ck0000768847-20211231
VANECK
FUNDS
STATEMENT
OF ADDITIONAL INFORMATION
Dated
May 1, 2022
EMERGING
MARKETS LEADERS FUND
CLASS
A: ELMAX / CLASS I: ELMIX / CLASS Y: ELMYX / CLASS Z: ELMZX
ENVIRONMENTAL
SUSTAINABILITY FUND
CLASS
A: ENVAX / CLASS I: ENVIX / CLASS Y: ENVYX
CM
COMMODITY INDEX FUND
CLASS
A: CMCAX / CLASS I: COMIX / CLASS Y: CMCYX
EMERGING
MARKETS BOND FUND
CLASS
A: EMBAX / CLASS I: EMBUX / CLASS Y: EMBYX
EMERGING
MARKETS FUND
CLASS
A : GBFAX / CLASS C: EMRCX / CLASS I: EMRIX / CLASS Y: EMRYX/ CLASS Z:
EMRZX
GLOBAL
RESOURCES FUND
CLASS
A : GHAAX / CLASS C: GHACX / CLASS I: GHAIX / CLASS Y: GHAYX
INTERNATIONAL
INVESTORS GOLD FUND
CLASS
A : INIVX / CLASS C: IIGCX / CLASS I: INIIX / CLASS Y: INIYX
VANECK
MORNINGSTAR WIDE MOAT FUND
CLASS
I: MWMIX / CLASS Z: MWMZX
This
statement of additional information (“SAI”) is not a prospectus. It should be
read in conjunction with the prospectuses for VanEck Funds (the “Trust”) dated
May 1, 2022, relating to CM Commodity Index Fund, Emerging Markets Bond Fund,
Emerging Markets Fund, Emerging Markets Leaders Fund, Environmental
Sustainability Fund, Global Resources Fund, International Investors Gold Fund
and VanEck Morningstar Wide Moat Fund; (each, a “Fund” and collectively, the
“Funds”), as each may be revised from time to time (each, a “Prospectus”). The
audited
financial statements of the Funds (except for Emerging Markets Leaders
Fund)
for the fiscal year ended December 31, 2021
are hereby incorporated by reference from the Funds’ Annual Report to
shareholders. A copy of the Prospectuses and Annual and Semi-Annual Reports for
the Trust, relating to the Funds, may be obtained without charge by visiting the
VanEck website at vaneck.com, by calling toll-free 800.826.1115 or by writing to
the Trust or Van Eck Securities Corporation, the Funds’ distributor (the
“Distributor”). The Trust’s and the Distributor’s address is 666 Third Avenue,
9th Floor, New York, New York 10017. Capitalized terms used herein that are not
defined have the same meaning as in the Prospectuses, unless otherwise
noted.
TABLE
OF CONTENTS
STATEMENT
OF ADDITIONAL INFORMATION
MAY
1, 2022
GENERAL
INFORMATION
The
Trust is an open-end management investment company organized as a business trust
under the laws of the Commonwealth of Massachusetts on April 3, 1985. On May 1,
2016, Van Eck Funds changed its name to VanEck Funds. The Trust’s series which
are currently being offered are the following: Emerging Markets Fund, which
offers Class A, Class C, Class I, Class Y and Class Z shares; Global Resources
Fund (formerly, Global Hard Assets Fund prior to May 1, 2021) and International
Investors Gold Fund, each of which offers Class A, Class C, Class I and Class Y
shares; CM Commodity Index Fund, Emerging Markets Bond Fund, and Environmental
Sustainability Fund, each of which offers Class A, Class I and Class Y shares;
VanEck Morningstar Wide Moat Fund which offers Class I and Class Z shares, and
Emerging Markets Leaders Fund which offers Class A, Class I, Class Y and Class Z
shares. The Board of Trustees of the Trust (the “Board”) has authority, without
the necessity of a shareholder vote, to create additional series or funds, each
of which may issue separate classes of shares.
Emerging
Markets Bond Fund, Emerging Markets Leaders Fund, Environmental Sustainability
Fund and International Investors Gold Fund are classified as non-diversified
funds under the Investment Company Act of 1940, as amended (the “1940 Act”). CM
Commodity Index Fund, Emerging Markets Fund, Global Resources Fund and VanEck
Morningstar Wide Moat Fund are classified as diversified funds under the 1940
Act. Van Eck Associates Corporation (“VEAC”) serves as investment adviser to all
the Funds, except for CM Commodity Index Fund. Van Eck Absolute Return Advisers
Corporation (“VEARA” and together with VEAC, each an “Adviser” or the
“Advisers”) serves as investment adviser to CM Commodity Index
Fund.
INVESTMENT
POLICIES AND RISKS
The
following is additional information regarding the investment policies and
strategies used by the Funds in attempting to achieve their respective
objectives, and should be read with the sections of the Funds’ Prospectuses
titled “Summary Information - Principal Investment Strategies”, “Summary
Information - Principal Risks” and “Investment Objectives, Strategies, Policies,
Risks and Other Information”. The Funds, except for VanEck Morningstar Wide Moat
Fund, may take temporary defensive positions in anticipation of or in an attempt
to respond to adverse market, economic, political or other conditions. Such a
position could have the effect of reducing any benefit a Fund may receive from a
market increase. When taking a temporary defensive position, a Fund may invest
all or a substantial portion of its total assets in cash or cash equivalents,
government securities, short-term or medium-term fixed income securities, which
may include, but not be limited to, shares of other mutual funds, U.S. Treasury
bills, commercial paper or repurchase agreements. A Fund may not achieve its
investment objective while it is investing defensively. Each of the Emerging
Markets Bond Fund and VanEck Morningstar Wide Moat Fund may engage in active and
frequent trading of its portfolio securities.
CM
Commodity Index Fund seeks to achieve its investment objective by investing in
instruments that derive their value from the performance of the UBS Bloomberg
Constant Maturity Commodity Total Return Index (the “CMCI”), as described below,
and in bonds, debt securities and other fixed income instruments (“Fixed Income
Instruments”) issued by various U.S. public- or private-sector entities. CM
Commodity Index Fund invests in commodity-linked derivative instruments,
including commodity index-linked notes, swap agreements, commodity futures
contracts and options on futures contracts that provide economic exposure to the
investment returns of the commodities markets, as represented by the CMCI and
its constituents. A derivative is an investment whose value depends on (or is
derived from) that value of an underlying security. Commodities are assets that
have tangible properties, such as oil, metals, and agricultural products. A
commodity-linked derivative is a derivative instrument whose value is linked to
the movement of a commodity, commodity index, commodity option or futures
contract. The value of commodity-linked derivative instruments may be affected
by overall market movements and other factors affecting the value of a
particular industry or commodity, such as weather, disease, embargoes, or
political and regulatory developments.
The
CMCI is a rules-based, composite benchmark index diversified across 29 commodity
components from the following five sectors: energy, precious metals, industrial
metals, agriculture and livestock. The CMCI is comprised of futures contracts
with maturities ranging from three months up to a maximum of about three years
for each commodity, depending on liquidity. The return of the CMCI reflects a
combination of (i) the returns on the futures contracts comprising the CMCI; and
(ii) the fixed-income return that would be earned on a hypothetical portfolio of
13-week U.S. Treasury bills theoretically deposited as full collateral for the
notional exposure of the hypothetical positions in the futures contracts
comprising the CMCI. The selection and relative weightings of the components of
the CMCI are designed to reflect the economic significance and market liquidity
of each commodity, as determined based on global economic data, consumption
data, commodity futures prices, open interest and volume data. The maturity of
each commodity component in the CMCI remains fixed at a predefined time interval
from the current date at all times by means of a continuous rolling process, in
which a weighted percentage of shorter dated contracts for each commodity are
swapped for longer dated contracts on a daily basis. The CMCI is rebalanced
monthly
back to the target weightings of the commodity components of the CMCI and the
target weightings of all commodity components are revised once per year. A more
detailed description of the CMCI is contained in the section of this SAI
entitled “Additional Information About the CMCI.”
CM
Commodity Index Fund seeks to track the returns of the CMCI by entering into
swap contracts and commodity index-linked notes with one or more counterparties,
which contracts and notes will rise and fall in value in response to changes in
the value of the CMCI. As of the date of this SAI, UBS was the only available
counterparty with which CM Commodity Index Fund may enter into such swap
contracts on the CMCI. CM Commodity Index Fund may enter into such contracts and
notes directly or indirectly through a wholly-owned subsidiary of the Fund (the
“CMCI Subsidiary”). Commodity index-linked notes are derivative debt instruments
with principal and/or coupon payments linked to the performance of commodity
indices (such as the CMCI). These commodity index-linked notes are sometimes
referred to as “structured notes” because the terms of these notes may be
structured by the issuer and the purchaser of the note. CM Commodity Index Fund
may also seek to gain exposure to the individual commodity components of the
CMCI by investing in futures contracts that comprise the CMCI, either directly
or indirectly through the Subsidiary.
Under
normal conditions, the VanEck Morningstar Wide Moat Fund invests at least 80% of
its net assets in securities that comprise the Morningstar® Wide Moat Focus
IndexSM
(the “Wide Moat Index”). The Wide Moat Index is comprised of securities issued
by companies that Morningstar, Inc. (“Morningstar”) determines to have
sustainable competitive advantages based on a proprietary methodology that
considers quantitative and qualitative factors (“wide moat companies”). Wide
moat companies are selected from the universe of companies represented in the
Morningstar® US Market IndexSM,
a broad market index representing 97% of U.S. market capitalization. The Wide
Moat Index targets a select group of wide moat companies: those that according
to Morningstar’s equity research team are attractively priced as of each Wide
Moat Index review. Out of the companies in the Morningstar US Market Index that
Morningstar determines are wide moat companies, Morningstar selects companies to
be included in Index as determined by the ratio of Morningstar’s estimate of
fair value of the issuer’s common stock to the price. Morningstar’s equity
research fair value estimates are calculated using a standardized, proprietary
valuation model. Wide moat companies may include medium-capitalization
companies. VanEck Morningstar Wide Moat Fund’s 80% investment policy is
non-fundamental and may be changed without shareholder approval upon 60 days’
prior written notice to shareholders. In seeking to achieve its investment
objective, VanEck Morningstar Wide Moat Fund may also invest in VanEck
Morningstar Wide Moat ETF (the “underlying fund”), an affiliated fund, which
also seeks to replicate the price and yield performance of the Wide Moat Index,
and such investment will count towards the VanEck Morningstar Wide Moat Fund’s
80% investment policy. VanEck Morningstar Wide Moat Fund, using a “passive” or
indexing investment approach, attempts to replicate the price and yield
performance of the Index by investing in a portfolio of securities that
generally replicate the performance of the Wide Moat Index.
ASSET-BACKED
SECURITIES
The
Funds may invest in asset-backed securities. Asset-backed securities, directly
or indirectly, represent interests in, or are secured by and payable from, pools
of consumer loans (generally unrelated to mortgage loans) and most often are
structured as pass-through securities. Interest and principal payments
ultimately depend on payment of the underlying loans, although the securities
may be supported by letters of credit or other credit enhancements. The value of
asset-backed securities may also depend on the creditworthiness of the servicing
agent for the loan pool, the originator of the loans, or the financial
institution providing the credit enhancement.
Asset-backed
securities are subject to certain risks. These risks generally arise out of the
security interest in the assets collateralizing the security. For example,
credit card receivables are generally unsecured and the debtors are entitled to
a number of protections from the state and through federal consumer laws, many
of which give the debtor the right to offset certain amounts of credit card
debts and thereby reducing the amounts due.
BELOW
INVESTMENT GRADE SECURITIES
The
Funds may invest in below investment grade debt securities. Investments in
securities rated below investment grade that are eligible for purchase by a Fund
are described as “speculative” by Moody’s, S&P and Fitch, Inc. Investments
in lower rated corporate debt securities (“high yield securities” or “junk
bonds”) generally provide greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but they also
typically entail greater price volatility and principal and income
risk.
These
high yield securities are regarded as predominantly speculative with respect to
the issuer’s continuing ability to meet principal and interest payments.
Analysis of the creditworthiness of issuers of debt securities that are high
yield may be more complex than for issuers of higher quality debt
securities.
High
yield securities may be more susceptible to real or perceived adverse economic
and competitive industry conditions than investment grade securities. The prices
of high yield securities have been found to be less sensitive to interest-rate
changes than higher-rated investments, but more sensitive to adverse economic
downturns or individual corporate
developments.
A projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If an issuer of
high yield securities defaults, in addition to risking payment of all or a
portion of interest and principal, a Fund by investing in such securities may
incur additional expenses to seek recovery. In the case of high yield securities
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to be
more volatile than securities which pay interest periodically and in
cash.
The
secondary market on which high yield securities are traded may be less liquid
than the market for higher grade securities. Less liquidity in the secondary
trading market could adversely affect the price at which a Fund could sell a
high yield security, and could adversely affect the daily net asset value of the
shares. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly-traded market. When secondary markets for
high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data
available.
BORROWING;
LEVERAGE
Borrowing
to invest more is called “leverage.” A Fund may borrow from banks provided that
the amount of borrowing is no more than one third of the net assets of the Fund
plus the amount of the borrowings. A Fund is required to be able to restore
borrowing to its permitted level within three days, if it should increase to
more than one-third of its net assets as stated above. Methods that may be used
to restore borrowings in this context include selling securities, even if the
sale hurts a Fund’s investment performance. Leverage exaggerates the effect of
rises or falls in prices of securities bought with borrowed money. Borrowing
also costs money, including fees and interest. The Funds expect to borrow only
through negotiated loan agreements with commercial banks or other institutional
lenders.
COLLATERALIZED
MORTGAGE OBLIGATIONS
The
Funds may invest in collateralized mortgage obligations (“CMOs”). CMOs are
fixed-income securities which are collateralized by pools of mortgage loans or
mortgage-related securities created by commercial banks, savings and loan
institutions, private mortgage insurance companies and mortgage bankers. In
effect, CMOs “pass through” the monthly payments made by individual borrowers on
their mortgage loans. Prepayments of the mortgages included in the mortgage pool
may influence the yield of the CMO. In addition, prepayments usually increase
when interest rates are decreasing, thereby decreasing the life of the pool. As
a result, reinvestment of prepayments may be at a lower rate than that on the
original CMO. There are different classes of CMOs, and certain classes have
priority over others with respect to prepayment of the mortgages. Timely payment
of interest and principal (but not the market value) of these pools is supported
by various forms of insurance or guarantees. Each Fund may buy CMOs without
insurance or guarantees if, in the opinion of its Adviser, the pooler is
creditworthy or if rated investment grade. In the event that any CMOs are
determined to be investment companies, the Funds will be subject to certain
limitations under the 1940 Act.
COMMERCIAL
PAPER
The
Funds may invest in commercial paper that is indexed to certain specific foreign
currency exchange rates which may entail the risk of loss of principal. The
terms of such commercial paper typically provide that its principal amount is
adjusted upwards or downwards (but not below zero) at maturity to reflect
changes in the exchange rate between two currencies while the obligation is
outstanding. The Funds purchase such commercial paper with the currency in which
it is denominated and, at maturity, will typically receive interest and
principal payments thereon in that currency, but the amount or principal payable
by the issuer at maturity will change in proportion to the change (if any) in
the exchange rate between two specified currencies between the date the
instrument is issued and the date the instrument matures.
The
Funds may invest in commercial paper with the principal amount indexed to the
difference, up or down, in value between two foreign currencies. The Funds
segregate asset accounts with an equivalent amount of cash, U.S. government
securities or other highly liquid securities equal in value to this commercial
paper.
COMMODITIES
AND COMMODITY-LINKED DERIVATIVES
Exposure
to the commodities markets may subject the Funds to greater volatility than
investments in traditional securities. The commodities markets may fluctuate
widely based on a variety of factors including changes in overall market
movements, political and economic events and policies, war, disease, acts of
terrorism, natural disasters, and changes in interest rates or inflation rates.
Prices of various commodities may also be affected by factors such as drought,
floods, weather, embargoes, tariffs and other regulatory developments. The
prices of commodities can also fluctuate widely due to supply and demand
disruptions in major producing or consuming regions. Certain commodities may be
produced in a limited number of countries and may be controlled by a small
number of producers. As a result, political, economic and supply related events
in such countries could have a disproportionate impact on the prices of such
commodities.
Commodity-Linked
“Structured” Securities.
Because the value of a commodity-linked derivative instrument typically is based
upon the price movements of a physical commodity, the value of the
commodity-linked derivative instrument may be affected by changes in overall
market movements, commodity index volatility, changes in interest rates, or
factors affecting a particular industry. The value of these securities typically
rises or falls in response to changes in the underlying commodity or related
index of investment.
Structured
Notes.
Structured notes expose CM Commodity Index Fund economically to movements in
commodity prices. The performance of a structured note is determined by the
price movement of the commodity underlying the note. A liquid secondary market
may not exist for structured notes, and there can be no assurance that one will
develop. These notes are often leveraged, increasing the volatility of each
note’s market value relative to changes in the underlying commodity, commodity
futures contract or commodity index.
CONCENTRATION
To
the extent that the Wide Moat Index is concentrated in a particular sector or
sectors or industry or group of industries, VanEck Morningstar Wide Moat Fund
will be subject to the risk that economic, political or other conditions that
have a negative effect on that sector or industry may negatively impact the Fund
to a greater extent than if the Fund’s assets were invested in a wider variety
of sectors or industries.
CONVERTIBLE
SECURITIES
The
Funds may invest in securities that are convertible into common stock or other
securities of the same or a different issuer or into cash within a particular
period of time at a specified price or formula. Convertible securities are
generally fixed income securities (but may include preferred stock) and
generally rank senior to common stocks in a corporation’s capital structure and,
therefore, entail less risk than the corporation’s common stock. The value of a
convertible security is a function of its “investment value” (its value as if it
did not have a conversion privilege), and its “conversion value” (the security’s
worth if it were to be exchanged for the underlying security, at market value,
pursuant to its conversion privilege).
To
the extent that a convertible security’s investment value is greater than its
conversion value, its price will generally be primarily a reflection of such
investment value and its price will be likely to increase when interest rates
fall and decrease when interest rates rise, as with a fixed-income security (the
credit standing of the issuer and other factors may also have an effect on the
convertible security’s value). If the conversion value exceeds the investment
value, the price of the convertible security will generally rise above its
investment value and, in addition, will generally sell at some premium over its
conversion value. (This premium represents the price investors are willing to
pay for the privilege of purchasing a fixed-income security with a possibility
of capital appreciation due to the conversion privilege.) At such times, the
price of the convertible security will tend to fluctuate directly with the price
of the underlying equity security. Convertible securities may be purchased by
the Funds at varying price levels above their investment values and/or their
conversion values in keeping with the Funds’ objectives.
CREDIT
Credit
risk is the risk that the issuer or guarantor of a debt security or the
counterparty to an over-the-counter (“OTC”) contract (including many
derivatives) will be unable or unwilling to make timely principal, interest or
settlement payments or otherwise honor its obligations. The Funds invest in debt
securities that are subject to varying degrees of risk that the issuers of the
securities will have their credit ratings downgraded or will default,
potentially reducing the value of the securities. A Fund may enter into
financial transactions that involve a limited number of counterparties, which
may increase the Fund’s exposure to credit risk. The Fund does not specifically
limit its credit risk with respect to any single counterparty. Further, there is
a risk that no suitable counterparties will be willing to enter into, or
continue to enter into, transactions with the Fund and, as a result, the Fund
may not be able to achieve its investment objective.
CURRENCY
FORWARDS
A
currency forward transaction is a contract to buy or sell a specified quantity
of currency at a specified date in the future at a specified price which may be
any fixed number of days from the date of the contract agreed upon by the
parties. Currency forward contracts may be used to increase or reduce exposure
to currency price movements.
The
use of currency forward transactions involves certain risks. For example, if the
counterparty under the contract defaults on its obligation to make payments due
from it as a result of its bankruptcy or otherwise, a Fund may lose such
payments altogether or collect only a portion thereof, which collection could
involve costs or delays.
CURRENCY
MANAGEMENT STRATEGIES
Currency
management strategies are generally used in an attempt to reduce the risk and
impact of adverse currency movements to protect the value of, or seek to
mitigate the currency exposure associated with, an investment (including, for
example, mitigating the exposure to the Euro that may be embedded in the Polish
zloty). Currency management strategies, including currency forward contracts
(described above) and cross-hedging, may substantially change a Fund’s exposure
to currency exchange rates and could result in losses to the Fund if currencies
do not perform as an Adviser expects. In addition, currency management
strategies, to the extent that such strategies reduce a Fund’s exposure to
currency risks, may also reduce the Fund’s ability to benefit from favorable
changes in currency exchange rates. There is no assurance that an Adviser’s use
of currency management strategies will benefit a Fund or that they will be, or
can be, used at appropriate times. Furthermore, there may not be a perfect
correlation between the amount of exposure to a particular currency and the
amount of securities in the portfolio denominated in that currency or exposed to
that currency. Currency markets are generally less regulated than securities
markets. Derivatives transactions, especially currency forward contracts,
currency related futures contracts and swap agreements, may involve significant
amounts of currency management strategies risk. The Emerging Markets Bond Fund,
which may utilize these types of instruments to a significant extent, will be
especially subject to currency management strategies risk.
