reasonable efforts to obtain missing proxies.

 

As with all votes, when we internally review an agenda, MAP considers the long-term financial merits of the proposal and takes into account relevant environmental or social impacts that may result from supporting the proposal. Adherence to, and/or consideration of certain global ESG frameworks in proxy voting does not necessarily alter our long-standing, traditional and seemingly contrary fundamental investment analysis and strategies.

 

Proxy voting decisions will be determined solely by the Portfolio Management Team. The ProxyEdge service does not include any Broadridge recommendations as to the manner in which MAP should vote or the factors that MAP should consider when voting on any issue, candidate or ballot proposition. In instances where the client(s) has directed MAP to hold a specific security(ies), but have elected MAP to vote their proxies, the Portfolio Management Team will vote according to the Proxy Voting Process described herein except in instances of case-by-case issues where we will defer to management and vote according to their recommendation. Issues not covered by these guidelines or any deviations from these guidelines must be discussed with and reviewed by the Portfolio Management Team. Any decision requires a unanimous vote, except for those where the client has directed MAP to hold a specific security.

 

MAP may determine not to vote a particular proxy if the costs and burdens exceed the benefits of voting (e.g., when securities are subject to loan or to share blocking restrictions).

 

79 
 

PROXY VOTING PROCESS

 

The following sections detail how MAP votes on the primary and most prevalent topics presented to shareholders at annual and special meetings:

 

CORPORATE

 

Non-Audit Fees – Vote against the ratification of auditors when a company's non-audit fees (i.e., consulting fees) are greater than 50 percent of total fees paid to the auditor.

 

Auditor Tenure – We do not factor in tenure in auditor ratification proposals.

 

SHAREHOLDER EQUITY

 

Authorized Capital Increase – Requests for additional capital are analyzed on a case-by- case basis after considering the company's use of authorized shares during the last three years, disclosure in the proxy statement of the specific purposes of the proposed increase, disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request, and the dilutive impact of the request.

 

Blank Check Preferred – MAP generally opposes authorization of “blank check” preferred stock since it may be a possible entrenchment or anti-takeover device. MAP may support blank check share issuances where the company has committed to not use it for anti-takeover and has a legitimate need for the financing with this being an advantageous method.

 

Equal Voting Rights – Generally, shareholders should be entitled to votes in proportion to their economic interests. Companies with multiple share classes should regularly engage shareholders on the topic.

 

Increase or Issuance of Preferred Stock – MAP generally supports proposals to increase or issue preferred stock in cases where the company specifies the voting, dividend, conversion, and other rights of such stock and where the terms of the preferred stock appear reasonable.

 

Reverse Stock Splits – Vote for management proposals to implement a reverse stock split.

 

Share Repurchase Programs – Vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal

80 
 

terms, or to grant the board authority to conduct open-market repurchases, in the absence of company- specific concerns.

 

Vote Case-By-Case on Shareholder Proposals and to Repurchase Shares Directly from Specified Shareholders.

 

ENVIRONMENTAL/SOCIAL

 

Shareholder proposals in the environmental and social categories tend to fall into two categories: those requesting reports or additional disclosure, and those that are more prescriptive such as requests for policies or the company to take action beyond issuing a report. Generally speaking, MAP supports requests for additional disclosure, and we evaluate requests for action beyond that on a case-by-case basis. In both circumstances, MAP relies on its assessment of the financial relevance of the matter.

 

CORPORATE GOVERNANCE

 

Adjourn Meeting – Generally support unless the agenda items are not aligned with shareholders’ best long-term economic interests.

 

Amendment to Charter/Articles/Bylaws – Shareholders should generally have the right to vote on key governance concerns and amendments. When voting MAP considers the stated rationale; the company’s governance profile and history; relevant jurisdictional laws; and situational or contextual circumstances.

 

Exclusive Forum Provisions – MAP generally supports exclusive forum for certain shareholder litigation.

 

IPO Governance - One vote for one share is our preferred structure for public companies.

Other Business – We oppose these proposals since we may not have an opportunity to review and understand those measures and carry out an appropriate review.

 

Poison Pill Plans – Although MAP opposes most plans, we may support plans that include:

 

· Shareholder ratification of the pill and stipulate a sunset provision whereby the pill expires unless it is renewed;
· A reasonable “qualifying offer clause”;
· An all-cash bid for all shares that includes a fairness opinion and evidence of financing does not trigger the pill;
· Where it is protecting tax or economic benefits.