CYBER
SECURITY
The
Funds and their service providers are susceptible to cyber security risks that
include, among other things, theft, unauthorized monitoring, release, misuse,
loss, destruction or corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems; compromises
to networks or devices that the Funds and their service providers use to service
the Funds’ operations; and operational disruption or failures in the physical
infrastructure or operating systems that support the Funds and their service
providers. Cyber attacks against or security breakdowns of the Funds or their
service providers may adversely impact the Funds and their shareholders,
potentially resulting in, among other things, financial losses; the inability of
Fund shareholders to transact business and the Funds to process transactions;
the inability to calculate the Funds’ NAV; violations of applicable privacy and
other laws; regulatory fines, penalties, reputational damage, reimbursement or
other compensation costs; and/or additional compliance costs. The Funds may
incur additional costs for cyber security risk management and remediation
purposes. In addition, cyber security risks may also impact issuers of
securities in which the Funds invest, which may cause the Funds’ investments in
such issuers to lose value. There can be no assurance that the Funds or their
service providers will not suffer losses relating to cyber attacks or other
information security breaches in the future.
DEBT
SECURITIES
The
Funds may invest in debt securities. The market value of debt securities
generally varies in response to changes in interest rates and the financial
condition of each issuer and the value of a global resource if linked to the
value of a global resource. Debt securities with similar maturities may have
different yields, depending upon several factors, including the relative
financial condition of the issuers. Investment grade means a rating of Baa3 or
better by Moody’s or BBB- or better by S&P, or of comparable quality in the
judgment of a Fund’s Adviser or if no rating has been given by either service.
Many securities of foreign issuers are not rated by these services. Therefore,
the selection of such issuers depends to a large extent on the credit analysis
performed by an Adviser. During periods of declining interest rates, the value
of debt securities generally increases. Conversely, during periods of rising
interest rates, the value of such securities generally declines. These changes
in market value will be reflected in a Fund’s net asset value. Debt securities
with similar maturities may have different yields, depending upon several
factors, including the relative financial condition of the issuers. For example,
higher yields are generally available from securities in the lower rating
categories of S&P or Moody’s. However, the values of lower-rated securities
generally fluctuate more than those of high-grade securities. Many securities of
foreign issuers are not rated by these services. Therefore the selection of such
issuers depends to a large extent on the credit analysis performed by an
Adviser.
New
issues of certain debt securities are often offered on a when-issued basis. That
is, the payment obligation and the interest rate are fixed at the time the buyer
enters into the commitment, but delivery and payment for the securities normally
take place after the date of the commitment to purchase. The value of
when-issued securities may vary prior to and after delivery depending on market
conditions and changes in interest rate levels. However, the Funds do not accrue
any income on these securities prior to delivery. The Funds may also invest in
low rated or unrated debt securities. Low rated debt securities present a
significantly greater risk of default than do higher rated securities, in times
of poor business or economic conditions, the Funds may lose interest and/or
principal on such securities.
The
Funds may also invest in various money market securities for cash management
purposes or when assuming a temporary defensive position. Money market
securities may include commercial paper, bankers’ acceptances, bank obligations,
corporate debt securities, certificates of deposit, U.S. government securities
and obligations of savings institutions.
DEPOSITARY
RECEIPTS
The
Funds may invest in Depositary Receipts, which represent an ownership interest
in securities of foreign companies (an “underlying issuer”) that are deposited
with a depositary. Depositary Receipts are not necessarily denominated in the
same currency as the underlying securities. Depositary Receipts include American
Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”) and other
types of Depositary Receipts (which, together with ADRs and GDRs, are
hereinafter collectively referred to as “Depositary Receipts”). ADRs are
dollar-denominated Depositary Receipts typically issued by a U.S. financial
institution which evidence an ownership interest in a security or pool of
securities issued by a foreign issuer. ADRs are listed and traded in the United
States. GDRs and other types of Depositary Receipts are typically issued by
foreign banks or trust companies, although they also may be issued by U.S.
financial institutions, and evidence ownership interests in a security or pool
of securities issued by either a foreign or a U.S. corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities market and Depositary Receipts in bearer form are designed for use in
securities markets outside the United States.
Depositary
Receipts may be “sponsored” or “unsponsored.” Sponsored Depositary Receipts are
established jointly by a depositary and the underlying issuer, whereas
unsponsored Depositary Receipts may be established by a depositary without
participation by the underlying issuer. Holders of unsponsored Depositary
Receipts generally bear all the costs associated with establishing unsponsored
Depositary Receipts. In addition, the issuers of the securities underlying
unsponsored Depository Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the Depositary Receipts.
DERIVATIVES
The
Funds may also use derivatives, such as futures contracts, options, forward
contracts and swaps as part of various investment techniques and strategies,
such as creating non-speculative “synthetic” positions (covered by segregation
of liquid assets) or implementing “cross-hedging” strategies. A “synthetic”
position is the duplication of a cash market transaction. “Cross-hedging”
involves the use of one currency to hedge against the decline in the value of
another currency. The use of such instruments as described herein involves
several risks. First, there can be no assurance that the prices of such
instruments and the hedge security or the cash market position will move as
anticipated. If prices do not move as anticipated, a Fund may incur a loss on
its investment, may not achieve the hedging protection it anticipated and/or may
incur a loss greater than if it had entered into a cash market position. Second,
investments in such instruments may reduce the gains which would otherwise be
realized from the sale of the underlying securities or assets which are being
hedged. Third, positions in such instruments can be closed out only on an
exchange that provides a market for those instruments. There can be no assurance
that such a market will exist for a particular derivative. If the Fund cannot
close out an exchange traded derivative which it holds, it may have to perform
its contract obligation or exercise its option to realize any profit and may
incur transaction cost on the sale of the underlying assets. In addition, the
use of derivative instruments involves the risk that a loss may be sustained as
a result of the failure of the counterparty to the derivatives contract to make
required payments or otherwise comply with the contract’s terms.
When
the Funds intend to acquire securities (or gold bullion or coins as the case may
be) for their portfolio, they may use call derivatives as a means of fixing the
price of the security (or gold) they intend to purchase at the exercise price or
contract price depending on the derivative. An increase in the acquisition cost
may be offset, in whole or part, by a gain on the derivative. Options and
futures contracts requiring delivery of a security may also be useful to the
Funds in purchasing a large block of securities that would be more difficult to
acquire by direct market purchases. If the Funds hold a call option rather than
the underlying security itself, the Funds are partially protected from any
unexpected decline in the market price of the underlying security and in such
event could allow the call option to expire, incurring a loss only to the extent
of the premium paid for the option. Using a futures contract would not offer
such partial protection against market declines and the Funds may experience a
loss as if they had owned the underlying security.
In
addition, the Funds may invest in Participation Notes or P-Notes which are
issued by banks or broker-dealers and are designed to offer a return linked to
the performance of a particular underlying equity security or market. P-Notes
can have the characteristics or take the form of various instruments, including,
but not limited to, certificates or warrants. The holder of a P-Note that is
linked to a particular underlying security is entitled to receive any dividends
paid in connection with the underlying security. However, the holder of a P-Note
generally does not receive voting rights as it would if it directly owned the
underlying security. P-Notes constitute direct, general and unsecured
contractual obligations of the banks or broker-dealers that issue them, which
therefore subject a Fund to counterparty risk, as discussed below. Investments
in P-Notes involve certain risks in addition to those associated with a direct
investment in the underlying foreign companies or foreign securities markets
whose return they seek to replicate. For instance, there can be no assurance
that the trading price of a P-Note will equal the underlying value of the
foreign company or foreign securities market that it seeks to replicate. As the
purchaser of a P-Note, a Fund is relying on the creditworthiness of the
counterparty issuing the P-Note and has no rights under a P-Note against the
issuer of the underlying security. Therefore, if such counterparty were to
become insolvent, a Fund would lose its investment.
The
risk that a Fund may lose its investments due to the insolvency of a single
counterparty may be amplified to the extent the Fund purchases P-Notes issued by
one issuer or a small number of issuers. P-Notes also include transaction costs
in addition to those applicable to a direct investment in securities. In
addition, the use of P-Notes by VanEck Morningstar Wide Moat Fund may cause the
Fund’s performance to deviate from the performance of the portion of the Wide
Moat Index to which the Fund is gaining exposure through the use of
P-Notes.
Due
to liquidity and transfer restrictions, the secondary markets on which P-Notes
are traded may be less liquid than the markets for other securities, which may
lead to the absence of readily available market quotations for securities in a
Fund’s portfolio. The ability of a Fund to value its securities becomes more
difficult and the judgment in the application of fair value procedures may play
a greater role in the valuation of a Fund’s securities due to reduced
availability of reliable objective pricing data. Consequently, while such
determinations will be made in good faith, it may nevertheless be more difficult
for a Fund to accurately assign a daily value to such securities.
On
October 28, 2020, the SEC adopted new regulations governing the use of
derivatives by registered investment companies. The Funds will be required to
implement and comply with Rule 18f-4 by August 19, 2022. Rule 18f-4 will impose
limits on the amount of derivatives a fund can enter into, eliminate the asset
segregation framework currently used by funds to comply with Section 18 of the
1940 Act, treat derivatives as senior securities so that a failure to comply
with the limits would result in a statutory violation and require funds whose
use of derivatives is more than a limited specified exposure amount to establish
and maintain a comprehensive derivatives risk management program and appoint a
derivatives risk manager.
DIRECT
INVESTMENTS
The
Funds, except CM Commodity Index Fund, Emerging Markets Bond Fund and VanEck
Morningstar Wide Moat Fund, may not invest more than 10% of their total assets
in direct investments. Direct investments include (i) the private purchase from
an enterprise of an equity interest in the enterprise, and (ii) the purchase of
such an equity interest in an enterprise from an investor in the enterprise. In
each case, a Fund may, at the time of making an investment, enter into a
shareholder or similar agreement with the enterprise and one or more other
holders of equity interests in the enterprise.
Certain
of the Funds’ direct investments may include investments in smaller, less
seasoned companies. These companies may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group. In
some cases, the Funds’ direct investments may fund new start-up operations for
an enterprise. With respect to Emerging Markets Fund and Emerging Markets
Leaders Fund, such direct investments may be made in entities that are
reasonably expected in the foreseeable future to become growth companies, either
by expanding current operations or establishing significant
operations.
Direct
investments may involve a high degree of business and financial risk that can
result in substantial losses. Because of the absence of any public trading
market for these investments, the Funds may take longer to liquidate these
positions than would be the case for publicly traded securities. Although these
securities may be resold in privately negotiated transactions, the prices on
these sales could be less than those originally paid by the Funds. Furthermore,
issuers whose securities are not publicly traded may not be subject to public
disclosure and other investor protection requirements applicable to publicly
traded securities. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being resold, the Funds may
be required to bear the expense of the registration. Direct investments are
generally considered illiquid and will be aggregated with other illiquid
investments for purposes of the limitation on illiquid investments. Direct
investments can be difficult to price. The pricing of direct investments may not
be reflective of the price at which these assets could be
liquidated.
EQUITY
SECURITIES
The
Funds may invest in equity securities. Equity securities, such as common stock,
represent an ownership interest, or the right to acquire an ownership interest,
in an issuer.
Common
stock generally takes the form of shares in a corporation. The value of a
company’s stock may fall as a result of factors directly relating to that
company, such as decisions made by its management or lower demand for the
company’s products or services. A stock’s value also may fall because of factors
affecting not just the company, but also companies in the same industry or in a
number of different industries, such as increases in production costs. The value
of a company’s stock also may be affected by changes in financial markets that
are relatively unrelated to the company or its industry, such as changes in
interest rates or currency exchange rates. In addition, a company’s stock
generally pays dividends only after the company invests in its own business and
makes required payments to holders of its bonds, other debt and preferred stock.
For this reason, the value of a company’s stock usually reacts more strongly
than its bonds, other debt and preferred stock to actual or perceived changes in
the company’s financial condition or prospects. Stocks of smaller companies may
be more vulnerable to adverse developments than those of larger companies.
Stocks of companies that the portfolio manager believes are fast-growing may
trade at a higher multiple of current earnings than other stocks. The value of
such stocks may be more sensitive to changes in current or expected earnings
than the values of other stocks.
Different
types of equity securities provide different voting and dividend rights and
priority in the event of the bankruptcy and/or insolvency of the issuer. In
addition to common stock, equity securities may include preferred stock,
convertible securities and warrants, which are discussed elsewhere in the
Prospectus and this Statement of Additional Information. Equity securities other
than common stock are subject to many of the same risks as common stock,
although possibly to different degrees.
ESG
considerations, may be utilized as a component of a Fund’s investment process to
implement its investment strategy in pursuit of its investment objective. ESG
factors may be incorporated to evaluate an issuer, as part of risk analysis,
opportunity analysis, or in other manners. ESG factors may vary across types of
investments and issuers, and not every ESG factor may be identified or
evaluated. The incorporation of ESG factors may affect a Fund’s exposure to
certain issuers or industries and may not work as intended. A Fund may
underperform other funds that do not assess an issuer’s ESG factors as part of
the investment process or that use a different methodology to identify and/or
incorporate ESG factors. Because ESG considerations may be used as one part of
an overall investment process, a Fund may still invest in securities of issuers
that are not considered ESG-focused or that may be viewed as having a high ESG
risk profile. As investors can differ in their views regarding ESG factors, a
Fund may invest in issuers that do not reflect the views with respect to ESG of
any particular investor. Information used by a Fund to evaluate such factors,
including information from reliance on third-party research and/or proprietary
research, may not be readily available, complete or accurate, and may vary
across providers and issuers as
ESG
is not a uniformly defined characteristic, which could negatively impact a
Fund’s ability to accurately assess an issuer, which could negatively impact a
Fund’s performance. There is no guarantee that the evaluation of ESG
considerations will be additive to a Fund’s performance.
FOREIGN
SECURITIES
Foreign
securities include securities issued by a foreign government, quasi-government
or corporate entity, traded in foreign currencies or issued by companies with
most of their business interests in foreign countries. Investors should
recognize that investing in foreign securities involves certain special
considerations that are not typically associated with investing in United States
securities. Since investments in foreign companies frequently involve currencies
of foreign countries, and since the Funds may hold securities and funds in
foreign currencies, the Funds may be affected favorably or unfavorably by
changes in currency rates and in exchange control regulations, if any, and may
incur costs in connection with conversions between various currencies. Most
foreign stock markets, while growing in volume of trading activity, have less
volume than the New York Stock Exchange (“NYSE”), and securities of some foreign
companies may be less liquid and more volatile than securities of comparable
domestic companies. Similarly, volume and liquidity in most foreign bond markets
may be less than in the United States, and at times volatility of price can be
greater than in the United States. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on United States
exchanges. There is generally less government supervision and regulation of
securities exchanges, brokers and listed companies in foreign countries than in
the United States. In addition, with respect to certain foreign countries, there
is the possibility of exchange control restrictions, expropriation or
confiscatory taxation, political, economic or social instability, which could
affect investments in those countries. Foreign securities such as those
purchased by the Funds may be subject to foreign government taxes, higher
custodian fees, higher brokerage commissions and dividend collection fees which
could reduce the yield on such securities.
Trading
in futures contracts traded on foreign commodity exchanges may be subject to the
same or similar risks as trading in foreign securities.
FOREIGN
SECURITIES - EMERGING MARKET SECURITIES
The
Funds, except for VanEck Morningstar Wide Moat Fund, may have a substantial
portion of their assets invested in emerging markets. A Fund’s Adviser has broad
discretion to identify countries that it considers to qualify as emerging
markets. Each Fund’s Adviser selects emerging market countries and currencies
that the Fund will invest in based on the Adviser’s evaluation of economic
fundamentals, legal structure, political developments and other specific factors
the Adviser believes to be relevant. An instrument may qualify as an emerging
market debt security if it is either (i) issued by an emerging market
government, quasi-government or corporate entity (regardless of the currency in
which it is denominated) or (ii) denominated in the currency of an emerging
market country (regardless of the location of the issuer).
Investing
in the equity and fixed income markets of emerging market countries involves
exposure to potentially unstable governments, the risk of nationalization of
businesses, restrictions on foreign ownership, prohibitions on repatriation of
assets and a system of laws that may offer less protection of property rights.
Emerging market economies may be based on only a few industries, may be highly
vulnerable to changes in local and global trade conditions, and may suffer from
extreme and volatile debt burdens or inflation rates.
Additionally,
the government in an emerging market country may restrict or control to varying
degrees the ability of foreign investors to invest in securities of issuers
located or operating in such emerging market countries. These restrictions
and/or controls may at times limit or prevent foreign investment in securities
of issuers located or operating in emerging market countries. In addition, a
Fund may not be able to buy or sell securities or receive full value for such
securities. Moreover,
certain
emerging market countries may require governmental approval or special licenses
prior to investments by foreign investors and may limit the amount of
investments by foreign investors in a particular industry and/or issuer; may
limit such foreign investment to a certain class of securities of an issuer that
may have less advantageous rights than the classes available for purchase by
domiciliaries of such emerging market countries; and/or may impose additional
taxes on foreign investors. A delay in obtaining a required government approval
or a license would delay investments in those emerging market countries, and, as
a result, a Fund may not be able to invest in certain securities while approval
is pending. The government of certain emerging market countries may also
withdraw or decline to renew a license that enables a Fund to invest in such
country. These factors make investing in issuers located or operating in
emerging market countries significantly riskier than investing in issuers
located or operating in more developed countries, and any one of them could
cause a decline in the value of a Fund’s shares.
Additionally,
investments in issuers located in certain emerging market countries may be
subject to a greater degree of risk associated with governmental approval in
connection with the repatriation of investment income, capital or the proceeds
of sales of securities by foreign investors. Moreover, there is the risk that if
the balance of payments in an emerging market country declines, the government
of such country may impose temporary restrictions on foreign capital
remittances. Consequently, a Fund could be adversely affected by delays in, or a
refusal to grant, required governmental approval for repatriation of capital, as
well as by the application to the Fund of any restrictions on investments.
Furthermore, investments in emerging market countries may require a Fund to
adopt special procedures, seek local government approvals or take other actions,
each of which may involve additional costs to a Fund.
The
securities markets in emerging markets are substantially smaller, less liquid
and more volatile than the major securities markets in the United States. A high
proportion of the shares of many issuers may be held by a limited number of
persons and financial institutions, which may limit the number of shares
available for investment by the portfolio. Similarly, volume and liquidity in
the bond markets in Asia, Eastern and Central Europe and other emerging markets
are less than in the United States and, at times, price volatility can be
greater than in the United States. A limited number of issuers in Asian and
emerging market securities markets may represent a disproportionately large
percentage of market capitalization and trading value. The limited liquidity of
securities markets in these regions may also affect a Fund’s ability to acquire
or dispose of securities at the price and time it wishes to do so. Accordingly,
during periods of rising securities prices in the more illiquid regions’
securities markets, a Fund’s ability to participate fully in such price
increases may be limited by its investment policy of investing not more than 15%
of its net assets in illiquid investments. Conversely, the inability of a Fund
to dispose fully and promptly of positions in declining markets may cause such
Fund’s net asset values to decline as the values of the unsold positions are
marked to lower prices. In addition, these securities markets are susceptible to
being influenced by large investors trading significant blocks of securities.
Also, stockbrokers and other intermediaries in emerging markets may not perform
in the same way as their counterparts in the United States and other more
developed securities markets. The prices at which a Fund may acquire investments
may be affected by trading by persons with material non-public information and
by securities transactions by brokers in anticipation of transactions by the
Fund in particular securities.
The
Funds may invest in Latin American, Asian, Eurasian and other countries with
emerging economies or securities markets. Political and economic structures in
many such countries may be undergoing significant evolution and rapid
development, and such countries may lack the social, political and economic
stability characteristic of the United States. Certain such countries have in
the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result, the
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. In addition, unanticipated political or social
developments may affect the value of the Fund’s investments in those countries
and the availability to the Fund of additional investments in those countries.
Emerging market countries may have different accounting, auditing and financial
reporting standards and may employ other regulatory practices and requirements
as compared to more developed markets.
The
Russian, Eastern and Central European, Chinese and Taiwanese stock markets are
undergoing a period of growth and change which may result in trading volatility
and difficulties in the settlement and recording of transactions, and in
interpreting and applying the relevant law and regulations.
Certain
Risks of Investing in Asia-Pacific Countries.
In addition to the risks of foreign investing and the risks of investing in
developing markets, the developing market Asia-Pacific countries in which a Fund
may invest are subject to certain additional or specific risks. A Fund may make
substantial investments in Asia-Pacific countries. In many of these markets,
there is a high concentration of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as well as
a high concentration of investors and financial intermediaries. Many of these
markets also may be affected by developments with respect to more established
markets in the region such as in Japan and Hong Kong. Brokers in developing
market Asia-Pacific countries typically are fewer in number and less well
capitalized than brokers in the United States. These factors, combined with the
U.S. regulatory requirements for open-end investment companies, result in
potentially fewer investment opportunities for the Fund and may have an adverse
impact on the investment performance of a Fund.
Many
of the developing market Asia-Pacific countries may be subject to a greater
degree of economic, political and social instability than is the case in the
United States and Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and (v) ethnic, religious and
racial disaffection. Public health crises or major health-related developments
may have a substantial impact on the economy of certain Asian-Pacific countries.
Outbreaks of contagious viruses and diseases, including the novel viruses
commonly known as SARS, MERS, and Covid-19 (Coronavirus), may reduce business
activity or disrupt market activity, and have the potential to exacerbate market
risks such as volatility in exchange rates or the trading of Asian-Pacific
securities listed domestically or abroad.
In
addition, the governments of many of such countries, such as Indonesia, have a
substantial role in regulating and supervising the economy. Another risk common
to most such countries is that the economy is heavily export oriented and,
accordingly, is dependent upon international trade. The existence of
overburdened infrastructure and obsolete financial systems also presents risks
in certain countries, as do environmental problems. Certain economies also
depend to a significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices that, in turn, may be
affected by a variety of factors.
Governments
of many developing market Asia-Pacific countries have exercised and continue to
exercise substantial influence over many aspects of the private sector. In
certain cases, the government owns or controls many companies, including the
largest in the country. Accordingly, government actions in the future could have
a significant effect on economic conditions in developing market Asia-Pacific
countries, which could affect private sector companies and a Fund itself, as
well as the value of securities in the Fund’s portfolio. In addition, economic
statistics of developing market Asia-Pacific countries may be less reliable than
economic statistics of more developed nations.
Investments
through Stock Connect.
Each of the Emerging Markets Fund, Emerging Markets Leaders Fund and the
Environmental Sustainability Fund may invest in A-shares listed and traded on
the Shanghai Stock Exchange and the Shenzhen Stock Exchange through the
Shanghai-Hong Kong Stock Connect Program and the Shenzhen-Hong Kong Stock
Connect Program (together, “Stock Connect”), or on such other stock exchanges in
China which participate in Stock Connect from time to time or in the future.
Trading through Stock Connect is subject to a number of restrictions that may
affect each of the Fund's investments and returns. For example, trading through
Stock Connect is subject to daily quotas that limit the maximum daily net
purchases on any particular day, which may restrict or preclude each of the
Fund's ability to invest in Stock Connect A-shares. In addition, investments
made through Stock Connect are subject to trading, clearance and settlement
procedures that are relatively untested in the PRC, which could pose risks to
the Funds. Furthermore, securities purchased via Stock Connect are generally
held via a book entry omnibus account in the name of Hong Kong Securities
Clearing Company Limited (“HKSCC”), Hong Kong’s clearing entity, at the China
Securities Depository and Clearing Corporation Limited (“CSDCC”). These Funds'
ownership interest in Stock Connect securities will not be reflected directly in
book entry with CSDCC and will instead only be reflected on the books of its
Hong Kong sub-custodian. The Funds may therefore depend on HKSCC’s ability or
willingness as record-holder of Stock Connect securities to enforce each of the
Fund’s shareholder rights. PRC law did not historically recognize the concept of
beneficial ownership; while PRC regulations and the Hong Kong Stock Exchange
have issued clarifications and guidance supporting the concept of beneficial
ownership via Stock Connect, the interpretation of beneficial ownership in the
PRC by regulators and courts may continue to evolve. Moreover, Stock Connect
A-shares generally may not be sold, purchased or otherwise transferred other
than through Stock Connect in accordance with applicable rules.
A
primary feature of Stock Connect is the application of the home market’s laws
and rules applicable to investors in A-shares. Therefore, each of the Fund’s
investments in Stock Connect A-shares are generally subject to PRC securities
regulations and listing rules, among other restrictions.The Stock Exchange of
Hong Kong, Shenzhen Stock Exchange (“SZSE”) and Shanghai Stock Exchange (“SSE”)
reserve the right to suspend trading if necessary for ensuring an orderly and
fair market and managing risks prudently, which could adversely affect each of
the Fund's ability to access the mainland China market. A stock may be recalled
from the scope of eligible SSE securities or SZSE securities for trading via the
Stock Connect for various reasons, and in such event, the stock can only be sold
but is restricted from being bought. Stock Connect is only available on days
when markets in both the PRC and Hong Kong are open, which may limit each of the
Fund's ability to trade when it would be otherwise attractive to do so. Since
the inception of Stock Connect, foreign investors (including each of the Funds)
investing in A-shares through Stock Connect would be temporarily exempt from the
PRC corporate income tax and value-added tax on the gains on disposal of such
A-shares. Dividends would be subject to PRC corporate income tax on a
withholding basis at 10%, unless reduced under a double tax treaty with China
upon application to and obtaining approval from the competent tax authority.
Aside from these temporary measures, uncertainties in permanent PRC tax rules
governing taxation of income and gains from investments in Stock Connect
A-shares could result in unexpected tax liabilities for the Funds.
The
Funds may, through the Stock Connect, access securities listed on the ChiNext
market and STAR Board of the SZSE. Listed companies on the ChiNext market and
START Board are usually of an emerging nature with smaller operating
scale.
Listed companies on the ChiNext Market and STAR Board are subject to wider price
fluctuation limits and due to higher entry thresholds for investors, may have
limited liquidity, compared to other boards. They are subject to higher
fluctuation in stock prices and liquidity and have higher risks and turnover
ratios than companies listed on the main board of the SZSE. Securities listed on
the ChiNext Market may be overvalued and such exceptionally high valuation may
not be sustainable. Stock prices may be more susceptible to manipulation due to
fewer circulating shares. It may be more common and faster for companies listed
on the ChiNext to delist. This may have an adverse impact on the Funds if the
companies that it invests in are delisted. Also, the rules and regulations
regarding companies listed on ChiNext Market and STAR Board are less stringent
in terms of profitability and share capital than those on the main board.
Investments in the ChiNext Market and STAR Board may result in significant
losses for the Funds and their investors. STAR Board is a newly established
board and may have a limited number of listed companies
during
the initial stage. Investments in STAR board may be concentrated in a small
number of stocks and subject the Funds to higher concentration risk.
The
Stock Connect only operates on days when both the PRC and Hong Kong markets are
open for trading and when banks in both markets are open on the corresponding
settlement days. So it is possible that there are occasions when it is a normal
trading day for the PRC market but the Fund cannot carry out any China A-Shares
trading via the Stock Connect. The Fund may be subject to a risk of price
fluctuations in China A-Shares during the time when any of the Stock Connect is
not trading as a result.
PRC
regulations require that before an investor sells any share, there should be
sufficient shares in the account; otherwise the SSE or SZSE will reject the sell
order concerned. SEHK will carry out pre-trade checking on China A-Shares sell
orders of its participants (i.e. the stock brokers) to ensure there is no
over-selling. If the Fund intends to sell certain China A-Shares it holds, it
must transfer those China A-Shares to the respective accounts of its broker(s)
before the market opens on the day of selling (“trading day”). If it fails to
meet this deadline, it will not be able to sell those shares on the trading day.
Because of this requirement, the Fund may not be able to dispose of its holdings
of China A-Shares in a timely manner.
The
Stock Connect program is a relatively new program and may be subject to further
interpretation and guidance. There can be no assurance as to the program’s
continued existence or whether future developments regarding the program may
restrict or adversely affect each of the Fund's investments or returns. In
addition, the application and interpretation of the laws and regulations of Hong
Kong and the PRC, and the rules, policies or guidelines published or applied by
relevant regulators and exchanges in respect of the Stock Connect program are
uncertain, and they may have a detrimental effect on each of the Fund's
investments and returns. Moreover, the rules and regulations may have potential
retrospective effect. There can be no assurance that the Stock Connects will not
be abolished. Investments in mainland China markets through the Stock Connects
may adversely affect the Funds as a result of such changes.
Investments
through Bond Connect and the China Interbank Bond Market Direct Access
Program.
The Emerging Markets Bond Fund may invest in Renminbi (“RMB”)-denominated bonds
issued in the PRC by Chinese credit, government, and quasi-governmental issuers
(“RMB Bonds”). RMB Bonds are available on the China interbank bond market
(“CIBM”) to eligible foreign investors through the CIBM Direct Access Program
and through the “Mutual Bond Market Access between Mainland China and Hong Kong”
(“Bond Connect”) program. The Emerging Markets Bond Fund’s investments in bonds
through either program will be subject to a number of additional risks and
restrictions that may affect the Emerging Markets Bond Fund’s investments and
returns.
Bond
Connect Risks (VanEck
Emerging Markets Bond Fund only)
The
“Mutual Bond Market Access between Mainland China and Hong Kong” (“Bond
Connect”) program is a new initiative established by China Foreign Exchange
Trade System & National Interbank Funding Centre (“CFETS”), CSDCC, Shanghai
Clearing House (“SHCH”), and Hong Kong Exchanges and Clearing Limited (“HKEx”)
and Central Moneymarkets Unit (“CMU”) of the Hong Kong Monetary Authority
(“HKMA”) to facilitate investors from Mainland China and Hong Kong to trade in
each other’s bond markets through connection between the Mainland China and Hong
Kong financial institutions.
Under
the prevailing PRC regulations, eligible foreign investors will be allowed to
invest in the bonds available on the CIBM through the northbound trading of the
Bond Connect (“Northbound Trading Link”). There will be no investment quota for
the Northbound Trading Link.
Under
the Northbound Trading Link, eligible foreign investors are required to appoint
the CFETS or other institutions recognized by the PBOC as registration agents to
apply for registration with the PBOC.
The
Northbound Trading Link refers to the trading platform that is located outside
of Mainland China and is connected to CFETS for eligible foreign investors to
submit their trade requests for bonds circulated in the CIBM through the Bond
Connect. HKEx and CFETS will work together with offshore electronic bond trading
platforms to provide electronic trading
services
and platforms to allow direct trading between eligible foreign investors and
approved onshore dealers in Mainland China through CFETS.
Eligible
foreign investors may submit trade requests for bonds circulated in the CIBM
through the Northbound Trading Link provided by offshore electronic bond trading
platforms, which will in turn transmit their requests for quotation to CFETS.
CFETS will send the requests for quotation to a number of approved onshore
dealers (including market makers and others engaged in the market-making
business) in Mainland China. The approved onshore dealers will respond to the
requests for quotation via CFETS, and CFETS will send their responses to those
eligible foreign investors through the same offshore electronic bond trading
platforms. Once the eligible foreign investor accepts the quotation, the trade
is concluded on CFETS.
On
the other hand, the settlement and custody of bond securities traded in the CIBM
under the Bond Connect will be done through the settlement and custody link
between the CMU, as an offshore custody agent, and the CSDCC and the SHCH, as
onshore custodian and clearing institutions in Mainland China. Under the
settlement link, CSDCC or the SHCH will effect gross settlement of confirmed
trades onshore and the CMU will process bond settlement instructions from the
CMU members on behalf of eligible foreign investors in accordance with its
relevant rules.
Pursuant
to the prevailing regulations in Mainland China, the CMU, being the offshore
custody agent recognized by the HKMA, open omnibus nominee accounts with the
onshore custody agent recognized by the PBOC (i.e., the CSDCC and Interbank
Clearing Company Limited). All bonds traded by eligible foreign investors will
be registered in the name of the CMU, which will hold such bonds as a nominee
owner.
The
Bond Connect is relatively new. Laws, rules, regulations, policies, notices,
circulars or guidelines relating to the Bond Connect (the “Applicable Bond
Connect Regulations”) as published or applied by any of the Bond Connect
Authorities (as defined below) are untested and are subject to change from time
to time. There can be no assurance that the Bond Connect will not be restricted,
suspended or abolished. If such event occurs, the Fund’s ability to invest in
the CIBM through the Bond Connect will be adversely affected, and if the Fund is
unable to adequately access the CIBM through other means, the Fund’s ability to
achieve its investment objective will be adversely affected. “Bond Connect
Authorities” refers to the exchanges, trading systems, settlement systems,
governmental, regulatory or tax bodies which provide services and/or regulate
Bond Connect and activities relating to Bond Connect, including, without
limitation, the PBOC, the HKMA, the HKEx, the CEFTS, the CMU, the CSDCC and the
SHCH and any other regulator, agency or authority with jurisdiction, authority
or responsibility in respect of Bond Connect.
Under
the prevailing Applicable Bond Connect Regulations, eligible foreign investors
who wish to participate in the Bond Connect may do so through an offshore
custody agent, registration agent or other third parties (as the case may be),
who would be responsible for making the relevant filings and account opening
with the relevant authorities. The Fund is therefore subject to the risk of
default or errors on the part of such agents.
Trading
through the Bond Connect is performed through newly developed trading platforms
and operational systems. There is no assurance that such systems will function
properly (in particular, under extreme market conditions) or will continue to be
adapted to changes and developments in the market. In the event that the
relevant systems fails to function properly, trading through the Bond Connect
may be disrupted. The Fund’s ability to trade through the Bond Connect (and
hence to pursue its investment strategy) may therefore be adversely affected. In
addition, where the Fund invests in the CIBM through the Bond Connect, it may be
subject to risks of delays inherent in the order placing and/or settlement.
The
CMU (i.e. the HKMA) is the “nominee holder” of the bonds acquired by the Fund
through the Bond Connect. Whilst the Bond Connect Authorities have expressly
stated that investors will enjoy the rights and interests of the bonds acquired
through the Bond Connect in accordance with applicable laws, the exercise and
the enforcement of beneficial ownership rights over such bonds in the courts in
China is yet to be tested. In addition, in the event that the nominee holder
(i.e. the HKMA) becomes insolvent, such bonds may form part of the pool of
assets of the nominee holder available for distribution to its creditors and the
Fund, as a beneficial owner, may have no rights whatsoever in respect
thereof.
Risk
of Investing through the CIBM Direct Access Program (VanEck
Emerging Markets Bond Fund only)
The
China interbank bond market (“CIBM”) is an OTC market established in 1997, and
accounts for more than 95% of outstanding bond values of the total trading
volume in the PRC. On CIBM, domestic institutional investors and certain foreign
institutional investors can trade, on a one-to-one quote-driven basis, sovereign
bonds, government bonds, corporate bonds, bond repo, bond lending, bills issued
by the People’s Bank of China (“PBOC”) and other financial debt
instruments.
CIBM
is regulated and supervised by the PBOC. The PBOC is responsible for, among
others, promulgating the applicable CIBM listing, trading and operating rules,
and supervising the market operators of CIBM. CIBM provides for two trading
models: (i) bilateral negotiation and (ii) “click-and-deal.” The China Foreign
Exchange Trading System (“CEFTS”) is the unified trading platform for CIBM, on
which all products are traded through independent bilateral negotiation on a
transaction
by transaction basis, and spot bonds and interest rate derivatives are traded by
“click-and-deal.” A market-making mechanism has also been introduced to improve
market liquidity and enhance efficiency with respect to trading on
CIBM.
Once
a transaction is agreed, the parties will, in accordance with the terms of the
transaction, promptly send instructions for the delivery of bonds and funds.
Parties are required to have sufficient bonds and funds for delivery on the
agreed delivery date. CSDCC will deliver bonds according to the instructions
sent by the parties. Funds clearing banks will handle the transfer and
settlement of the payments of the bonds on behalf of the parties.
Pursuant
to the Announcement (2016) No. 3 issued by the PBOC on February 24, 2016,
eligible foreign institutional investors can conduct trading on the CIBM under a
program established by the PBOC (“CIBM Direct Access Program”) subject to other
rules and regulations as promulgated by the PRC authorities. There is no trading
quota limitation.
The
Fund’s investments in bonds through the CIBM Direct Access Program will be
subject to a number of additional risks and restrictions that may affect the
Fund’s investments and returns.
The
CIBM Direct Access Program is relatively new. Laws, rules, regulations,
policies, notices, circulars or guidelines relating to the CIBM Direct Access
Program as published or applied by the PBOC and other PRC authorities are
untested and are subject to change from time to time. There can be no assurance
that the CIBM Direct Access Program will not be restricted, suspended or
abolished. If such event occurs, the Fund’s ability to invest in the CIBM
through the CIBM Direct Access Program will be adversely affected, and if the
Fund is unable to adequately access the CIBM through other means, the Fund’s
ability to achieve its investment objective will be adversely
affected.
Under
the prevailing PRC regulations, eligible foreign institutional investors who
wish to invest directly in CIBM through the CIBM Direct Access Program may do so
through an onshore settlement agent, who would be responsible for making the
relevant filings and account opening with the relevant authorities. The Fund is
therefore subject to the risk of default or errors on the part of such agent.
Cash deposited in the cash account of the Fund with the relevant onshore
settlement agent will not be segregated. In the event of the bankruptcy or
liquidation of the onshore settlement agent, the Fund will not have any
proprietary rights to the cash deposited in such cash account and may face
difficulty and/or encounter delays in recovering such assets, or may not be able
to recover it in full or at all, in which case the Fund will suffer
losses.
Market
volatility and potential lack of liquidity due to low trading volume of certain
debt securities in the China interbank bond market may result in prices of
certain debt securities traded on such market fluctuating significantly. The
Fund is therefore subject to liquidity and volatility risks. The bid and offer
spreads of the prices of such securities may be large, and the Fund may
therefore incur significant trading and realization costs and may even suffer
losses when selling such investments.
The
Fund is also exposed to risks associated with settlement procedures and default
of counterparties. The counterparty which has entered into a transaction with
the Fund may default in its obligation to settle the transaction by delivery of
the relevant security or by payment for value. Although there is no quota
limitation regarding investment via the CIBM Direct Access Program, the Fund may
be required to make further filings with the PBOC if it wishes to increase its
anticipated investment size. There is no guarantee the PBOC will accept such
further filings. In the event any further filings for an increase in the
anticipated investment size are not accepted by the PBOC, the Fund’s ability to
invest in the CIBM will be limited and the performance of the relevant Fund may
be unfavorably affected as a result.
Investing
in the CIBM is also subject to certain restrictions imposed by the PRC
authorities on fund remittance and repatriation which may potentially affect the
Fund’s performance and liquidity. Any non-compliance with or failure to meet the
fund remittance and repatriation requirements may result in regulatory sanctions
which in turn may have an adverse impact on the portion of the Fund’s investment
via the CIBM Direct Access Program. Further, there is no assurance that the fund
remittance and repatriation requirements in relation to investment in CIBM will
not be changed as a result of change in government policies or foreign exchange
control policies. The Fund may incur loss in the event such change in the fund
remittance and repatriation requirements in relation to investment in CIBM
occurs.
Chinese
Variable Interest Entities Risks
Chinese
operating companies sometimes rely on variable interest entity (“VIE”)
structures to raise capital from non Chinese investors. In a VIE structure, a
China-based operating company establishes an entity (typically offshore) that
enters into service and other contracts with the Chinese company designed to
provide economic exposure to the company. The offshore entity then issues
exchange-traded shares that are sold to the public, including non-Chinese
investors (such as a Fund). Shares of the offshore entity are not equity
ownership interests in the Chinese operating company and therefore the ability
of the offshore entity to control the activities of the Chinese company are
limited and the Chinese company may engage in activities that negatively impact
investment value. The VIE structure is designed to provide the offshore entity
(and in turn, investors in the entity) with economic exposure to the Chinese
company that replicates equity ownership, without actual equity
ownership.
VIE structures are used due to Chinese government prohibitions on foreign
ownership of companies in certain industries and it is not clear that the
contracts are enforceable or that the structures will otherwise work as
intended.
Intervention
by the Chinese government with respect to VIE structures could adversely affect
the Chinese operating company’s performance, the enforceability of the offshore
entity’s contractual arrangements with the Chinese company and the value of the
offshore entity’s shares. Further, if the Chinese government determines that the
agreements establishing the VIE structure do not comply with Chinese law and
regulations, including those related to prohibitions on foreign ownership, the
Chinese government could subject the Chinese company to penalties, revocation of
business and operating licenses or forfeiture of ownership interests. The
offshore entity’s control over the Chinese company may also be jeopardized if
certain legal formalities are not observed in connection with the agreements, if
the agreements are breached or if the agreements are otherwise determined not to
be enforceable. If any of the foregoing were to occur, the market value of a
Fund’s associated portfolio holdings would likely fall, causing substantial
investment losses for the Fund.
In
addition, Chinese companies listed on U.S. exchanges, including ADRs and
companies that rely on VIE structures, may be delisted if they do not meet U.S.
accounting standards and auditor oversight requirements. Delisting could
significantly decrease the liquidity and value of the securities of these
companies, decrease the ability of a Fund to invest in such securities and
increase the cost of the Fund if it is required to seek alternative markets in
which to invest in such securities.
FOREIGN
SECURITIES - FOREIGN CURRENCY TRANSACTIONS
Although
the Funds value their assets daily in terms of U.S. dollars, they do not
generally physically convert their holdings of foreign currencies into U.S.
dollars on a daily basis. The Funds may do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the “spread”) between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Funds at one rate, while offering a lesser rate of exchange should the
Funds desire to resell that currency to the dealer. The Funds may use forward
contracts, along with futures contracts, foreign exchange swaps and put and call
options (all types of derivatives) as part of their overall hedging strategy.