 

81 
 

For shareholder proposals, MAP generally votes to rescind poison pills.

 

Proxy Access – MAP believes that shareholders should be able to nominate directors on the company’s proxy card. MAP generally supports proxy access proposals which allow a shareholder (or group of up to 20 shareholders) holding three percent of a company’s outstanding shares for at least three years the right to nominate the greater of up to two directors or 20% of the board.

 

Reincorporation – MAP generally supports management and prefers to understand the strategic rationale behind the proposal to reincorporate.

 

Greenmail – MAP is supportive of management and shareholder proposals seeking adoption of anti-green mail charters or bylaw amendments.

 

Simple Majority Voting – MAP generally favors a simple majority requirement to pass proposals. MAP supports the reduction or the elimination of supermajority voting, although in situations where there is a substantial or dominant shareholder, supermajority voting may be protective of minority shareholders.

 

Virtual Meetings – Shareholders should be able to participate in annual and special meetings and virtual meetings may facilitate accessibility, inclusiveness, and efficiency. We are concerned however if the technology is used to limit shareholder participation.

 

COMPENSATION

 

Claw Back Proposals – MAP generally favors recoupment from compensation based on faulty financial reporting or deceptive business practices.

 

Management Say-on-Pay – MAP generally supports management proposals seeking advisory votes on executive compensation with closer scrutiny on pay magnitude and performance alignment, internal pay disparity, performance-based equity, and problematic change-in-control and/or severance provisions.

Equity-Based Compensation Plans – MAP generally votes with management on certain equity-based compensation plans depending on a combination of certain plan features and equity grant practices.

 

Incentive Bonus Plans – Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans.

 

Frequency of “Say on Pay” Advisory Resolutions – Generally support annual advisory votes.

82 
 

 

Golden Parachutes – Golden parachutes may encourage management to consider transactions that might be beneficial to shareholders. However, a large potential pay-out presents risk of a sub-optimal sale price. When evaluating a golden parachute plan, we consider whether the triggering event is in the interest of shareholder.

 

Option Exchanges – There may be instances where underwater options create an overhang on a company’s capital structure and a repricing or option exchange may be warranted.

 

Supplemental Executive Retirement Plans – MAP may support shareholder proposals requesting to put supplemental executive retirement plans (“SERP”) benefits to a shareholder vote.

 

BOARD OF DIRECTORS

 

MAP’s starting position is one of support for the Board. However, we may at times determine that the Board is not representing our clients’ interests, and in those cases, we may withhold our support or vote against.

 

Board Diversity – MAP is supportive of diverse boards. On this matter, as with others, we believe in voicing our view via engagement with boards and management teams in addition to our proxy vote. If we determine a company has failed to make sufficient efforts or demonstrate progress towards a more diverse director slate, we may escalate our concerns and vote against key directors, such as the chair of the nominating committee. MAP may also consider supporting shareholder requests for increased reporting on company efforts to diversify the board.

 

Board Independence – The majority of the Board should be comprised of independent Directors. In situations where this is not the case, MAP will vote against the Nominating and Governance Committee of the Board.

 

Board Size – MAP typically defers setting the size of the board to the board. However, boards that are too small or too large may not function efficiently.

 

Contests for Control – Assessed on a case-by-case basis, MAP considers the qualifications of the candidates on both slates, the validity of the concerns identified by the dissident, the viability of the plans from the competing slates, the likelihood that the dissident’s plan will produce the desired impact, and whether the dissident represents the best option for enhancing long-term shareholder value.

 

CEO and Management Succession Planning – MAP supports transparency into the executive succession planning process, including Board responsibility; recognizing

83 
 

appropriate sensitivity, we tend to defer to the Nominating and Governance Committee of the Board.

 

Classified / Staggered Board – MAP believes that directors should be elected annually but may support staggered boards on a case-by-case basis.

 

Cumulative Voting – MAP believes that a majority vote standard is in the best long-term interests of shareholders but tend to defer to management.

 

Director Participation – MAP believes directors must be actively engaged and in attendance for at least 75% of board meetings throughout the year. If director nominees fail to attend board meeting, MAP will vote against the nominee.

 

Director Compensation – Compensation for directors should be structured to attract, retain and align directors’ interests with shareholders. It should be linked with long - term value creation and directors should build share ownership over time.

 

Director Tenure – Tenure is not a factor in our classifying directors.