The Funds generally conduct their foreign currency exchange transactions, either
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market, or through purchasing put and call options on, or entering into
futures contracts or forward contracts to purchase or sell foreign currencies.
See “Options, Futures, Warrants and Subscription Rights.”
Changes
in currency exchange rates may affect the Funds’ net asset value and
performance. The Adviser may not be able to anticipate currency fluctuations in
exchange rates accurately. The Funds may invest in a variety of derivatives and
enter into hedging transactions to attempt to moderate the effect of currency
fluctuations. The Funds may purchase and sell put and call options on, or enter
into futures contracts or forward contracts to purchase or sell foreign
currencies. This may reduce a Fund’s losses on a security when a foreign
currency’s value changes. Hedging against a change in the value of a foreign
currency does not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should change relative to the other currency. Finally, when
the Funds use options and futures in anticipation of the purchase of a portfolio
security to hedge against adverse movements in the security’s underlying
currency, but the purchase of such security is subsequently deemed undesirable,
a Fund may incur a gain or loss on the option or futures contract.
The
Funds may enter into forward contracts to duplicate a cash market transaction.
See also “Options, Futures, Warrants and Subscription Rights.”
A
Fund may (but is not required to) engage in these transactions in order to
protect against uncertainty in the level of future foreign exchange rates in the
purchase and sale of securities. A Fund may also use foreign currency options
and foreign currency forward contracts to increase exposure to a foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. Suitable currency hedging transactions may not be available in all
circumstances and an Adviser may decide not to use hedging transactions that are
available.
In
those situations where foreign currency options or futures contracts, or options
on futures contracts may not be readily purchased (or where they may be deemed
illiquid or unattractive) in the primary currency in which the hedge is desired,
the hedge may be obtained by purchasing or selling an option, futures contract
or forward contract on a secondary currency. There can be no assurances that the
exchange rate or the primary and secondary currencies will move as anticipated,
or that the relationship between the hedged security and the hedging instrument
will continue. If they do not move as anticipated or the relationship does not
continue, a loss may result to a Fund on its investments in the hedging
positions.
A
forward foreign currency exchange 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. Although forwards are intended to minimize the risk of
loss due to a decline in the value of the hedged
currencies,
at the same time, they tend to limit any potential gain which might result
should the value of such currencies increase.
The
forecasting of currency market movement is extremely difficult, and whether any
hedging strategy will be successful is highly uncertain. Moreover, it is
impossible to forecast with precision the market value of portfolio securities
at the expiration of a foreign currency forward contract. Accordingly, a Fund
may be required to buy or sell additional currency on the spot market (and bear
the expense of such transaction) if an Adviser’s predictions regarding the
movement of foreign currency or securities markets prove inaccurate. In
addition, the use of cross-hedging transactions may involve special risks, and
may leave the Fund in a less advantageous position than if such a hedge had not
been established.
The
Funds’ Custodian will place the securities being hedged, cash, U.S. government
securities or debt or equity securities into a segregated account of the Fund in
an amount equal to the value of the Fund’s total assets committed to the
consummation of forward foreign currency contracts to ensure that the Fund is
not leveraged beyond applicable limits. If the value of the securities placed in
the segregated account declines, additional cash or securities will be placed in
the account on a daily basis so that the value of the account will equal the
amount of the Fund’s commitments with respect to such contracts. At the maturity
of a forward contract, the Funds may either sell the portfolio security and make
delivery of the foreign currency, or they may retain the security and terminate
their contractual obligation to deliver the foreign currency prior to maturity
by purchasing an “offsetting” contract with the same currency trader, obligating
it to purchase, on the same maturity date, the same amount of the foreign
currency. There can be no assurance, however, that the Funds will be able to
effect such a closing purchase transaction.
It
is impossible to forecast the market value of a particular portfolio security at
the expiration of the contract. Accordingly, if a decision is made to sell the
security and make delivery of the foreign currency it may be necessary for a
Fund to purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than the
amount of foreign currency that a Fund is obligated to deliver.
If
a Fund retains the portfolio security and engages in an offsetting transaction,
the Fund may incur a gain or a loss to the extent that there has been movement
in forward contract prices. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result
should the value of such currency increase.
FUTURE
DEVELOPMENTS
The
Funds may take advantage of opportunities in the area of options, futures
contracts, options on futures contracts, warrants, swaps and any other
investments which are not presently contemplated for use or which are not
currently available, but which may be developed, to the extent such investments
are considered suitable for the Funds by each Adviser.
GLOBAL
RESOURCES SECURITIES
Global
resources securities include securities of global resource companies and
instruments that derive their value from global resources. Global resources
include precious metals (including gold), base and industrial metals, energy,
natural resources and other commodities. A global resource company is a company
that derives, directly or indirectly, at least 50% of its revenues from
exploration, development, production, distribution or facilitation of processes
relating to global resources.
Since
the market action of global resources securities may move against or
independently of the market trend of industrial shares, the addition of such
securities to an overall portfolio may increase the return and reduce the price
fluctuations of such a portfolio. There can be no assurance that an increased
rate of return or a reduction in price fluctuations of a portfolio will be
achieved. Global resources securities are affected by many factors, including
movement in the stock market.
Inflation
may cause a decline in the market, including global resource securities. The
Global Resources Fund has a fundamental policy of concentrating in “global
resource” industries, and more than 50% of the Global Resources Fund’s assets
may be invested in any one of the above sectors. Precious metal and natural
resource securities are at times volatile and there may be sharp fluctuations in
prices, even during periods of rising prices.
HEDGING
Hedging
is a strategy in which a derivative or other instrument or practice is used to
offset the risks associated with other Fund holdings. Losses on the other
investment may be substantially reduced by gains on a derivative that reacts in
an opposite manner to market movements. Hedging can reduce or eliminate gains or
cause losses if the market moves in a manner different from that anticipated by
a Fund or if the cost of the derivative outweighs the benefit of the hedge.
Hedging also involves correlation risk, i.e. the risk that changes in the value
of the derivative will not match those of the holdings being hedged as expected
by a Fund, in which case any losses on the holdings being hedged may not be
reduced or may be increased. The inability to close options and futures
positions also could have an adverse impact on a Fund’s ability to hedge
effectively its portfolio. There is also a risk of loss by a Fund of margin
deposits or collateral in the event of bankruptcy of a broker with whom the Fund
has an open position in an option, a futures contract or a related option. There
can be no assurance that a Fund’s
hedging
strategies will be effective. The use of hedging may invoke the application of
the mark-to-market and straddle provisions of the Internal Revenue Code of 1986,
as amended (the “Code”). If such provisions are applicable, there could be an
increase (or decrease) in the amount of taxable dividends paid by a Fund and may
impact whether dividends paid by the Fund are classified as capital gains or
ordinary income. The use of derivatives increases the risk that a Fund will be
unable to close out certain hedged positions to avoid adverse tax
consequences.
ILLIQUID
INVESTMENTS
Each
Fund may not acquire any illiquid investment if, immediately after the
acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments that are assets. For purposes of the above 15% limitation,
illiquid investment means any investment that a Fund reasonably expects cannot
be sold or disposed of in current market conditions in seven calendar days or
less without the sale or disposition significantly changing the market value of
the investment, as determined pursuant to the 1940 Act and applicable rules and
regulations thereunder.
INDEXED
SECURITIES AND STRUCTURED NOTES
The
Funds may invest in indexed securities, i.e., structured notes securities and
index options, whose value is linked to one or more currencies, interest rates,
commodities, or financial or commodity indices. An indexed security enables the
investor to purchase a note whose coupon and/or principal redemption is linked
to the performance of an underlying asset. Indexed securities may be positively
or negatively indexed (i.e., their value may increase or decrease if the
underlying instrument appreciates). Indexed securities may have return
characteristics similar to direct investments in the underlying instrument or to
one or more options on the underlying instrument. Indexed securities may be more
volatile than the underlying instrument itself, and present many of the same
risks as investing in futures and options. Indexed securities are also subject
to credit risks associated with the issuer of the security with respect to both
principal and interest. Securities linked to one or more non-agriculture
commodities or commodity indices may be considered a global resources
securities.
Indexed
securities may be publicly traded or may be two-party contracts (such two-party
agreements are referred to hereafter collectively as structured notes). When a
Fund purchases a structured note, it makes a payment of principal to the
counterparty. Some structured notes have a guaranteed repayment of principal
while others place a portion (or all) of the principal at risk. Notes determined
to be illiquid will be aggregated with other illiquid securities and will be
subject to the Funds’ limitations on illiquid investments.
Credit
Linked Notes.
The Funds may invest in credit linked securities or credit linked notes
(“CLNs”). CLNs are typically issued by a limited purpose trust or other vehicle
(the “CLN trust”) that, in turn, invests in a derivative or basket of
derivatives instruments, such as credit default swaps, interest rate swaps
and/or other securities, in order to provide exposure to certain high yield,
sovereign debt, emerging markets, or other fixed income markets. Generally,
investments in CLNs represent the right to receive periodic income payments (in
the form of distributions) and payment of principal at the end of the term of
the CLN. However, these payments are conditioned on the CLN trust’s receipt of
payments from, and the CLN trust’s potential obligations, to the counterparties
to the derivative instruments and other securities in which the CLN trust
invests. For example, the CLN trust may sell one or more credit default swaps,
under which the CLN trust would receive a stream of payments over the term of
the swap agreements provided that no event of default has occurred with respect
to the referenced debt obligation upon which the swap is based. If a default
were to occur, the stream of payments may stop and the CLN trust would be
obligated to pay the counterparty the par (or other agreed upon value) of the
referenced debt obligation. This, in turn, would reduce the amount of income and
principal that the Fund would receive as an investor in the CLN trust. A Fund
may also enter in CLNs to gain access to sovereign debt and securities in
emerging markets particularly in markets where the Fund is not able to purchase
securities directly due to domicile restrictions or tax restrictions or tariffs.
In such an instance, the issuer of the CLN may purchase the reference security
directly and/or gain exposure through a credit default swap or other derivative.
The Fund’s investments in CLNs is subject to the risks associated with the
underlying reference obligations and derivative instruments.
INITIAL
PUBLIC OFFERINGS
The
Funds may invest in initial public offerings (IPOs) of common stock or other
primary or secondary syndicated offerings of equity or debt securities issued by
a corporate issuer. A purchase of IPO securities often involves higher
transaction costs than those associated with the purchase of securities already
traded on exchanges or markets. IPO securities are subject to market risk and
liquidity risk. The market value of recently issued IPO securities may fluctuate
considerably due to factors such as the absence of a prior public market,
unseasoned trading and speculation, a potentially small number of securities
available for trading, limited information about the issuer, and other factors.
A Fund may hold IPO securities for a period of time, or may sell them soon after
the purchase. Investments in IPOs could have a magnified impact – either
positive or negative – on the Fund’s performance while the Fund’s assets are
relatively small. The impact of an IPO on the Fund’s performance may tend to
diminish as the Fund’s assets grow.
INVESTMENTS
IN OTHER INVESTMENT COMPANIES
Emerging
Markets Bond Fund, Emerging Markets Fund, Emerging Markets Leaders Fund,
Environmental Sustainability Fund, Global Resources Fund and International
Investors Gold Fund may invest up to 20% of its net assets in securities issued
by other investment companies (excluding money market funds), including open end
and closed end funds and exchange-traded funds (“ETFs”), subject to the
limitations under the 1940 Act. The Funds’ investments in money market funds are
not subject to this limitation. CM Commodity Index Fund may invest in securities
issued by other investment companies, including open end and closed end funds
and ETFs, subject to the limitations of under the 1940 Act. The Funds may invest
in investment companies which are sponsored or advised by each Adviser and/or
their affiliates (each, a “VanEck Investment Company”).
A
Fund’s investment in another investment company may subject such Fund indirectly
to the underlying risks of the investment company. Such Fund also will bear its
share of the underlying investment company’s fees and expenses, which are in
addition to the Fund’s own fees and expenses. Shares of closed-end funds and
ETFs may trade at prices that reflect a premium above or a discount below the
investment company’s net asset value, which may be substantial in the case of
closed-end funds. If investment company securities are purchased at a premium to
net asset value, the premium may not exist when those securities are sold and
the Fund could incur a loss.
Rule
12d1-4 under the 1940 Act, which became effective January 19, 2022, created a
regulatory framework for Funds’ investments in other funds. Rule 12d1-4 allows a
fund to acquire the securities of another investment company in excess of the
limitations imposed by Section 12 without obtaining an exemptive order from the
SEC, subject to certain limitations and conditions. Among those conditions is
the requirement that, prior to a fund relying on Rule 12d1-4 to acquire
securities of another fund in excess of the limits of Section 12(d)(1), the
acquiring fund must enter into a Fund of Funds Agreement with the acquired fund,
unless the acquiring fund’s investment adviser acts as the acquired fund’s
investment adviser and does not act as sub-adviser to either fund. In connection
with the adoption of Rule 12d1-4, the SEC also rescinded certain prior exemptive
relief. These regulatory changes may adversely impact a Fund’s investment
strategies and operations to the extent that it invests, or might otherwise have
invested, in shares issued by other investment companies.
FLOATING
RATE LIBOR RISK
Certain
financial instruments in which a Fund invests may pay interest based on, or
otherwise have payments tied to, the London Inter-bank Offered Rate (“LIBOR”),
Euro Interbank Offered Rate and other similar types of reference rates (each, a
“Reference Rate”). Due to the uncertainty regarding the future utilization
of LIBOR and the nature of any replacement rate, the potential effect of a
transition away from LIBOR on a fund or the financial instruments in which a
Fund may invest cannot yet be determined.
On
July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority
(“FCA”), which regulates LIBOR, announced that the FCA will no longer persuade
nor require banks to submit rates for the calculation of LIBOR and certain other
Reference Rates after 2021. In March 2021, the FCA and LIBOR’s administrator,
ICE Benchmark Administration Limited (“IBA”) announced that all Sterling,
Japanese Yen, Swiss Franc and Euro and certain U.S. dollar LIBOR settings will
no longer be published after the end of 2021 and the remaining (being the
majority of the) U.S. dollar LIBOR settings will no longer be published after
June 30, 2023. It is possible that the FCA, using new statutory powers to be
granted to it, will compel the IBA to publish a subset of LIBOR settings after
these dates on a “synthetic” basis. These announcements and any additional
regulatory or market changes may have an adverse impact on a Fund or its
investments.
In
advance of 2022, public and private sector industry initiatives, regulators and
market participants are currently engaged in identifying successor Reference
Rates (“Alternative Reference Rates”), (e.g., the Secured Overnight Financing
Rate, which is likely to replace U.S. dollar LIBOR and measures the cost of
overnight borrowings through repurchase agreement transactions collateralized
with U.S. Treasury securities). The Federal Reserve Bank of New York began
publishing SOFR in 2018, and it has been used increasingly on a voluntary basis
in new instruments and transactions. At times, SOFR has proven to be more
volatile than the 3-month USD LIBOR. Working groups and regulators in other
countries have suggested other alternatives for their markets, including the
Sterling Overnight Interbank Average Rate (“SONIA”) in England.
In
many cases, in the event that an instrument falls back to a so-called risk free
Alternative Reference Rate, including the SOFR, the risk free Alternative
Reference Rate will not perform the same as LIBOR because the risk free
Alternative Reference Rate does not include a credit sensitive component in the
calculation of the rate. SOFR, for example, generally reflects the performance
of the market for overnight repurchase transactions secured by U.S. treasury
securities and not the performance of inter-bank lending markets. In the event
of a credit crisis, floating rate instruments using certain risk free
Alternative Reference Rates could therefore perform differently than those
instruments using a rate indexed to the inter-bank lending market. There is no
assurance that the composition or characteristics of any such Alternative
Reference Rate will be similar to or produce the same value or economic
equivalence as LIBOR or that it will have the same volume or liquidity as did
LIBOR prior to its
discontinuance
or unavailability, which may affect the value or liquidity or return on certain
of a Fund’s investments and result in costs incurred in connection with closing
out positions and entering into new trades.
Additionally,
it is expected that market participants will focus on the transition mechanisms
by which the Reference Rates in existing contracts or instruments may be
amended, whether through marketwide protocols, fallback contractual provisions,
bespoke negotiations or amendments or otherwise. Nonetheless, the termination of
certain Reference Rates presents risks to a Fund. At this time, it is not
possible to completely identify or predict the effect of any such changes, any
establishment of Alternative Reference Rates or any other reforms to Reference
Rates that may be enacted in the UK or elsewhere. The elimination of a Reference
Rate or any other changes or reforms to the determination or supervision of
Reference Rates could have an adverse impact on the market for or value of any
securities or payments linked to those Reference Rates and other financial
obligations held by a Fund or on its overall financial condition or results of
operations.
The
transition process might lead to increased volatility and illiquidity in markets
that currently rely on Reference Rates to determine interest rates. It could
also lead to a reduction in the value of some Reference Rate-based investments
held by a Fund and reduce the effectiveness of new hedges placed against
existing Reference Rate-based instruments. While market participants are
endeavoring to minimize the economic impact of the transition from Reference
Rates to Alternative Reference Rates, the transition away from LIBOR and certain
other Reference Rates could, among other negative consequences:
•Adversely
impact the pricing, liquidity, value of, return on and trading for a broad array
of financial products, including any Reference Rate-linked securities, loans and
derivatives in which a Fund may invest;
• Require
extensive negotiations of and/or amendments to agreements and other
documentation governing Reference Rate-linked investments products;
• Lead
to disputes, litigation or other actions with counterparties or portfolio
companies regarding the interpretation and enforceability of “fallback”
provisions that provide for an Alternative Reference Rate in the event of
Reference Rate unavailability; or
• Cause
a Fund to incur additional costs in relation to any of the above
factors.
The
risks associated with the above factors, including decreased liquidity, are
heightened with respect to investments in Reference Rate-based products that do
not include a fallback provision that addresses how interest rates will be
determined if LIBOR and certain other Reference Rates stop being published. Even
with some Reference Rate-based instruments that may contemplate a scenario where
Reference Rates are no longer available by providing for an alternative
rate-setting methodology and/or increased costs for certain Reference
Rate-related instruments or financing transactions, there may be significant
uncertainty regarding the effectiveness of any such alternative methodologies,
resulting in prolonged adverse market conditions for a Fund. There also remains
uncertainty and risk regarding the willingness and ability of issuers to include
enhanced provisions in new and existing contracts or instruments. In addition,
when a Reference Rate is discontinued, the Alternative Reference Rate may be
lower than market expectations, which could have an adverse impact on the value
of preferred and debt securities with floating or fixed-to-floating rate
coupons. In addition, any substitute Reference Rate and any pricing adjustments
imposed by a regulator or counterparties or otherwise may adversely affect a
Fund’s performance or NAV.
Laws
in some states, such as in New York, and pending legislation, including in the
U.S. Congress, may affect the transition of LIBOR-based instruments as well by
permitting trustees and calculation agents to transition instruments with no
LIBOR transition language to a risk free Alternative Reference Rate selected by
relevant regulators or committees designated by those regulators. The New York
law and the proposed federal legislation both include safe harbors shielding
such trustees and calculation agents from liability, including in the event that
a Fund suffers losses as a result of the transition of an instrument from LIBOR
to the applicable designated risk free Alternative Reference Rate. It is
uncertain whether any of the pending legislation will be signed into law.
Furthermore, no assurances can be given as to which investments of a Fund would
be subject to any existing, pending or future law related to the LIBOR
transition.
MARKET
A
Fund could lose money over short periods due to short-term market movements and
over longer periods during more prolonged market downturns. The prices of
the securities in a Fund are subject to the risks associated with investing in
the securities market, including general economic conditions, sudden and
unpredictable drops in value, exchange trading suspensions and closures and
public health risks. Market risk arises mainly from uncertainty about
future values of financial instruments and may be influenced by price, currency
and interest rate movements. These risks may be magnified if certain social,
political, economic and other conditions and events (such as natural disasters,
epidemics and pandemics, terrorism, conflicts and social unrest) adversely
interrupt the global economy; in these and other circumstances, such events or
developments
might affect companies world-wide. As global systems, economies and financial
markets are increasingly interconnected, events that occur in one country,
region or financial market will, more frequently, adversely impact issuers in
other countries, regions or markets. During a general market downturn, multiple
asset classes may be negatively affected. Changes in market conditions and
interest rates generally do not have the same impact on all types of securities
and instruments.
MASTER
LIMITED PARTNERSHIPS
Other
equity securities in which Global Resources Fund may invest include master
limited partnerships (“MLPs”). MLPs are limited partnerships in which the
ownership units are publicly traded. MLP units are registered with the SEC and
are freely traded on a securities exchange or in the OTC market. MLPs often own
several properties or businesses (or own interests) that are related to oil and
gas industries, but they also may finance research and development and other
projects. Generally, an MLP is operated under the supervision of one or more
managing general partners. Limited partners are not involved in the day-to-day
management of the partnership. The risks of investing in an MLP are generally
those involved in investing in a partnership as opposed to a corporation.