 

Independent Chair and Separation of CEO/Chair Positions – MAP has a preference for independent chairs or an independent lead director. We take into consideration the following: The scope and rationale of the proposal;

 

· The company's current board leadership structure;
· The company's governance structure and practices;
· Company performance; and
· Any other relevant factors that may be applicable.

 

Key Committee Independence – MAP tends to vote against or withhold votes from non- independent director nominees if they serve on the audit, compensation, or nominating committee or if the company lacks a key board committee so that the full board functions as that committee.

 

Majority Vote Requirements – MAP prefers directors to be elected by a majority of the shares voted.

 

Over Boarding – MAP evaluates the number of boards that a director is on, and would contemplate voting against a director if they had too many roles with other firms. We believe that they will not perform their duties to the best of their ability if they are too stretched. This is evaluated on a case-by-case basis.

Reimbursement of Expenses for Successful Shareholder Campaigns – We generally support shareholder proposals seeking the reimbursement of proxy contest expenses if the contest is well merited in our view.

84 
 

 

Risk Oversight Failure – MAP may vote against directors due to failure to manage environmental, social and governance (ESG) risks.

 

Responsiveness to Shareholders – If MAP believes a board has not been responsive to shareholders, we may vote against the responsible committee or individual director, and if the circumstances merit, the entire board.

 

Shareholder Rights – MAP expects a board to act with integrity and to uphold governance best practices. Where we believe a board has not acted in the best interests of its shareholders, we may vote against the responsible committee or individual director, and if the circumstances merit, the entire board.

 

CORPORATE ACTIONS – MERGERS & ACQUISITIONS

 

Vote case-by-case considering the following features:

 

· The premium relative to the unaffected share price;
· A clear strategic, operational, and / or financial rationale;
· Unanimous board approval and arm’s-length negotiations;
· The fairness opinion of a reputable financial advisor assessing the value of the transaction to shareholders in comparison to recent similar transactions.

 

CONFLICTS OF INTEREST

 

The Adviser is sensitive to conflicts of interest that may arise in the proxy decision-making process and has identified the following potential conflicts of interest:

 

· A principal of the Adviser or any person involved in the proxy decision-making process who currently serves on the company’s Board.
· An immediate family member of a principal of the Adviser or any person involved in the proxy decision-making process who currently serves as a director or executive officer of the company.
· The company is a client of the Adviser (or an affiliate of a client), provided that any client relationship that represents less than 2.5% of the firm’s revenues or less than $75,000 in annual revenues shall be presumed to be immaterial.

 

This list is not intended to be exclusive. All employees of the Adviser are obligated to disclose any potential conflict to the Chief Compliance Officer.

 

If a material conflict is identified, proxies will be voted for that company in the following manner:

 

85 
 
· If our Voting Guidelines indicate a vote “For” or “Against” a specific issue, MAP will vote in accordance with such predetermined guidelines.If the Guidelines do not cover an issue or indicate a “case-by-case” analysis, MAP will either seek the consent of applicable clients or the written recommendation of an independent third party.

 

RECORDKEEPING

 

Members of Compliance, the Operations Department and Investment Team are responsible for maintaining records as indicated below:

 

Compliance

 

· Proxy voting policies and procedures

 

Operations

 

· Proxy statements (provided, however, that the Adviser may rely on the Securities and Exchange Commission’s (the “SEC”) EDGAR system if the company filed its proxy statements via EDGAR or may rely on a third party as long as the third party has provided the Adviser with an undertaking to provide a copy of the proxy statement promptly upon request);
· Records of votes cast;
· Records of client requests for voting information

 

Investment Team

 

· Any records prepared by the Adviser that were material to a proxy voting decision or that memorialized a decision.

 

DISCLOSURE

 

The Adviser will describe these Policies and Procedures in Part 2A of its Form ADV and indicate that these Policies and Procedures are available to clients upon request. The Adviser will also advise clients in Part 2A of its Form ADV how a client may obtain information on how the Adviser voted with respect to that client’s securities. The Adviser will send the initial summary of these Policies and Procedures and the other information described in this Section to existing clients by separate notice.

 

CATALYST/MAP MUTUAL FUNDS

86 
 

 

Copies of all proxies voted must be maintained by fund year in data order for each fund. In addition, details of each vote cast for each fund must be maintained in spreadsheet form and submitted to the Fund Compliance Department annually.

 

INSTITUTIONAL CLIENTS

For those institutional clients that request it, copies of all proxies voted must be maintained in date order. In addition, details of each vote cast for each account must be maintained in spreadsheet form and submitted to the applicable Compliance Officer at requested intervals.

 

87 
 

Appendix E

CIFC Investment Management LLC

Proxy Voting Policy and Procedures

 

 

CIFC Investment Management LLC

Proxy Voting Policy and Procedures

 

Proxy Voting and Class Action Lawsuits

Implementation Date: August 2008

Most Recent Amendment Date: January 2015

______________________________________________________________________________

Background

Rule 206(4)-6 under the Advisers Act requires that each registered investment adviser that exercises proxy voting authority with respect to client securities:

· Adopt and implement written policies and procedures reasonably designed to ensure that the adviser votes client securities in the client’s best interests. Such policies and procedures must address the manner in which the adviser will resolve material conflicts of interest that can arise during the proxy voting process;
· Disclose to clients how they may obtain information from the adviser about how the adviser voted with respect to their securities; and
· Describe to clients the adviser’s proxy voting policies and procedures and, upon request, furnish a copy of the policies and procedures.

Additionally, paragraph (c)(2) of Rule 204-2 imposes additional recordkeeping requirements on investment advisers that execute proxy voting authority, as described in the Maintenance of Books and Records section of this Manual.

The Advisers Act lacks specific guidance regarding an adviser’s duty to direct clients’ participation in class action lawsuits. However, investment advisers may adopt policies and procedures regarding class action lawsuits as a best practice.

Risks

In developing these policies and procedures, CIFC considered numerous risks associated with the proxy voting process. This analysis includes risks such as:

88 
 

 

CIFC has established the following guidelines as an attempt to mitigate these risks.

Policies and Procedures

Proxy Voting

CIFC seeks to vote proxies in the best interests of our Clients in instances where the Company has discretionary authority to vote proxies. However, because CIFC invests primarily in senior secured loans, the Company generally does not receive proxy solicitations. If CIFC is invited to vote with respect to a Client’s Security, the Company will vote in accordance with its fiduciary duty to its Clients.

As a matter of policy, CIFC does not disclose to unaffiliated third parties how it expects to vote on upcoming proxies. Additionally, CIFC does not disclose the way it voted proxies to unaffiliated third parties without a legitimate need to know such information.

Class Action Lawsuits

As a fiduciary, CIFC always seeks to act in Clients’ best interests with good faith, loyalty, and due care. CIFC’s standard advisory contract authorizes the Company to direct Client participation in class action lawsuits. The Company does not anticipate that it will receive many invitations to participate in class action lawsuits because of the types of Investments that are owned by Clients. Nonetheless, CIFC has adopted the following policies and procedures with respect to class action lawsuits.

The Legal department will work with the Investment Analyst most closely associated with the Investment in question when determining whether Clients will (a) participate in a recovery achieved through a class action lawsuit, or (b) opt out of the class action and separately pursue their own remedy. The Legal department will maintain documentation associated with Clients participation in class action lawsuits.

Employees must notify the General Counsel if they are aware of any material conflict of interest associated with Clients’ participation in class action lawsuits. The General Counsel will evaluate any such conflicts and determine an appropriate course of action for CIFC.

CIFC generally does not serve as the lead plaintiff in class action lawsuits because the costs of such participation typically exceed any extra benefits that accrue to lead plaintiffs.

Conflicts of Interest

The CCO is responsible for identifying material conflicts that exist between the Company and its Clients. This process includes a review of the relationship of the Company with the issuer of each Security to determine if there is any relationship between the parties.

89 
 

Monitoring Corporate Actions

The CCO is responsible for monitoring corporate actions and ensuring that proxies are submitted in a timely manner. The relevant Portfolio Manager is responsible for making voting decisions, including the manner and whether to vote the proxy.

Disclosures to Clients and Investors

CIFC includes a description of its policies and procedures regarding proxy voting and class action lawsuits in Item 17 of Part 2A of Form ADV, along with a statement that Clients can contact the CCO to obtain (a) a copy of these policies and procedures and/or (b) information about how CIFC voted with respect to the Client’s Investments.

Any request for information about proxy voting or class action lawsuits should be promptly forwarded to the CCO, who will respond to such requests.