Investments in securities of MLPs involve risks that differ from an investment
in common stock. Holders of the units of MLPs have more limited control and
limited rights to vote on matters affecting the partnership. There are also
certain tax risks associated with an investment in units of MLPs. In addition,
conflicts of interest may exist between common unit holders, subordinated unit
holders and the general partner of an MLP, including a conflict arising as a
result of incentive distribution payments.
OPTIONS,
FUTURES, WARRANTS AND SUBSCRIPTION RIGHTS
Options
Transactions.
Each Fund may purchase and sell (write) exchange-traded and OTC call and put
options on domestic and foreign securities, foreign currencies, stock and bond
indices and financial futures contracts. Global Resources Fund may also buy and
sell options linked to the price of global resources.
Purchasing
Call and Put Options.
Each of Emerging Markets Fund, Emerging Markets Leaders Fund, Global Resources,
International Investors Gold Fund and Emerging Markets Bond Fund may invest up
to 5% of its total assets in premiums on call and put options. The purchase of a
call option would enable a Fund, in return for the premium paid, to lock in a
purchase price for a security or currency during the term of the option. The
purchase of a put option would enable a Fund, in return for a premium paid, to
lock in a price at which it may sell a security or currency during the term of
the option. OTC options are typically purchased from or sold (written) to
dealers or financial institutions which have entered into direct agreements with
a Fund. With OTC options, such variables as expiration date, exercise price and
premium are typically agreed upon between the Fund and the transacting
dealer.
The
principal factors affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until the
expiration date. Accordingly, the successful use of options depends on the
ability of an Adviser to forecast correctly interest rates, currency exchange
rates and/or market movements.
When
a Fund sells put or call options it has previously purchased, the Fund may
realize a net gain or loss, depending on whether the amount realized on the sale
is more or less than the premium and other transaction costs paid on the put or
call option which is sold. There is no assurance that a liquid secondary market
will exist for options, particularly in the case of OTC options. In the event of
the bankruptcy of a broker through which a Fund engages in transactions in
options, such Fund could experience delays and/or losses in liquidating open
positions purchased or sold through the broker and/or incur a loss of all or
part of its margin deposits with the broker. In the case of OTC options, if the
transacting dealer fails to make or take delivery of the securities underlying
an option it has written, in accordance with the terms of that option, due to
insolvency or otherwise, a Fund would lose the premium paid for the option as
well as any anticipated benefit of the transaction. If trading were suspended in
an option purchased by a Fund, the Fund would not be able to close out the
option. If restrictions on exercise were imposed, the Fund might be unable to
exercise an option it has purchased.
A
call option on a foreign currency gives the purchaser of the option the right to
purchase the currency at the exercise price until the option expires. A put
option on a foreign currency gives the purchaser of the option the right to sell
a foreign currency at the exercise price until the option expires. The
markets in foreign currency options are relatively new and the Fund’s ability to
establish and close out positions on such options is subject to the maintenance
of a liquid secondary market. Currency options traded on U.S. or other exchanges
may be subject to position limits, which may limit the ability of a Fund to
reduce foreign currency risk using such options.
Writing
Covered Call and Put Options.
VanEck Emerging Markets Leaders Fund and VanEck Morningstar Wide Moat Fund may
write covered call options on portfolio securities. Emerging Markets Fund,
Environmental Sustainability Fund, Global Resources Fund, International
Investors Gold Fund and Emerging Markets Bond Fund may write covered call
options on portfolio securities to the extent that the value of all securities
with respect to which covered calls are written does not exceed 10% of the
Fund’s net asset value. When a Fund writes a covered call option, the Fund
incurs an obligation to sell the
security
underlying the option to the purchaser of the call, at the option’s exercise
price at any time during the option period, at the purchaser’s election. When a
Fund writes a put option, the Fund incurs an obligation to buy the security
underlying the option from the purchaser of the put, at the option’s exercise
price at any time during the option period, at the purchaser’s
election.
Such
Fund may be required, at any time during the option period, to deliver the
underlying security (or currency) against payment of the exercise price on any
calls it has written, or to make payment of the exercise price against delivery
of the underlying security (or currency) on any puts it has written. This
obligation is terminated upon the expiration of the option period or at such
earlier time as the writer effects a closing purchase transaction. A closing
purchase transaction is accomplished by purchasing an option of the same series
as the option previously written. However, once the Fund has been assigned an
exercise notice, the Fund will typically be unable to effect a closing purchase
transaction.
A
call option is “covered” if the Fund owns the underlying security subject to the
option or has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional consideration (in cash,
Treasury bills or other liquid portfolio securities) held in a segregated
account on the Fund’s books) upon conversion or exchange of other securities
held in its portfolio. A call option is also covered if the Fund holds a call on
the same security as the call written where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written or (ii)
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other liquid portfolio
securities in a segregated account on the Fund’s books. A put option is
“covered” if the Fund maintains cash, Treasury bills or other liquid portfolio
securities with a value equal to the exercise price in a segregated account on
the Fund’s books, or holds a put on the same security as the put written where
the exercise price of the put held is equal to or greater than the exercise
price of the put written.
During
the option period, the Fund gives up, in return for the premium on the option,
the opportunity for capital appreciation above the exercise price should the
market price of the underlying security (or the value of its denominated
currency) increase, but retains the risk of loss should the price of the
underlying security (or the value of its denominated currency)
decline.
Futures
Contracts. The
Funds may buy and sell financial futures contracts which may include security
and interest-rate futures, stock and bond index futures contracts and foreign
currency futures contracts. Global Resources Fund may also buy and sell futures
contracts and options thereon linked to the price of global resources. CM
Commodity Index Fund may engage in these transactions for hedging purposes or
other purposes. A futures contract is an agreement between two parties to buy
and sell a security for a set price on a future date. An interest rate,
commodity, foreign currency or index futures contract provides for the future
sale by one party and purchase by another party of a specified quantity of a
financial instrument, commodity, foreign currency or the cash value of an index
at a specified price and time.
Futures
contracts and options on futures contracts may be used to reduce a Fund’s
exposure to fluctuations in the prices of portfolio securities and may prevent
losses if the prices of such securities decline. Similarly, such investments may
protect a Fund against fluctuation in the value of securities in which a Fund is
about to invest.
The
Funds may purchase and write (sell) call and put options on futures contracts
and enter into closing transactions with respect to such options to terminate an
existing position. An option on a futures contract gives the purchaser the right
(in return for the premium paid), and the writer the obligation, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
during the term of the option. Upon exercise of the option, the delivery of the
futures position by the writer of the option to the holder of the option is
accompanied by delivery of the accumulated balance in the writer’s futures
margin account, which represents the amount by which the market price of the
futures contract at the time of exercise exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option
contract.
Future
contracts are traded on exchanges, so that, in most cases, either party can
close out its position on the exchange for cash, without delivering the security
or commodity. However, there is no assurance that a Fund will be able to
enter into a closing transaction.
When
a Fund enters into a futures contract, it is initially required to deposit an
“initial margin” of cash, Treasury securities or other liquid portfolio
securities in an amount typically calculated in relation to the volatility in
market value of the contract over a fixed period. The margin deposits made are
marked-to-market daily and the Fund may be required to make subsequent deposits
of cash, U.S. government securities or other liquid portfolio securities, called
“variation margin,” which are reflective of price fluctuations in the futures
contract. In addition, cash or high quality securities equal in value to the
current value of the underlying securities less the margin requirement are
segregated, as may be required, with a Fund’s custodian to ensure that the
Fund’s position is unleveraged. This segregated account is marked-to market
daily to reflect changes in the value of the underlying futures
contract.
Risks
of Transactions in Futures Contracts and Related Options.
There are several risks associated with the use of futures contracts and futures
options as hedging techniques. A purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract. There
can be no guarantee that there will be a correlation between price movements in
the hedging vehicle and in the Fund securities being hedged. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. As a result, a hedge may be unsuccessful
because of market behavior or unexpected interest rate trends.
Investments
in options, futures contracts and options on futures contracts may reduce the
gains which would otherwise be realized from the sale of the underlying
securities or assets which are being hedged. Additionally, positions in futures
contracts and options can be closed out only on an exchange that provides a
market for those instruments. There can be no assurances that such a market will
exist for a particular futures contract or option. If a Fund cannot close out an
exchange traded futures contract or option which it holds, it would have to
perform its contractual obligation or exercise its option to realize any profit,
and would incur transaction costs on the sale of the underlying
assets.
There
is a risk of loss by a Fund of the initial and variation margin deposits in the
event of bankruptcy of the futures commission merchant (“FCM”) with which the
Fund has an open position in a futures contract.
Futures
exchanges may limit the amount of fluctuation permitted in certain futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day’s settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There
can be no assurance that an active market will exist at a time when a Fund seeks
to close out a futures or a futures option position, and that Fund would remain
obligated to meet margin requirements until the position is closed. In such
situations, if a Fund had insufficient cash, it might have to sell securities to
meet margin requirements at a time when it would be disadvantageous to do so.
Losses incurred in futures transactions and the costs of these transactions will
affect the performance of a Fund. Positions in futures contracts may be closed
out only on the exchange on which they were entered into (or through a linked
exchange). No secondary market for such contract exists.
It
is the policy of each Fund to meet the requirements of the Code, to qualify as a
regulated investment company and thus to prevent double taxation of the Fund and
its shareholders. One of the requirements is that at least 90% of a Fund’s gross
income be derived from dividends, interest, payment with respect to securities
loans and gains from the sale or other disposition of stocks or other
securities. Gains from commodity futures contracts do not currently qualify as
income for purposes of the 90% test. The extent to which a Fund may engage in
options and futures contract transactions may be materially limited by this
test.
Risks
Associated With Commodity Futures Contracts.
There are several additional risks associated with transactions in commodity
futures which are discussed below:
Storage.
Unlike the financial futures markets, in the commodity futures markets there are
costs of physical storage associated with purchasing the underlying commodity.
The price of the commodity futures contract reflect the storage costs of
purchasing the physical commodity, including the time value of money invested in
the physical commodity. To the extent that the storage costs for an underlying
commodity change while the Fund is invested in futures contracts on that
commodity, the value of the futures contract may change
proportionately.
Reinvestment.
In the commodity futures markets, producers of the underlying commodity may
decide to hedge the price risk of selling the commodity by selling futures
contracts today to lock in the price of the commodity at delivery tomorrow. In
order to induce speculators to purchase the other side of the same futures
contract, the commodity producer generally must sell the futures contract at a
lower price than the expected future spot price. Conversely, if most hedgers in
the futures market are purchasing futures contracts to hedge against a rise in
prices, then speculators tend to only sell the other side of the futures
contract at a higher futures price than the expected future spot price of the
commodity. The changing nature of the hedgers and speculators in the commodity
markets influence whether futures prices are above or below the expected future
spot price, which can have significant implications for the Fund. If the nature
of hedgers and speculators in futures markets has shifted when it is time for
the Fund to reinvest the proceeds of a maturing contract in a new futures
contract, the Fund might reinvest at higher or lower futures prices, or choose
to pursue other investments.
Other
Economic Factors.
The commodities which underlie commodity futures contracts may be subject to
additional economic and non-economic variables, such as drought, floods,
weather, livestock disease, embargoes, tariffs, and international economic,
political and regulatory developments. These factors may have a larger impact on
commodity prices and commodity-linked instruments, including futures contracts,
than on traditional securities. Certain commodities are also subject to limited
pricing flexibility because of supply and demand factors. Others are subject to
broad price fluctuations as a result of the volatility of the prices for certain
raw materials and the instability of supplies of other materials. These
additional variables may create additional investment risks which subject the
Fund’s investments to greater volatility than investments in traditional
securities.
Combined
Positions.
CM Commodity Index Fund may purchase and write options in any combination. For
example, the Fund may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and
return characteristics are similar to selling a futures contract. Another
possible combined position would involve writing a call option at one strike
price and buying a call option at a lower price, in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Warrants
and Subscription Rights. The
Funds may invest in warrants, which are instruments that permit, but do not
obligate, the holder to subscribe for other securities. Subscription rights are
similar to warrants, but normally have a short duration and are distributed
directly by the issuer to its shareholders. Warrants and rights are not
dividend-paying investments and do not have voting rights like common stock.
They also do not represent any rights in the assets of the issuer. As a result,
warrants and rights may be considered more speculative than direct equity
investments. In addition, the value of warrants and rights do not necessarily
change with the value of the underlying securities and may cease to have value
if they are not exercised prior to their expiration dates.
PARTLY
PAID SECURITIES
Securities
paid for on an installment basis. A partly paid security trades net of
outstanding installment payments—the buyer “takes over payments.” The buyer’s
rights are typically restricted until the security is fully paid. If the value
of a partly-paid security declines before a Fund finishes paying for it, the
Fund will still owe the payments, but may find it hard to sell and as a result
may incur a loss.
PRIVATE
INVESTMENT IN PUBLIC EQUITY
The
Funds may acquire equity securities of an issuer that are issued through a
private investment in public equity (PIPE) transaction, including on a
when-issued basis. See “When, As and If Issued Securities.” A Fund will earmark
an amount of cash or high quality securities equal (on a daily mark to market
basis) to the amount of its commitment to purchase the when-issued securities.
PIPE transactions typically involve the purchase of securities directly from a
publicly traded company or its affiliates in a private placement transaction,
typically at a discount to the market price of the company’s securities. See
also “Direct Investments.” There is a risk that if the market price of the
securities drops below a set threshold, the company may have to issue additional
stock at a significantly reduced price, which may dilute the value of a Fund’s
investment. Shares in PIPES generally are not registered with the SEC until
after a certain time period from the date the private sale is completed. This
restricted period can last many months. Until the public registration process is
completed, PIPES are restricted as to resale and a Fund cannot freely trade the
securities. Generally, such restrictions cause the PIPES to be illiquid during
this time. PIPES may contain provisions that the issuer will pay specified
financial penalties to the holder if the issuer does not publicly register the
restricted equity securities within a specified period of time, but there is no
assurance that the restricted equity securities will be publicly registered, or
that the registration will remain in effect. See “Rule 144A and Section 4(a)(2)
Securities.”
PREFERRED
STOCK
The
Funds may invest in preferred stock. Preferred stock represents an equity
interest in a company that generally entitles the holder to receive, in
preference to the holders of other stocks such as common stocks, dividends and a
fixed share of the proceeds resulting from a liquidation of the company. Some
preferred stocks also entitle their holders to receive additional liquidation
proceeds on the same basis as holders of a company’s common stock, and thus also
represent an ownership interest in that company.
Preferred
stocks may pay fixed or adjustable rates of return. Preferred stock is subject
to issuer-specific and market risks applicable generally to equity securities.
In addition, a company’s preferred stock generally pays dividends only after the
company makes required payments to holders of its bonds and other debt. For this
reason, the value of preferred stock will
usually
react more strongly than bonds and other debt to actual or perceived changes in
the company’s financial condition or prospects. Preferred stock of smaller
companies may be more vulnerable to adverse developments than preferred stock of
larger companies.
REAL
ESTATE SECURITIES
The
Funds may not purchase or sell real estate, except that the Funds may invest in
securities of issuers that invest in real estate or interests therein. These
include equity securities of REITs and other real estate industry companies or
companies with substantial real estate investments. Global Resources Fund may
invest more than 50% of its assets in such securities. The Funds are therefore
subject to certain risks associated with direct ownership of real estate and
with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; possible lack of availability of
mortgage funds; extended vacancies of properties; risks related to general and
local economic conditions; overbuilding; increases in competition, property
taxes and operating expenses; changes in zoning laws; costs resulting from the
clean-up of, and liability to third parties for damages resulting from,
environmental problems; casualty or condemnation losses; uninsured damages from
floods, earthquakes or other natural disasters; limitations on and variations in
rents; and changes in interest rates.
REITs
are pooled investment vehicles whose assets consist primarily of interests in
real estate and real estate loans. REITs are generally classified as equity
REITs, mortgage REITs or hybrid REITs. Equity REITs own interest in property and
realize income from the rents and gain or loss from the sale of real estate
interests. Mortgage REITs invest in real estate mortgage loans and realize
income from interest payments on the loans. Hybrid REITs invest in both equity
and debt. Equity REITs may be operating or financing companies. An operating
company provides operational and management expertise to and exercises control
over, many if not most operational aspects of the property. REITS are not taxed
on income distributed to shareholders, provided they comply with several
requirements of the Code.
Investing
in REITs involves certain unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified, and are subject
to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation and the possibilities of
failing to qualify for the exemption from tax for distributed income under the
Code. REITs (especially mortgage REITs) are also subject to interest rate risk
(i.e., as interest rates rise, the value of the REIT may decline).
Under
recent tax legislation, individuals (and certain other non-corporate entities)
are generally eligible for a 20% deduction with respect to taxable ordinary
dividends from REITs and certain taxable income from publicly traded
partnerships. Regulations issued by the Internal Revenue Service (“IRS”) enable
the Fund to pass through the special character of “qualified REIT dividends”
(i.e., ordinary REIT dividends other than capital gain dividends and portions of
REIT dividends designated as qualified dividend income), but not qualified
publicly traded partnership income, to a shareholder, provided both the Fund and
a shareholder meet certain holding period requirements with respect to their
shares. A noncorporate shareholder receiving such dividends would treat them as
eligible for the 20% deduction, provided the RIC shares were held by the
shareholder for more than 45 days during the 91-day period beginning on the date
that is 45 days before the date on which the shares become ex-dividend with
respect to such dividend. The amount of a RIC’s dividends eligible for the 20%
deduction for a taxable year is limited to the excess of the RIC’s qualified
REIT dividends for the taxable year over allocable expenses.
REGULATORY
Changes
in the laws or regulations of the United States or the Cayman Islands, including
any changes to applicable tax laws and regulations, could impair the ability of
the CM Commodity Index Fund and the International Investors Gold Fund to achieve
their investment objective and could increase the operating expenses of each of
these Funds or the wholly owned subsidiary of the International Investors Gold
Fund (the “Gold Subsidiary”) or the CMCI Subsidiary. For example, in 2012, the
CFTC adopted amendments to its rules that affect the ability of certain
investment advisers to registered investment companies and other entities to
rely on previously available exclusions or exemptions from registration under
the CEA and regulations thereunder. In addition, the CFTC or the SEC could at
any time alter the regulatory requirements governing the use of commodity
futures, options on commodity futures, structured notes or swap transactions by
investment companies, which could result in the inability of the International
Investors Gold Fund or the CM Commodity Index Fund to achieve its investment
objective through its current strategies.
Specifically,
these amendments, which became effective on January 1, 2013, require an
investment adviser of a registered investment company to register with the CFTC
as a “commodity pool operator” (“CPO”) if the investment company
either
markets itself as a vehicle for trading commodity interests or conducts more
than a de minimis amount of speculative trading in commodity
interests.
As
a result of the amendments referenced above and based on the CM Commodity Index
Fund’s and its CMCI Subsidiary’s current investment strategies, the CM Commodity
Index Fund and the CMCI Subsidiary are each a “commodity pool” and VEARA, which
is currently registered with the CFTC as a CPO and commodity trading adviser
under the CEA, is considered a CPO with respect to the CM Commodity Index Fund
and the CMCI Subsidiary. Accordingly, CM Commodity Index Fund and VEARA are
subject to dual regulation by the CFTC and the SEC. In August 2013, the CFTC
adopted regulations that seek to “harmonize” CFTC regulations with overlapping
SEC rules and regulations. Pursuant to the CFTC harmonization regulations, CM
Commodity Index Fund and VEARA may elect to meet the requirements of certain
CFTC regulations by complying with specific SEC rules and regulations relating
to disclosure and reporting requirements. The CFTC could deem CM Commodity Index
Fund or VEARA in violation of an applicable CFTC regulation if CMCI Commodity
Index Fund or VEARA failed to comply with a related SEC regulatory requirement
under the CFTC harmonization regulations. CM Commodity Index Fund and VEARA will
remain subject to certain CFTC-mandated disclosure, reporting and recordkeeping
regulations even if they elect substitute compliance under the CFTC
harmonization regulations. Compliance with the CFTC regulations could increase
CM Commodity Index Fund’s expenses, adversely affecting the Fund’s total return.
In addition, the CFTC or the SEC could at any time alter the regulatory
requirements governing the use of commodity index-linked notes, commodity
futures, options on commodity futures or swap transactions by investment
companies, which could result in the inability of the CM Commodity Index Fund to
achieve its investment objective through its current strategies.
REPURCHASE
AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
Each
of the Funds may enter into repurchase agreements. Repurchase agreements, which
may be viewed as a type of secured lending by a Fund, typically involve the
acquisition by a Fund of debt securities from a selling financial institution
such as a bank, savings and loan association or broker-dealer. The agreements
typically provide that a Fund will sell back to the institution, and that the
institution will repurchase, the underlying security serving as collateral at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. The collateral is marked-to-market daily to
determine that the value of the collateral, as specified in the agreement, does
not decrease below the purchase price plus accrued interest. If such decrease
occurs, additional collateral will be requested and, when received, added to the
account to maintain full collateralization. A Fund accrues interest from the
institution until the time when the repurchase is to occur.
The
Funds may also enter into reverse repurchase agreements. Reverse repurchase
agreements involve sales by the Funds of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. Such transactions are advantageous only if the interest cost to the Funds
of the reverse repurchase transaction is less than the cost of obtaining the
cash otherwise. Opportunities to achieve this advantage may not always be
available, and the Funds seek to use the reverse repurchase technique only when
it will be advantageous to the Funds. In addition, reverse repurchase agreements
may be viewed as a form of borrowing, and borrowed assets used for investment
creates leverage risk. Leverage can create interest expense that may lower the
Funds’ overall returns. Leverage may exaggerate the Funds’ volatility and risk
of loss.
RULE
144A AND SECTION 4(a)(2) SECURITIES
The
Funds may invest in securities which are subject to restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the “1933 Act”), or which are otherwise not readily
marketable.
Rule
144A under the 1933 Act allows a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a “safe harbor” from the registration requirements of the
1933 Act of resale of certain securities to qualified institutional
buyers.
Each
Adviser monitors the liquidity determinations of restricted securities in the
Funds’ holdings pursuant to Rule 22e-4. The determination of whether a Rule 144A
security is liquid or illiquid generally takes into account relevant market,
trading, and investment-specific considerations consistent with applicable SEC
guidance. Additional factors that may be considered include: (1) the frequency
of trades and quotes for the security; (2) the number of dealers wishing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanisms of
the transfer).
In
addition, commercial paper may be issued in reliance on the “private placement”
exemption from registration afforded by Section 4(a)(2) of the 1933 Act. Such
commercial paper is restricted as to disposition under the federal securities
laws and, therefore, any resale of such securities must be effected in a
transaction exempt from registration under the 1933 Act.
Securities
eligible for resale pursuant to Rule 144A under the 1933 Act and commercial
paper issued in reliance on the Section 4(a)(2) exemption under the 1940 Act may
be determined to be liquid in accordance with Rule 22e-4 for purposes of
complying with investment restrictions applicable to investments by the Funds in
illiquid investments. To the extent such securities are determined to be
illiquid, they will be aggregated with other illiquid investments for purposes
of the limitation on illiquid investments.
RISKS
RELATED TO RUSSIAN INVASION OF UKRAINE
In
late February 2022, Russian military forces invaded Ukraine, significantly
amplifying already existing geopolitical tensions among Russia, Ukraine, Europe,
NATO, and the West. Russia’s invasion, the responses of countries and political
bodies to Russia’s actions, and the potential for wider conflict may increase
financial market volatility and could have severe adverse effects on regional
and global economic markets, including the markets for certain securities and
commodities such as oil and natural gas. Following Russia’s actions, various
countries, including the U.S., Canada, the United Kingdom, Germany, and France,
as well as the European Union, issued broad-ranging economic sanctions against
Russia. The sanctions consist of the prohibition of trading in certain Russian
securities and engaging in certain private transactions, the prohibition of
doing business with certain Russian corporate entities, large financial
institutions, officials and oligarchs, and the freezing of Russian assets. The
sanctions include a commitment by certain countries and the European Union to
remove selected Russian banks from the Society for Worldwide Interbank Financial
Telecommunications, commonly called “SWIFT,” the electronic network that
connects banks globally, and imposed restrictive measures to prevent the Russian
Central Bank from undermining the impact of the sanctions. A number of large
corporations and U.S. states have also announced plans to divest interests or
otherwise curtail business dealings with certain Russian
businesses.
The
imposition of these current sanctions (and potential further sanctions in
response to continued Russian military activity) and other actions undertaken by
countries and businesses may adversely impact various sectors of the Russian
economy, including but not limited to, the financials, energy, metals and
mining, engineering, and defense and defense-related materials sectors. Such
actions also may result in a weakening of the ruble, a downgrade of Russia’s
credit rating, and the decline of the value and liquidity of Russian securities,
and could impair the ability of a Fund to buy, sell, receive, or deliver those
securities. Moreover, the measures could adversely affect global financial and
energy markets and thereby negatively affect the value of a Fund's investments
beyond any direct exposure to Russian issuers or those of adjoining geographic
regions. In response to sanctions, the Russian Central Bank raised its interest
rates and banned sales of local securities by foreigners, which may include a
Fund. Russia may take additional counter measures or retaliatory actions, which
may further impair the value and liquidity of Russian securities and Fund
investments. Such actions could, for example, include restricting gas exports to
other countries, seizure of U.S. and European residents' assets, conducting
cyberattacks on other governments, corporations or individuals, or undertaking
or provoking other military conflict elsewhere in Europe, any of which could
exacerbate negative consequences on global financial markets and the economy.
The actions discussed above could have a negative effect on the performance of
Funds that have exposure to Russia. While diplomatic efforts have been ongoing,
the conflict between Russia and Ukraine is currently unpredictable and has the
potential to result in broadened military actions. The duration of ongoing
hostilities and corresponding sanctions and related events cannot be predicted
and may result in a negative impact on performance and the value of Fund
investments, particularly as it relates to Russia exposure.
Due
to difficulties transacting in impacted securities, a Fund may experience
challenges liquidating the applicable positions to continue to seek a Fund’s
investment objective. Additionally, due to current and potential future
sanctions or potential market closure impacting the ability to trade Russian
securities, a Fund may experience higher transaction costs. Furthermore, any
exposure that a Fund may have to Russian counterparties or counterparties that
are otherwise impacted by sanctions also could negatively impact the Fund’s
portfolio.
SECURITIES
LENDING
The
Funds may lend securities to approved borrowers, including affiliates of the
Funds’ securities lending agent, State Street Bank and Trust Company (“State
Street”). Securities lending allows a Fund to retain ownership of the securities
loaned and, at the same time, earn additional income. The borrower provides cash
or non-cash collateral equal to at least 102% (105% for foreign securities) of
the value of the securities loaned. Collateral is maintained by State Street on
behalf of the Funds. Cash received as collateral through loan transactions is
generally invested in shares of a money market fund. Investing this cash
subjects that investment, as well as the securities loaned, to market
appreciation or depreciation. Non-cash collateral consists of securities issued
or guaranteed by the United States government or one of its agencies and cannot
be re-hypothecated by the Funds. The Funds maintain the ability to vote or
consent on proxy proposals involving material events affecting securities
loaned. If the borrower defaults on its obligation to return the securities
loaned because of insolvency or other reasons, a Fund could experience delays
and costs in recovering the securities loaned or in gaining access to the
collateral. These delays and costs could be greater for foreign securities. If a
Fund is not able to recover the securities loaned, the collateral may be sold
and a replacement investment may be purchased in the market. The value of the
collateral could decrease below the value of the replacement investment by the
time the replacement investment is purchased.
SHORT
SALES
The
Funds may short sell equity securities. The Funds will establish a segregated
account with respect to their short sales and maintain in the account cash not
available for investment or U.S. government securities or other liquid,
high-quality securities having a value equal to the difference between (i) the
market value of the securities sold short at the time they were sold short and
(ii) any cash, U.S. government securities or other liquid, high-quality
securities required to be deposited as collateral with the broker in connection
with the short sale (not including the proceeds from the short sale). The
segregated account will be marked to market daily, so that (i) the amount in the
segregated account plus the amount deposited with the broker as collateral
equals the current market value of the securities sold short and (ii) in no
event will the amount in the segregated account plus the amount deposited with
the broker as collateral fall below the original value of the securities at the
time they were sold short.
SPECIAL
PURPOSE ACQUISITION COMPANIES
The
Funds may invest in stock, warrants, and other securities of special purpose
acquisition companies (SPACs) or similar special purpose entities. A SPAC is
typically a publicly traded company that raises investment capital via an IPO
for the purpose of acquiring the equity securities of one or more existing
companies (or interests therein) via merger, combination, acquisition or other
similar transactions. A Fund may acquire an interest in a SPAC in an IPO or a
secondary market transaction. See also “Equity Securities” and “Options,
Futures, Warrants and Subscription Rights.”
Unless
and until an acquisition is completed, a SPAC generally invests its assets (less
a portion retained to cover expenses) in U.S. government securities, money
market securities and cash. To the extent the SPAC is invested in cash or
similar securities, this may negatively affect a Fund’s performance. Because
SPACs and similar entities are in essence blank check companies without
operating history or ongoing business other than seeking acquisitions, the value
of their securities is particularly dependent on the ability of the entity’s
management to identify and complete a profitable acquisition. There is no
guarantee that the SPACs in which a Fund invests will complete an acquisition or
that any acquisitions that are completed will be profitable. Some SPACs may
pursue acquisitions only within certain industries or regions, which may
increase the volatility of their prices. In addition, these securities, which
are typically traded in the over-the-counter market, may be considered illiquid
and/or be subject to restrictions on resale.
Other
risks of investing in SPACs include that a significant portion of the monies
raised by the SPAC may be expended during the search for a target transaction;
an attractive transaction may not be identified at all (or any requisite
approvals may not be obtained) and the SPAC may dissolve and be required to
return any remaining monies to shareholders, causing a Fund to incur the
opportunity cost of missed investment opportunities the Fund otherwise could
have benefited from; a transaction once identified or effected may prove
unsuccessful and an investment in the SPAC may lose value; the warrants or other
rights with respect to the SPAC held by a Fund may expire worthless or may be
repurchased or retired by the SPAC at an unfavorable price; and an investment in
a SPAC may be diluted by additional later offerings of interests in the SPAC or
by other investors exercising existing rights to purchase shares of the SPAC. In
addition, a SPAC target company may have limited operating experience, a smaller
size, limited product lines, markets, distribution channels and financial and
managerial resources. Investing in the securities of smaller companies involves
greater risk, and portfolio price volatility.
SUBSIDIARY
International
Investors Gold Fund’s investments in the Gold Subsidiary and CM Commodity Index
Fund’s investments in the CMCI Subsidiary are expected to provide such Funds
with exposure to the commodity markets within the limitations of Subchapter M of
the Code and the Internal Revenue Service (“IRS”) revenue rulings, as discussed
below under “Taxation.”
Each
of the Gold Subsidiary and the CMCI Subsidiary is a company organized under the
laws of the Cayman Islands and is overseen by its own board of directors.
International Investors Gold Fund is the sole shareholder of the Gold
Subsidiary, and it is not currently expected that shares of the Gold Subsidiary
will be sold or offered to other investors. CM Commodity Index Fund is the sole
shareholder of the CMCI Subsidiary, and it is not currently expected that shares
of the CMCI Subsidiary will be sold or offered to other investors. It is
expected that the Gold Subsidiary will primarily invest in gold bullion, gold
futures and other instruments that provide direct or indirect exposure to gold,
including ETFs, and also may invest in silver, platinum and palladium bullion
and futures. It is expected that the CMCI Subsidiary will primarily invest in
commodity-linked derivative instruments, including swap agreements, futures and
options on futures. To the extent that International Investors Gold Fund invests
in the Gold Subsidiary, such Fund may be subject to the risks associated with
those instruments and other securities. To the extent that the CM Commodity
Index Fund invests in the CMCI Subsidiary, such Fund may be subject to the risks
associated with those derivative instruments and other securities.
While
each of the Gold Subsidiary and the CMCI Subsidiary may be considered similar to
investment companies, they are not registered under the 1940 Act and, unless
otherwise noted in the applicable Prospectus and this SAI, is not subject to all
of the investor protections of the 1940 Act and other U.S. regulations. Changes
in the laws of the United States and/or the Cayman Islands could result in the
inability of International Investors Gold Fund and/or the Gold Subsidiary and/or
CM Commodity Index Fund and/or the CMCI Subsidiary to operate as described in
the applicable Prospectus and this SAI and could eliminate or severely limit
such Fund’s ability to invest in the Gold Subsidiary or the CMCI Subsidiary (as
applicable) which may adversely affect such Funds and their
shareholders.
SWAPS
The
Funds may enter into swap agreements. A swap is a derivative in the form of an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The payment streams are calculated by reference
to a specified index and agreed upon notional amount. The term “specified index”
includes currencies, fixed interest rates, prices, total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Fund may agree to swap the return generated by a fixed income index for the
return generated by a second fixed income index. The currency swaps in which a
Fund may enter will generally involve an agreement to pay interest streams in
one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon notional amount. The swaps in
which the CM Commodity Index Fund may engage also include rate caps, floors and
collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index.
A
Fund may also enter into credit default swaps, index swaps and interest rate
swaps. Credit default swaps may have as reference obligations one or more
securities or a basket of securities that are or are not currently held by the
Fund. The protection “buyer” in a credit default contract is generally obligated
to pay the protection “seller” an upfront or a periodic stream of payments over
the term of the contract provided that no credit event, such as a default, on a
reference obligation has occurred. If a credit event occurs, the seller
generally must pay the buyer the “par value” (full notional value) of the swap
in exchange for an equal face amount of deliverable obligations of the reference
entity described in the swap, or the seller may be required to deliver the
related net cash amount, if the swap is cash settled. Interest rate swaps
involve the exchange by a Fund with another party of their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments
for floating rate payments. Index swaps, also called total return swaps,
involves a Fund entering into a contract with a counterparty in which the
counterparty makes payments to the Fund based on the positive returns of an
index, such as a corporate bond index, in return for the Fund paying to the
counterparty a fixed or variable interest rate, as well as paying to the
counterparty any negative returns on the index. In a sense, a Fund is purchasing
exposure to an index in the amount of the notional principal in return for
making interest rate payments on the notional principal. As with interest-rate
swaps, the notional principal does not actually change hands at any point in the
transaction. Cross-currency swaps are interest rate swaps in which the notional
amount upon which the fixed interest rate is accrued is denominated in another
currency and the notional amount upon which the floating rate is accrued is
denominated in another currency. The notional amounts are typically determined
based on the spot exchange rate at the inception of the trade. The swaps in
which a Fund may engage also include rate caps, floors and collars under which
one party pays a single or periodic fixed amount(s) (or premium), and the other
party pays periodic amounts based on the movement of a specified index. Global
Resources Fund may also enter into other asset swaps. Asset swaps are similar to
swaps in that the performance of one global resource (e.g., gold) may be
“swapped” for another (e.g., energy).
Swaps
do not typically involve the delivery of securities, other underlying assets, or
principal. Accordingly, the risk of loss with respect to swaps is limited to the
net amount of payments that a Fund is contractually obligated to make. If the
other party to a swap defaults, a Fund’s risk of loss consists of the net amount
of payments that a Fund is contractually entitled to receive. Currency swaps
usually involve the delivery of the entire principal value of one designated
currency in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to
the swap will default on its contractual delivery obligations. If there is a
default by the counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. In addition, as of the date of this
SAI, UBS Financial Services, Inc. was the only available counterparty with which
the CM Commodity Index Fund may enter into swaps contracts on the CMCI.
Accordingly, this increases the CM Commodity Index Fund’s exposure to these
counterparty risks. The use of swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary fund securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates, and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used. Also, if a counterparty’s
creditworthiness declines, the value of the swap would likely
decline.
Certain
standardized swaps are subject to mandatory central clearing and
exchange-trading. Central clearing is intended to reduce counterparty credit
risk and increase liquidity, but central clearing does not eliminate these risks
and may involve additional costs and risks not involved with uncleared swaps.
Credit risk of cleared swap participants is concentrated in a few
clearinghouses, and the consequences of insolvency of a clearinghouse are not
clear. There is also a risk of loss by a Fund of the initial and variation
margin deposits in the event of bankruptcy of the FCM with which the Fund has an
open position, or the central counterparty in a swap contract.
TRACKING
ERROR
The
returns of VanEck Morningstar Wide Moat Fund and CM Commodity Index Fund’s
return may not match the return of the indexes that each of these funds seeks to
track due to, among other factors, the Fund incurring operating expenses, and
not being fully invested at all times as a result of cash inflows and cash
reserves to meet redemptions.
U.S.
GOVERNMENT AND RELATED OBLIGATIONS
U.S.
government obligations include U.S. Treasury obligations and securities issued
or guaranteed by various agencies of the U.S. government or by various
instrumentalities which have been established or sponsored by the U.S.
government. U.S. Treasury obligations and securities issued or guaranteed by
various agencies of the U.S. government differ in their interest rates,
maturities and time of issuance, as well as with respect to whether they are
guaranteed by the U.S. government. U.S. government and related obligations may
be structured as fixed-, variable- or floating-rate obligations.
While
U.S. Treasury obligations are backed by the “full faith and credit” of the U.S.
government, securities issued or guaranteed by federal agencies and U.S.
government-sponsored instrumentalities may or may not be backed by the full
faith and credit of the U.S. government. These securities may be supported by
the ability to borrow from the U.S. Treasury or only by the credit of the
issuing agency or instrumentality and, as a result, may be subject to greater
credit risk than securities issued or guaranteed by the U.S. Treasury.
Obligations of U.S. government agencies, authorities, instrumentalities and
sponsored enterprises historically have involved limited risk of loss of
principal if held to maturity. However, no assurance can be given that the U.S.
government would provide financial support to any of these entities if it is not
obligated to do so by law. Additionally, from time to time uncertainty regarding
the status of negotiations in the U.S. government to increase the statutory debt
limit, commonly called the “debt ceiling,” could increase the risk that the U.S.
government may default on payments on certain U.S. government securities, cause
the credit rating of the U.S. government to be downgraded, increase volatility
in the stock and bond markets, result in higher interest rates, reduce prices of
U.S. Treasury securities, and/or increase the costs of various kinds of debt. If
a U.S. government-sponsored entity is negatively impacted by legislative or
regulatory action, is unable to meet its obligations, or its creditworthiness
declines, the performance of a Fund that holds securities of that entity will be
adversely impacted.
WHEN,
AS AND IF ISSUED SECURITIES
Each
Fund may purchase securities on a “when, as and if issued” basis, under which
the issuance of the security depends upon the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring. At
that time, the Fund will record the transaction and, in determining its net
asset value, will reflect the value of the security daily. At that time, the
Fund will also earmark or establish a segregated account on the Fund’s books in
which it will maintain cash, cash equivalents or other liquid portfolio
securities equal in value to recognized commitments for such securities. An
increase in the percentage of the Fund assets committed to the purchase of
securities on a “when, as and if issued” basis may increase the volatility of
its net asset value. A Fund may also sell securities on a “when, as and if
issued” basis provided that the issuance of the security will result
automatically from the exchange or conversion of a security owned by the Fund at
the time of sale.
ADDITIONAL
INFORMATION ABOUT THE CMCI
The
following is a more complete description of the UBS Bloomberg Constant Maturity
Commodity Total Return Index (the “CMCI”), including, without limitation,
information about the composition, weighting, method of calculation and
procedures for changes in components and weights.
Overview
of the CMCI
The
CMCI represents a basket of commodity futures contracts with 29 components (as
of August 1, 2021). Exposure to each component is allocated across a range of
maturity pillars ranging from three months up to a maximum of three years. Not
all commodities have the full range of maturity exposures. In contrast,
traditional commodity indices typically invest in front-month and next-month
futures contracts which have shorter tenors (time to maturity) than the average
CMCI tenor.
The
CMCI also employs a “constant maturity” approach by relying on a continuous roll
methodology in which the Index invests in and out of future contracts on a daily
basis in order to maintain the average maturity of each pillar. This methodology
differs from traditional commodity indices, which usually are pre-defined to
roll during a fixed window of days on a monthly or bi-monthly basis. The CMCI
represents commodities in five primary sectors: Energy, Agriculture, Industrial
Metals, Precious Metals and Livestock. The underlying commodities trade on
various exchanges.
The
return of the CMCI is generated by two components: (i) uncollateralized returns
from holding and rolling of futures contracts comprising the Index and (ii) a
fixed-income return, which reflects the interest earned on a hypothetical
13-week U.S. Treasury bill portfolio theoretically deposited as full collateral
for the notional exposure of hypothetical positions in the futures contracts
comprising the Index.
As
of August 1, 2021, the CMCI consisted of the following commodity sectors with
the following relative Target Weights: Agriculture (31.0%), Energy (30.5%),
Industrial Metals (25.7%), Precious Metals (8.3%) and Livestock
(4.6%).
Component
Selection and Target Weights
The
weighting process for the Index is designed to reflect the economic significance
and market liquidity of each commodity. The Index sponsors use a two-step
approach to determine Target Weights: first, economic indicators (regional
Consumer Price Indexes (CPI), Producer Price Indexes (PPI) and Gross Domestic
Projects (GDP)), along with liquidity analysis, are used to determine the sector
weights (Energy, Agriculture, Industrial Metals, Precious Metals and Livestock);
secondly, global consumption data in conjunction with further liquidity analysis
is used to calculate the individual component weights. In order to ensure a high
level of diversification and avoid unnecessary dilution, the weight of any
individual index component is limited to 20% and any commodity with a weight
that is lower than 0.60% is excluded from the CMCI.
Changes
in the Target Weights and/or Index Composition
The
CMCI Governance Committee (in consultation with the CMCI Advisory Committee)
reviews the selection and weightings of the futures contracts in the annual
meeting in the first half of the year or at any special meeting called by the
CMCI Advisory Committee. New Target Weights are therefore established on an
annual basis during the CMCI Governance Committee meetings, subject to
ratification by the Index Sponsor. The Index is rebalanced to the new Target
Weights during the maintenance period, which is the final three CMCI business
days at the end of July.