 

 

 

 

 

 

90 
 

Appendix F

 

WYNKOOP LLC

PROXY VOTING POLICIES AND PROCEDURES

 

Pursuant to the recent adoption by the Securities and Exchange Commission (the “Commission”) of Rule 206(4)-6 (17 CFR 275.206(4)-6) and amendments to Rule 204-2 (17 CFR 275.204-2) under the Investment Advisors Act of 1940 (the “Act”), it is a fraudulent, deceptive, or manipulative act, practice or course of business, within the meaning of Section 206(4) of the Act, for an investment advisor to exercise voting authority with respect to client securities, unless (i) the advisor has adopted and implemented written policies and procedures that are reasonably designed to ensure that the advisor votes proxies in the best interests of its clients, (ii) the advisor describes its proxy voting procedures to its clients and provides copies on request, and (iii) the advisor discloses to clients how they may obtain information on how the advisor voted their proxies.

In order to fulfill its responsibilities under the Act, Wynkoop LLC (hereinafter “we” or “our”) has adopted the following policies and procedures for proxy voting with regard to companies in investment portfolios of our clients.

KEY OBJECTIVES

The key objectives of these policies and procedures recognize that a company’s management is entrusted with the day-to-day operations and longer term strategic planning of the company. While “ordinary business matters” are primarily the responsibility of management, these objectives also recognize that the limited partners (“investor(s)”) of each managed investment fund must have final say over how management and directors are performing, and how investor’s rights and ownership interests are handled, especially when matters could have substantial economic implications to the investor.

Therefore, we will pay particular attention to the following matters in exercising our proxy voting responsibilities as a fiduciary for our clients:

Accountability. Each company should have effective means in place to hold those entrusted with running a company’s business accountable for their actions. Management of a company should be accountable to its investors.

Alignment of Management and Investor Interests. Each company should endeavor to align the interests of management with the interests of the company’s investors. For example, we generally believe that compensation should be designed to reward management for doing a good job of creating value for the investors of the company.

Transparency. Promotion of timely disclosure of important information about a company’s business operations and financial performance enables investors to evaluate the performance of a company and to make informed decisions about the purchase and sale of a company’s securities.

DECISION METHODS

 

No set of proxy voting guidelines can anticipate all situations that may arise. In special cases, we may seek insight from our managers and analysts on how a particular proxy proposal may impact the financial prospects of a company, and vote accordingly.

We believe that we invest in companies with strong management. Therefore we will tend to vote proxies consistent with management’s recommendations. However, we will vote contrary to management’s recommendations if we believe those recommendations are not consistent with increasing shareholder value.

SUMMARY OF PROXY VOTING GUIDELINES

 

Election of the Board of Directors

 

We believe that good corporate governance generally starts with a board composed primarily of independent directors, unfettered by significant ties to management, all of whose members are elected annually. We also believe that turnover in board composition promotes independent board action, fresh approaches to governance, and generally has a positive impact on shareholder value. We will generally vote in favor of non-incumbent independent directors.

91 
 

The election of a company’s board of directors is one of the most fundamental rights held by shareholders. Because a classified board structure prevents shareholders from electing a full slate of directors annually, we will generally support efforts to declassify boards or other measures that permit shareholders to remove a majority of directors at any time, and will generally oppose efforts to adopt classified board structures.

Approval of Independent Auditors

We believe that the relationship between a company and its auditors should be limited primarily to the audit engagement, although it may include certain closely related activities that do not raise an appearance of impaired independence.

We will evaluate on a case-by-case basis instances in which the audit firm has a substantial non-audit relationship with a company to determine whether we believe independence has been, or could be, compromised.

Equity-based compensation plans

We believe that appropriately designed equity-based compensation plans, approved by shareholders, can be an effective way to align the interests of shareholders and the interests of directors, management, and employees by providing incentives to increase shareholder value. Conversely, we are opposed to plans that substantially dilute ownership interests in the company, provide participants with excessive awards, or have inherently objectionable structural features.

We will generally support measures intended to increase stock ownership by executives and the use of employee stock purchase plans to increase company stock ownership by employees. These may include:

1.       Requiring senior executives to hold stock in a company.

2.       Requiring stock acquired through option exercise to be held for a certain period of time.

 

These are guidelines, and we consider other factors, such as the nature of the industry and size of the company, when assessing a plan’s impact on ownership interests.

 

 

Corporate Structure

 

We view the exercise of shareholders’ rights, including the rights to act by written consent, to call special meetings and to remove directors, to be fundamental to good corporate governance.

Because classes of common stock with unequal voting rights limit the rights of certain shareholders, we generally believe that shareholders should have voting power equal to their equity interest in the company and should be able to approve or reject changes to a company’s by-laws by a simple majority vote.

We will generally support the ability of shareholders to cumulate their votes for the election of directors.

 

 

92