Tenors
of Contracts
The
CMCI represents a weighted average of all available CMCI constant maturities
(ranging from three months to over three years). The distribution of weights to
available tenors (time to maturity) is a function of relative liquidity of the
underlying futures contracts. As of August 2021, the average tenor of the
futures contracts comprising the Index is approximately 6.6 months. Since the
relative liquidity of commodity futures contracts for a given commodity tends to
decline as time to maturity increases, the weights of the longer-dated tenors
are typically lower than those for the short-dated tenors for a given
commodity.
Rebalancing
of the Index Components
Due
to price movements, the weight of each component in the Index will fluctuate
from its Target Weight over time. The weight of each Index component is
therefore rebalanced over the final three CMCI Business Days of each month in
order to bring each underlying commodity risk position back to its Target Weight
for each tenor. The process is automatic and is implemented via a pre-defined
methodology. The Index provider may delay or change a scheduled rebalancing or
reconstitution of the CMCI or the implementation of certain rules at its sole
discretion.
Calculation
of the Index
The
CMCI is calculated and disseminated by UBS approximately every fifteen seconds
(assuming the Index level has changed within such fifteen-second interval) from
8:00 a.m. to 3:00 p.m., New York City time, and a daily closing Index level is
published between 4:00 p.m. and 6:00 p.m., New York City time, on each Trading
Day. Information relating to the CMCI is available via Bloomberg on pages CUBS,
CMCN or CMCX and from Reuters on page UBSCMCI. Index information is also
available on the Bloomberg website: http://www.bloomberg.com (Select
“COMMODITIES” from the drop-down menu entitled “Market Data”). For further
information on CMCI methodology and CMCI index values, investors can go to
http://www.ubs.com/cmci.
Total
Return
CMCI
is a “total return” index. In addition to uncollateralized returns generated
from the futures contracts comprising the Index, a daily fixed-income return is
added, which reflects the interest earned on a hypothetical 13-week Treasury
bill portfolio which theoretically collateralizes 100% of the notional value of
the hypothetical positions in the futures contracts comprising the CMCI. The
rate used to calculate the daily fixed-income return is the 13-week U.S.
Treasury bill Auction High Rate, as published by the “Treasury Security Auction
Results” report, published by the Bureau of the Public Debt currently available
on the website:
http://www.treasurydirect.gov/instit/annceresult/press/preanre/preanre.htm. The
rate is generally published once per week on Monday and generally made effective
with respect to the Index on the following Trading Day.
ADDITIONAL
INFORMATION ABOUT MORNINGSTAR WIDE MOAT FOCUS INDEX
The
Wide Moat Focus Index is a rules-based index intended to offer exposure to
companies that the Index Provider determines have sustainable competitive
advantages based on a proprietary methodology that considers quantitative and
qualitative factors (“wide moat companies”). Wide moat companies are selected
from the universe of companies represented in the Morningstar® US Market
IndexSM,
a broad market index representing 97% of U.S. market capitalization. The Wide
Moat Focus Index targets a select group of wide moat companies: those that
according to Morningstar’s equity research team are attractively priced as of
each Wide Moat Focus Index review. Out of the companies in the Morningstar US
Market Index that the Index Provider determines are wide moat companies, the
Index Provider selects companies to be included in the Wide Moat Focus Index as
determined by the ratio of the Index Provider’s estimate of fair value of the
issuer’s common stock to the price. The Index Provider’s equity research team’s
fair value estimates are calculated using a standardized, proprietary valuation
model.
A
selection committee, comprising members of Morningstar’s equity research team,
makes the final determination of whether a company is a wide moat company. Only
those companies with one or more of the identifiable competitive advantages, as
determined by the Index Provider’s equity research team and agreed to by the
selection committee, are wide moat companies. The quantitative factors used to
identify competitive advantages include historical and projected returns on
invested capital relative to cost of capital. The qualitative factors used to
identify competitive advantages include customer switching cost (i.e., the costs
of customers switching to competitors), internal cost advantages, intangible
assets (e.g., intellectual property and brands), network effects (i.e., whether
products or services become more valuable as the number of customers grows) and
efficient scale (i.e., whether the company effectively serves a limited market
that potential rivals have little incentive to enter into). The Index Provider’s
equity research team uses a standardized, proprietary valuation model to assign
fair values to potential Wide Moat Focus Index constituents’ common
stock.
The
Index Provider’s equity research team estimates the issuer’s future free cash
flows and then calculates an enterprise value using weighted average costs of
capital as the discount rate. The Index Provider’s equity research team then
assigns each issuer’s common stock a fair value by adjusting the enterprise
value to account for net debt and other adjustments.
A
buffer rule is applied to the current Wide Moat Focus Index constituents. Those
that are ranked in the top 150% of stocks representing the lowest current market
price/fair value price eligible for inclusion in the Wide Moat Focus Index will
remain in the Wide Moat Focus Index at the time of reconstitution and those that
fall outside of the top 150% are excluded from the Index. The maximum weight of
an individual sector in the Wide Moat Focus Index is capped at 10% more than its
corresponding weight in the Morningstar US Market Index at the time of
reconstitution, or 40%, whichever is higher.
As
of December 31, 2021, the Wide Moat Focus Index included 46 securities of
companies with a market capitalization range of between approximately $1.7
billion and $2,525 billion and a weighted average market capitalization of
$235.2 billion. These amounts are subject to change.
The
Wide Moat Focus Index employs a staggered rebalance methodology. The Wide Moat
Focus Index is divided into two equally-weighted sub-portfolios, and each is
reconstituted and rebalanced semi-annually on alternating quarters. Each
subportfolio will contain 40 equally-weighted securities at its semi-annual
reconstitution and weights will vary with market prices until the next
reconstitution date. Due to the staggered rebalance methodology, constituents
and weightings may vary between sub-portfolios. Each sub-portfolio is reweighted
to 50% of the total Wide Moat Focus Index every six months. Adjustments to one
sub-portfolio are performed after the close of business on the third Friday of
March and September and
adjustments
to the other sub-portfolio are performed after the close of business on the
third Friday of June and December, and all adjustments are effective on the
following Monday. If the Monday is a market holiday, reconstitution and
rebalancing occurs on the Tuesday immediately following. The Index provider may
delay or change a scheduled rebalancing or reconstitution of the Wide Moat Focus
Index or the implementation of certain rules at its sole
discretion.
Rebalancing
data, including constituent weights and related information, is posted on the
Index Provider’s website at the end of each quarter-end month. Target weights of
the constituents are not otherwise adjusted between quarters except in the event
of certain types of corporate actions.
FUNDAMENTAL
INVESTMENT RESTRICTIONS
The
following investment restrictions are in addition to those described in the
Prospectuses. These investment restrictions are “fundamental” and may be changed
with respect to the Fund only with the approval of the holders of a majority of
the Fund’s “outstanding voting securities”, (which for this purpose and under
the 1940 Act, means the lesser of (i) 67% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented; or (ii) more
than 50% of the outstanding shares). As to any of the following investment
restrictions, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in value of portfolio securities or amount of net assets will not be considered
a violation of the investment restriction. In the case of borrowing, however, a
Fund will promptly take action to reduce the amount of the Fund’s borrowings
outstanding if, because of changes in the net asset value of the Fund due to
market action, the amount of such borrowings exceeds one-third of the value of
the Fund’s net assets. The fundamental investment restrictions are as
follows:
Each
Fund may not:
1.Borrow
money, except as permitted under the 1940 Act, as amended and as interpreted or
modified by regulation from time to time.
2.Engage
in the business of underwriting securities issued by others, except to the
extent that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities or in
connection with its investments in other investment companies.
3.Make
loans, except that the Fund may (i) lend portfolio securities, (ii) enter into
repurchase agreements, (iii) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of deposit,
bankers’ acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities, and (iv)
participate in an interfund lending program with other registered investment
companies.
4.Issue
senior securities, except as permitted under the 1940 Act, as amended and as
interpreted or modified by regulation from time to time.
5.Purchase
or sell real estate, except that the Fund may (i) invest in securities of
issuers that invest in real estate or interests therein, (ii) invest in
mortgage-related securities and other securities that are secured by real estate
or interests therein, and (iii) hold and sell real estate acquired by the Fund
as a result of the ownership of securities.
Each
of the Emerging Markets Fund, Emerging Markets Leaders Fund, Environmental
Sustainability Fund, Global Resources Fund and International Investors Gold Fund
may not:
6.Purchase
or sell commodities, unless acquired as a result of owning securities or other
instruments, but it may purchase, sell or enter into financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments and may invest in securities or
other instruments backed by commodities, except that International Investors
Gold Fund may invest in gold and silver coins which are legal tender in the
country of issue and gold and silver bullion, and palladium and platinum group
metals bullion.
7.Purchase
any security if, as a result of that purchase, 25% or more of its total assets
would be invested in securities of issuers having their principal business
activities in the same industry, except that (i) Global Resources Fund will
invest 25% or more of its total assets in “global resource” industries as
defined in its Prospectus; (ii) Environmental Sustainability Fund will invest
25% or more of its total assets in industries relating to environmental
sustainability as defined in its Prospectus; and (iii) International Investors
Gold Fund may invest 25% or more of its total assets in the gold-mining
industry. This limit does not apply to securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities.
Emerging
Markets Bond Fund may not:
6. Purchase
or sell commodities, unless acquired as a result of owning securities or other
instruments, but it may purchase, sell or enter into financial options and
futures, forward and spot currency contracts, swap transactions and
other
financial contracts or derivative instruments and may invest in securities or
other instruments backed by commodities.
7. Purchase
any security if, as a result of that purchase, 25% or more of its total assets
would be invested in securities of issuers having their principal business
activities in the same industry. This limit does not apply to (i) securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
or (ii) securities of other investment companies.
CM
Commodity Index Fund may not:
6. Purchase
or sell commodities, unless acquired as a result of owning securities or other
instruments, but it may purchase, sell or enter into financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments and may invest in securities or
other instruments backed by commodities.
7. Purchase
any security if, as a result of that purchase, 25% or more of its total assets
would be invested in securities of issuers having their principal business
activities in the same industry, provided that this restriction does not limit
the Fund’s investments in (i) securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, (ii) securities of other
investment companies, and provided further that (iii) to the extent the
benchmark index for the Fund is concentrated in a particular industry, the Fund
will necessarily be concentrated in that industry.
VanEck
Morningstar Wide Moat Fund may not:
6. Purchase
or sell commodities, unless acquired as a result of owning securities or other
instruments, but it may purchase, sell or enter into financial options and
futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments and may invest in securities or
other instruments backed by commodities.
7. Purchase
any security if, as a result of that purchase, 25% or more of its total assets
would be invested in securities of issuers having their principal business
activities in the same industry, except that the Fund may invest 25% or more of
the value of its total assets in securities of issuers in any one industry or
group of industries if the index that the Fund replicates concentrates in an
industry or group of industries. This limit does not apply to securities issued
or guaranteed by the U.S. Government, its agencies or
instrumentalities.
In
addition, each of CM Commodity Index Fund, Emerging Markets Fund, Global
Resources Fund and VanEck Morningstar Wide Moat Fund may not invest in a manner
inconsistent with each of their classifications as a “diversified company” as
provided by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief applicable to the Fund from the
provisions of the 1940 Act, as amended from time to time.
For
purposes of Restriction 1, the 1940 Act generally permits a Fund to borrow money
in amounts of up to one-third of the Fund’s total assets from banks, and to
borrow up to 5% of the Fund’s total assets from banks or other lenders for
temporary purposes. To limit the risks attendant to borrowing, the 1940 Act
generally requires a Fund to maintain at all times an “asset coverage” of at
least 300% of the amount of its borrowings. Asset coverage generally means the
ratio that the value of a Fund’s total assets, minus liabilities other than
borrowings, bears to the aggregate amount of all borrowings.
For
purposes of Restriction 4, “senior securities” are generally Fund obligations
that have a priority over the Fund’s shares with respect to the payment of
dividends or the distribution of Fund assets. The 1940 Act generally prohibits a
Fund from issuing senior securities, except that the Fund may borrow money in
amounts of up to one-third of the Fund’s total assets from banks. A Fund also
may borrow an amount equal to up to 5% of the Fund’s total assets from banks or
other lenders for temporary purposes, and these borrowings are not considered
senior securities.
For
the purposes of Restriction 7, companies in different geographical locations
will not be deemed to be in the same industry if the investment risks associated
with the securities of such companies are substantially different. For example,
although generally considered to be “interest rate-sensitive,” investing in
banking institutions in different countries is generally dependent upon
substantially different risk factors, such as the condition and prospects of the
economy in a particular country and in particular industries, and political
conditions. Similarly, each foreign government issuing securities (together with
its agencies and instrumentalities) will be treated as a separate industry.
Also, for the purposes of Restriction 7, investment companies are not considered
to be part of an industry. To the extent a Fund invests its assets in underlying
investment companies, 25% or more of such Fund’s total assets may be indirectly
exposed to a particular industry or group of related industries through its
investment in one or more underlying investment companies. In accordance with
each of VanEck Morningstar Wide Moat Fund’s principal investment strategies as
set forth in its Prospectus, each Fund invests its assets in underlying
investment companies.
VanEck
Morningstar Wide Moat Fund may invest its remaining assets in securities not
included in the Moat Index, money market instruments or funds which reinvest
exclusively in money market instruments, exchange traded products, in stocks
that are in the relevant market but not the Fund’s Index, and/or in combinations
of certain stock index futures contracts, options on such futures contracts,
stock options, stock index options, options on the shares, and stock index swaps
and swaptions, each with a view towards providing the Fund with exposure to the
securities in its respective Index. These investments may be made to invest
uncommitted cash balances or, in limited circumstances, to assist in meeting
shareholder redemptions. The Fund will not invest in money market instruments as
part of a temporary defensive strategy to protect against potential stock market
declines.
PORTFOLIO
HOLDINGS DISCLOSURE
The
Funds have adopted policies and procedures governing the disclosure of
information regarding the Funds’ portfolio holdings. They are reasonably
designed to prevent selective disclosure of the Funds’ portfolio holdings to
third parties, other than disclosures that are consistent with the best
interests of the Funds’ shareholders. The Board is responsible for overseeing
the implementation of these policies and procedures, and will review them
annually to ensure their adequacy.
These
policies and procedures apply to employees of the Advisers, administrator,
principal underwriter, and all other service providers to the Funds that, in the
ordinary course of their activities, come into possession of information about
the Funds’ portfolio holdings. These policies and procedures are made available
to each service provider.
The
following outlines the policies and procedures adopted by the Funds regarding
the disclosure of portfolio-related information:
Generally,
it is the policy of the Funds that no current or potential investor (or their
representative), including any Fund shareholder (collectively, “Investors”),
shall be provided information about a Fund’s portfolio on a preferential basis
in advance of the provision of that same information to other
investors.
Disclosure
to Investors.
Portfolio holdings information for the Funds is available to all investors on
the VanEck website at vaneck.com. Information regarding the Funds’ top holdings
and country and sector weightings, updated as of each month-end, is located on
this website. Generally, this information is posted to the website within 10
business days of the end of the applicable month. The Funds may also publish a
detailed list of the securities held by such Fund as of each month-end, which is
generally posted to the website within 10 business days after the end of the
applicable month. This information generally remains available on the website
until new information is posted. Each Fund reserves the right to exclude any
portion of these portfolio holdings from publication when deemed in the best
interest of the Fund, and to discontinue the posting of portfolio holdings
information at any time, without prior notice.
Best
Interest of the Funds:
Information regarding the Funds’ specific security holdings, sector weightings,
geographic distribution, issuer allocations and related information
(“Portfolio-Related Information”), shall be disclosed to the public only (i) as
required by applicable laws, rules or regulations, (ii) pursuant to the Funds’
Portfolio-Related Information disclosure policies and procedures, or (iii)
otherwise when the disclosure of such information is determined by the Trust’s
officers to be in the best interest of Fund shareholders.
Conflicts
of Interest:
Should a conflict of interest arise between a Fund and any of the Fund’s service
providers regarding the possible disclosure of Portfolio-Related Information,
the Trust’s officers shall resolve any conflict of interest in favor of the
Fund’s interest. In the event that an officer of the Fund is unable to resolve
such a conflict of interest, the matter shall be referred to the Trust’s Audit
Committee for resolution.
Equality
of Dissemination:
Shareholders of the same Fund shall be treated alike in terms of access to the
Fund’s portfolio holdings. With the exception of certain selective disclosures,
noted in the paragraph below, Portfolio-Related Information with respect to a
Fund shall not be disclosed to any Investor prior to the time the same
information is disclosed publicly (e.g., posted on the Fund’s website).
Accordingly, all Investors will have equal access to such
information.
Selective
Disclosure of Portfolio-Related Information in Certain
Circumstances:
In some instances, it may be appropriate for a Fund to selectively disclose a
Fund’s Portfolio-Related Information (e.g., for due diligence purposes,
disclosure to a newly hired adviser or sub-adviser, or disclosure to a rating
agency) prior to public dissemination of such information.
Conditional
Use of Selectively-Disclosed Portfolio-Related Information:
To the extent practicable, each of the Trust’s officers shall condition the
receipt of Portfolio-Related Information upon the receiving party’s written
agreement to both keep such information confidential and not to trade Fund
shares based on this information.
Compensation:
No person, including officers of the Funds or employees of other service
providers or their affiliates, shall receive any compensation in connection with
the disclosure of Portfolio-Related Information. Notwithstanding the
foregoing,
the Funds reserve the right to charge a nominal processing fee, payable to the
Funds, to non-shareholders requesting Portfolio-Related Information. This fee is
designed to offset the Fund’s costs in disseminating such
information.
Source
of Portfolio-Related Information:
All Portfolio-Related Information shall be based on information provided by the
Fund’s administrator(s)/accounting agent.
The
Funds may provide non-public portfolio holdings information to third parties in
the normal course of their performance of services to the Funds, including to
the Funds’ auditors; custodian; financial printers; counsel to the Funds or
counsel to the Funds’ independent trustees; regulatory authorities; and
securities exchanges and other listing organizations. In addition, the Funds may
provide non-public portfolio holdings information to data providers, fund
ranking/rating services, and fair valuation services. The entities to which the
Funds voluntarily disclose portfolio holdings information are required, either
by explicit agreement or by virtue of their respective duties to the Funds, to
maintain the confidentiality of the information disclosed.
There
can be no assurance that the Funds’ policies and procedures regarding selective
disclosure of the Funds’ portfolio holdings will protect the Funds from
potential misuse of that information by individuals or entities to which it is
disclosed.
The
Board shall be responsible for overseeing the implementation of these policies
and procedures. These policies and procedures shall be reviewed by the Board on
an annual basis for their continuing appropriateness.
Additionally,
the Funds shall maintain and preserve permanently in an easily accessible place
a written copy of these policies and procedures. The Fund shall also maintain
and preserve, for a period not less than six years (the first two years in an
easily accessible place), all Portfolio-Related Information disclosed to the
public.
INVESTMENT
ADVISORY SERVICES
The
following information supplements and should be read in conjunction with the
section in the Prospectuses entitled “Shareholder Information – Management of
the Funds.”
Van
Eck Associates Corporation acts as investment manager to all the Funds (except
CM Commodity Index Fund) and, subject to the supervision of the Board, is
responsible for the day-to-day investment management of the Funds. VEAC is a
private company with headquarters in New York and acts as adviser or sub-adviser
to other mutual funds, ETFs, other pooled investment vehicles and separate
accounts. Van Eck Absolute Return Advisers Corporation acts as investment
manager to CM Commodity Index Fund and, subject to the supervision of the Board,
is responsible for the day-to-day investment management of CM Commodity Index
Fund. VEARA is a private company with headquarters in New York and acts as
adviser to other pooled investment vehicles. VEARA is a wholly owned subsidiary
of VEAC and is registered with the SEC as an investment adviser under the
Investment Advisers Act of 1940, as amended, and with the CFTC as a CPO and a
CTA under the CEA.
VEAC
and VEARA each serve as investment manager to the applicable Funds pursuant to
an investment advisory agreement between the Trust and such Adviser (each, an
“Advisory Agreement”). The advisory fee paid pursuant to each Advisory Agreement
is computed daily and paid monthly by each Fund to its Adviser at the following
annual rates: CM Commodity Index Fund pays VEARA a fee at the annual rate of
0.75% of the Fund’s average daily net assets, which includes the fee paid to
VEARA for accounting and administrative services; Emerging Markets Fund pays
VEAC a fee at the annual rate of 0.75% of average daily net assets of the Fund;
Emerging Markets Leaders Fund pays VEAC a fee at the annual rate of 0.75% of the
Fund's average daily net assets, which includes the fee paid to VEAC for
accounting and administrative services; Environmental Sustainability Fund pays
VEAC a fee at the annual rate of 0.75% of the Fund's average daily net assets,
which includes the fee paid to VEAC for accounting and administrative services;
Global Resources Fund pays VEAC a fee at the annual rate of 1.00% of the first
$2.5 billion of average daily net assets of the Fund and 0.90% of average daily
net assets in excess of $2.5 billion, which includes the fee paid to VEAC for
accounting and administrative services; International Investors Gold Fund pays
VEAC a fee at the annual rate of 0.75% of the first $500 million of average
daily net assets of the Fund, 0.65% of the next $250 million of average daily
net assets and 0.50% of average daily net assets in excess of $750 million;
Emerging Markets Bond Fund pays VEAC a fee at the annual rate of 0.80% of the
first $1.5 billion of average daily net assets of the Fund and 0.75% of average
daily net assets in excess of $1.5 billion, which includes the fee paid to VEAC
for accounting and administrative services; and VanEck Morningstar Wide Moat
Fund pays VEAC a fee at the annual rate of 0.45% of average daily net assets,
which includes the fee paid to VEAC for accounting and administrative services.
Each class of a Fund’s shares pays its proportionate share of the Fund’s fee.
For purposes of calculating these fees for the International Investors Gold Fund
and CM Commodity Index Fund, the net assets of each Fund include the value of
each Fund’s interest in the Gold Subsidiary and the CMCI Subsidiary,
respectively. Each of the Gold Subsidiary and the CMCI Subsidiary does not pay
VEAC or VEARA, respectively, a fee for managing the Gold Subsidiary’s or the
CMCI Subsidiary’s portfolio.
Under
its respective Advisory Agreement, each Adviser, subject to the supervision of
the Board and in conformity with the stated investment policies of each Fund to
which it serves as an adviser, manages the investment of such Fund’s assets.
Each
Adviser is responsible for placing purchase and sale orders and providing
continuous supervision of the investment portfolio of the Funds it
manages.
Each
Adviser has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of each Fund (excluding acquired
fund fees and expenses, interest expense, trading expenses, dividends and
interest payments on securities sold short, taxes and extraordinary expenses)
from exceeding the following:
|
|
|
|
|
|
|
|
|
Fund |
Expense
Cap |
Fee
Arrangement Duration Date |
CM
Commodity Index Fund |
|
|
Class
A |
0.95% |
May
1, 2023 |
Class
I |
0.65% |
May
1, 2023 |
Class
Y |
0.70% |
May
1, 2023 |
|
|
|
Emerging
Markets Fund |
|
|
Class
A |
1.60% |
May
1, 2023 |
Class
C |
2.50% |
May
1, 2023 |
Class
I |
1.00% |
May
1, 2023 |
Class
Y |
1.10% |
May
1, 2023 |
Class
Z |
0.90% |
May
1, 2023 |
|
|
|
Emerging
Markets Leaders Fund |
|
|
Class
A |
1.45% |
May
1, 2023 |
Class
I |
0.85% |
May
1, 2023 |
Class
Y |
0.95% |
May
1, 2023 |
Class
Z |
0.75% |
May
1, 2023 |
|
|
|
Environmental
Sustainability Fund |
|
|
Class
A |
1.25% |
May
1, 2023 |
Class
I |
0.95% |
May
1, 2023 |
Class
Y |
1.05% |
May
1, 2023 |
|
|
|
Global
Resources Fund |
|
|
Class
A |
1.38% |
May
1, 2023 |
Class
C |
2.20% |
May
1, 2023 |
Class
I |
0.95% |
May
1, 2023 |
Class
Y |
1.13% |
May
1, 2023 |
|
|
|
International
Investors Gold Fund |
|
|
Class
A |
1.45% |
May
1, 2023 |
Class
C |
2.20% |
May
1, 2023 |
Class
I |
1.00% |
May
1, 2023 |
Class
Y |
1.10% |
May
1, 2023 |
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
A |
1.25% |
May
1, 2023 |
Class
I |
0.95% |
May
1, 2023 |
Class
Y |
1.00% |
May
1, 2023 |
|
|
|
VanEck
Morningstar Wide Moat Fund |
|
|
Class
I |
0.59% |
May
1, 2023 |
Class
Z |
0.49% |
May
1, 2023 |
|
|
|
|
|
|
During
such time, the expense limitation is expected to continue until the Board of
Trustees acts to discontinue all or a portion of such expense
limitation.
In
addition to providing investment advisory services, VEAC also performs
accounting and administrative services for Emerging Markets Fund and
International Investors Gold Fund pursuant to a written agreement. For these
accounting and administrative services, a fee is calculated daily and paid
monthly at the following annual rates: Emerging Markets Fund pays VEAC a fee of
0.25% of average daily net assets and International Investors Gold Fund pays the
VEAC a fee equal to 0.25% on the first $750 million of average daily net assets,
and 0.20% of average daily net assets in excess of $750
million.
Pursuant
to each Advisory Agreement, the Trust has agreed to indemnify each Adviser for
certain liabilities, including certain liabilities arising under the federal
securities laws, unless such loss or liability results from willful misfeasance,
bad faith or gross negligence in the performance of its duties or the reckless
disregard of its obligations and duties.
Investments
in the securities of underlying funds involve duplication of advisory fees and
certain other expenses. By investing in an underlying fund, VanEck Morningstar
Wide Moat Fund becomes a shareholder of that underlying fund. As a result,
VanEck Morningstar Wide Moat Fund’s shareholders will indirectly bear the Fund’s
proportionate share of the fees and expenses paid by shareholders of the
underlying fund, in addition to the fees and expenses the Fund’s shareholders
directly bear in connection with the Fund’s own operations. To minimize the
duplication of fees, VEAC has agreed to waive the management fee it charges to
VanEck Morningstar Wide Moat Fund by any amount it collects as a management fee
from an underlying fund managed by VEAC, as a result of an investment of the
Fund’s assets in such underlying fund.
The
management fees earned and the expenses waived or assumed by each Adviser for
the past three fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MANAGEMENT
FEES |
|
EXPENSES WAIVED/ASSUMED BY
THE ADVISERS |
CM
Commodity Index Fund |
2021 |
|
$ |
4,548,328 |
|
|
$ |
1,647,713 |
|
|
2020 |
|
$ |
2,864,439 |
|
|
$ |
1,215,797 |
|
|
2019 |
|
$ |
3,649,521 |
|
|
$ |
1,645,687 |
|
Emerging
Markets Fund |
2021 |
|
$ |
21,335,483 |
|
|
$ |
2,172,992 |
|
|
2020 |
|
$ |
16,458,393 |
|
|
$ |
1,500,126 |
|
|
2019 |
|
$ |
15,173,944 |
|
|
$ |
1,981,311 |
|
Global
Resources Fund |
2021 |
|
$ |
7,263,373 |
|
|
$ |
878,369 |
|
|
2020 |
|
$ |
5,098,274 |
|
|
$ |
994,614 |
|
|
2019 |
|
$ |
10,887,700 |
|
|
$ |
1,609,168 |
|
International
Investors Gold Fund |
2021 |
|
$ |
6,356,810 |
|
|
$ |
59,592 |
|
|
2020 |
|
$ |
6,284,731 |
|
|
$ |
38,726 |
|
|
2019 |
|
$ |
4,679,595 |
|
|
$ |
434,045 |
|
Emerging
Markets Bond Fund |
2021 |
|
$ |
216,678 |
|
|
$ |
256,091 |
|
|
2020 |
|
$ |
199,421 |
|
|
$ |
245,466 |
|
|
2019 |
|
$ |
158,547 |
|
|
$ |
291,064 |
|
Emerging
Markets Leaders Fund1 |
2021 |
|
N/A |
|
N/A |
|
2020 |
|
N/A |
|
N/A |
|
2019 |
|
N/A |
|
N/A |
Environmental
Sustainability Fund2 |
2021 |
|
$ |
17,772 |
|
|
$ |
109,925 |
|
|
2020 |
|
N/A |
|
N/A |
|
2019 |
|
N/A |
|
N/A |
VanEck
Morningstar Wide Moat Fund |
2021 |
|
$ |
73,458 |
|
|
$ |
199,586 |
|
|
2020 |
|
$ |
42,069 |
|
|
$ |
210,224 |
|
|
2019 |
|
$ |
32,052 |
|
|
$ |
205,811 |
|
1
Emerging Markets Leaders Fund commenced operations on March 1,
2022.
2
Environmental Sustainability Fund commenced operations on July 14,
2021.
Each
Advisory Agreement provides that it shall continue in effect from year to year
as long as it is approved at least annually by (1) the Board or (2) a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
each Fund, provided that in either event such continuance also is approved by a
majority of the Trustees who are not interested persons (as defined in the 1940
Act) of the Trust by a vote cast in person at a meeting called for the purpose
of voting on such approval. Each Advisory Agreement is terminable without
penalty, on 60 days’ notice, by the Board or by a vote of the holders of a
majority (as defined in the 1940 Act) of a Fund’s outstanding voting securities.
Each Advisory Agreement is also terminable upon 60 days’ notice by the
applicable Adviser and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
THE
DISTRIBUTOR
Shares
of the Funds are offered on a continuous basis and are distributed through Van
Eck Securities Corporation, the Distributor, 666 Third Avenue, New York, New
York, 10017, a wholly owned subsidiary of VEAC and an affiliate of VEARA. The
Board has approved a Distribution Agreement appointing the Distributor as
distributor of shares of the Funds.
The
Trust has authorized one or more intermediaries (who are authorized to designate
other intermediaries) to accept purchase and redemption orders on the Trust’s
behalf. The Trust will be deemed to have received a purchase or redemption order
when the authorized broker or its designee accepts the order. Orders will be
priced at the net asset value next computed after they are accepted by the
authorized broker or its designee.
The
Distribution Agreement provides that the Distributor will pay all fees and
expenses in connection with printing and distributing prospectuses and reports
for use in offering and selling shares of the Funds and preparing, printing and
distributing advertising or promotional materials. The Funds will pay all fees
and expenses in connection with registering and qualifying their shares under
federal and state securities laws. The Distribution Agreement is reviewed and
approved annually by the Board.
The
Distributor retained underwriting commissions on sales of shares of the Funds
during the past three fiscal years, after reallowance to dealers, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VAN
ECK SECURITIES CORPORATION |
REALLOWANCE
TO DEALERS |
CM
Commodity Index Fund |
2021 |
|
$ |
7,037 |
|
$ |
44,256 |
|
|
2020 |
|
$ |
840 |
|
$ |
5,260 |
|
|
2019 |
|
$ |
1,597 |
|
$ |
12,434 |
|
Emerging
Markets Fund |
2021 |
|
$ |
13,225 |
|
$ |
99,383 |
|
|
2020 |
|
$ |
6,461 |
|
$ |
218,370 |
|
|
2019 |
|
$ |
20,208 |
|
$ |
213,079 |
|
Global
Resources Fund |
2021 |
|
$ |
32,827 |
|
$ |
497,518 |
|
|
2020 |
|
$ |
7,602 |
|
$ |
84,345 |
|
|
2019 |
|
$ |
10,935 |
|
$ |
71,655 |
|
International
Investors Gold Fund |
2021 |
|
$ |
61,679 |
|
$ |
489,186 |
|
|
2020 |
|
$ |
97,286 |
|
$ |
769,893 |
|
|
2019 |
|
$ |
54,928 |
|
$ |
491,289 |
|
Emerging
Markets Bond Fund |
2021 |
|
$ |
1,066 |
|
$ |
7,181 |
|
|
2020 |
|
$ |
1,739 |
|
$ |
11,589 |
|
|
2019 |
|
$ |
446 |
|
$ |
3,240 |
|
Emerging
Markets Leaders Fund1 |
2021 |
|
N/A |
N/A |
|
2020 |
|
N/A |
N/A |
|
2019 |
|
N/A |
N/A |
Environmental
Sustainability Fund2 |
2021 |
|
$— |
$— |
|
2020 |
|
N/A |
N/A |
|
2019 |
|
N/A |
N/A |
VanEck
Morningstar Wide Moat Fund |
2021 |
|
N/A |
N/A |
|
2020 |
|
N/A |
N/A |
|
2019 |
|
N/A |
N/A |
1
Emerging Markets Leaders Fund commenced operations on March 1,
2022.
2
Environmental Sustainability Fund commenced operations on July 14,
2021.
PLAN
OF DISTRIBUTION (12B-1 PLAN)
Each
Fund has adopted a plan of distribution pursuant to Rule 12b-1 (collectively,
the “Plan”) on behalf of its Class A and Class C shares (where applicable) which
provides for the compensation of brokers and dealers who sell shares of the
Funds and/or provide servicing. The Plan is a compensation-type plan. Pursuant
to the Plan, the Distributor provides the Funds at least quarterly with a
written report of the amounts expended under the Plan and the purpose for which
such expenditures were made. The Board reviews such reports on a quarterly
basis.
The
Plan is reapproved annually for each Fund’s Class A and Class C shares (where
applicable) by the Board, including a majority of the Trustees who are not
“interested persons” of the Fund and who have no direct or indirect financial
interest in the operation of the Plan.
The
Plan shall continue in effect as to each Fund’s Class A and Class C shares,
provided such continuance is approved annually by a vote of the Board in
accordance with the 1940 Act. The Plan may not be amended to increase materially
the amount to be spent for the services described therein without approval of
the Class A or Class C shareholders of the Funds (as applicable), and all
material amendments to the Plan must also be approved by the Board in the manner
described above. The Plan may be terminated at any time, without payment of any
penalty, by vote of a majority of the Trustees who are not “interested persons”
of a Fund and who have no direct or indirect financial interest in the operation
of the Plan, or by a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund’s Class A or Class C shares (as applicable)
on written notice to any other party to the Plan. The Plan will automatically
terminate in the event of its assignment (as defined in the 1940 Act). So long
as the Plan is in effect, the election and nomination of Trustees who are not
“interested persons” of the Trust shall be committed to the discretion of the
Trustees who are not “interested persons.” The Board has determined that, in its
judgment, there is a reasonable likelihood that the Plan will benefit the Funds
and their shareholders. The Funds will preserve copies of the Plan and any
agreement or report made pursuant to Rule 12b-1 under the 1940 Act, for a period
of not less than six years from the date of the Plan or such agreement or
report, the first two years in an easily accessible place. For additional
information regarding the Plan, see the Prospectuses.
Because
the Emerging Markets Leaders Fund commenced operations on March 1, 2022, it is
not reflected in the table below.
For
the fiscal year ended December 31, 2021, it is estimated that the Distributor
spent the amounts received under the Plan in the following ways:
|
|
|
|
|
|
|
CM
COMMODITY INDEX FUND |
|
Class
A |
|
|
Total
12b-1 Fees |
$74,222 |
|
|
Compensation
to Dealers |
(74,618) |
|
|
Net
12b-1 Fees |
(396) |
|
|
Expenditures: |
|
Printing
and Mailing |
(47) |
Telephone
and Internal Sales |
(256) |
Marketing
Department |
(14,000) |
External
Wholesalers |
(71,345) |
Total
Expenditures |
(85,648) |
|
|
Expenditures
in Excess of Net 12b-1 Fees |
(86,044)(1) |
(1)
Represents 0.01% of the Fund’s net assets as of December 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EMERGING
MARKETS FUND |
|
GLOBAL
RESOURCES FUND |
|
Class
A |
|
Class
C |
|
Class
A |
|
Class
C |
Total
12b-1 Fees |
$391,757 |
|
$276,974 |
|
$352,376 |
|
$73,959 |
Compensation
to Dealers |
(369,977) |
|
(276,790) |
|
(326,582) |
|
(73,866) |
Net
12b-1 Fees |
21,780 |
|
184 |
|
25,794 |
|
93 |
Expenditures: |
|
|
|
|
|
|
|
Printing
and Mailing |
(47) |
|
(47) |
|
(47) |
|
(47) |
Telephone
and Internal Sales |
(982) |
|
(80) |
|
(2,801) |
|
(126) |
Marketing
Department |
(70,689) |
|
(14,559) |
|
(66,470) |
|
(5,212) |
External
Wholesalers |
(359,992) |
|
(76,977) |
|
(287,302) |
|
(25,978) |
Total
Expenditures |
(431,710) |
|
(91,663) |
|
(356,620) |
|
(31,363) |
Expenditures
in Excess of Net 12b-1 Fees |
(409,930)(2) |
|
(91,479)(3) |
|
(330,826)(4) |
|
(31,270)(3) |
(2)Represents
0.02% of the Fund’s net assets as of December 31, 2021.
(3)Represents
0.00% of the Fund’s net assets as of December 31, 2021.
(4)Represents
0.04% of the Fund’s net assets as of December 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTERNATIONAL
INVESTORS GOLD FUND |
|
EMERGING MARKETS
BOND FUND |
|
ENVIRONMENTAL
SUSTAINABILITY FUND
|
|
Class
A |
|
Class
C |
|
Class
A |
|
Class
A |
Total
12b-1 Fees |
$841,695 |
|
$395,398 |
|
$17,331 |
|
$978 |
Compensation
to Dealers |
(704,411) |
|
(394,164) |
|
(14,209) |
|
210 |
Net
12b-1 Fees |
137,284 |
|
1,234 |
|
3,122 |
|
1,188 |
Expenditures: |
|
|
|
|
|
|
|
Printing
and Mailing |
(47) |
|
(47) |
|
(47) |
|
(47) |
Telephone
and Internal Sales |
(6,748) |
|
(338) |
|
(45) |
|
(4) |
Marketing
Department |
(151,143) |
|
(24,499) |
|
(3,140) |
|
(457) |
External
Wholesalers |
(620,461) |
|
(116,771) |
|
(12,095) |
|
(1,408) |
Total
Expenditures |
(778,399) |
|
(141,655) |
|
(15,327) |
|
(1,916) |
Expenditures
in Excess of Net 12b-1 Fees |
(641,115)(5) |
|
(140,421)(6) |
|
(12,205)(7) |
|
(728)(1) |
(5)Represents
0.07% of the Fund’s net assets as of December 31, 2021.
(6)Represents
0.02% of the Fund's net assets as of December 31, 2021.
(7)Represents
0.08% of the Fund's net assets as of December 31, 2021.
ADMINISTRATIVE
AND PROCESSING SUPPORT PAYMENTS
The
Funds may make payments (either directly or as reimbursement to the Distributor
or an affiliate of the Distributor for payments made by the Distributor) to
financial intermediaries (such as brokers or third party administrators) for
providing the types of services that would typically be provided by the Funds’
transfer agent, including sub-accounting, sub-transfer agency or similar
recordkeeping services, shareholder reporting, shareholder transaction
processing, and/or the provision of call center support. These payments will be
in lieu of, and may differ from, amounts paid to the Funds’ transfer agent for
providing similar services to other accounts. These payments may be in addition
to any amounts the intermediary may receive as compensation for distribution or
shareholder servicing pursuant to the Plan or as part of any revenue sharing or
similar arrangement with the Distributor or its affiliates, as described
elsewhere in the Prospectuses.
PORTFOLIO
MANAGER COMPENSATION
The
Advisers’ portfolio managers are paid a fixed base salary and a bonus. The bonus
is based upon the quality of investment analysis and management of the funds for
which they serve as portfolio manager. Portfolio managers who oversee accounts
with significantly different fee structures are generally compensated by
discretionary bonus rather than a set formula to help reduce potential conflicts
of interest. At times, the Adviser and affiliates may manage accounts with
incentive fees.
The
Advisers’ portfolio managers may serve as portfolio managers to other clients.
Such “Other Clients” may have investment objectives or may implement investment
strategies similar to those of the Funds. When the portfolio managers implement
investment strategies for Other Clients that are similar or directly contrary to
the positions taken by a Fund, the prices of the Fund’s securities may be
negatively affected. The compensation that a Fund’s portfolio manager receives
for managing other client accounts may be higher than the compensation the
portfolio manager receives for managing the Fund. The portfolio managers do not
believe that their activities materially disadvantage the Fund. The Advisers
have implemented procedures to monitor trading across funds and its Other
Clients.
PORTFOLIO
MANAGER SHARE OWNERSHIP
As
of December 31, 2021, the dollar range of equity securities in a Fund
beneficially owned by such Fund’s portfolio manager(s) and deputy portfolio
manager (if any) is shown below. Because the Emerging Markets Leaders Fund
commenced operations on March 1, 2022, it is not reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
None |
$1
to $10,000 |
$10,001
to $50,000 |
$50,001
to $100,000 |
$100,001
to $500,000 |
$500,001
to $1,000,000 |
Over
$1,000,000 |
David
Austerweil |
Emerging
Markets Bond Fund (Deputy Portfolio Manager) |
|
|
|
|
X |
|
|
Charles
Cameron |
Global
Resources Fund (Deputy Portfolio Manager) |
|
|
|
|
|
X |
|
Imaru
Casanova |
International
Investors Gold Fund (Deputy Portfolio Manager) |
|
|
|
|
X |
|
|
Eric
Fine |
Emerging
Markets Bond Fund (Portfolio Manager) |
|
|
|
|
X |
|
|
Joseph
Foster |
International
Investors Gold Fund (Portfolio Manager) |
|
|
|
|
|
X |
|
Gregory
F. Krenzer, CFA |
CM
Commodity Index Fund (Deputy Portfolio Manager) |
|
|
X |
|
|
|
|
VanEck
Morningstar Wide Moat Fund (Portfolio Manager) |
|
|
X |
|
|
|
|
Peter
H. Liao |
VanEck
Morningstar Wide Moat Fund (Portfolio Manager) |
|
|
X |
|
|
|
|
Roland
Morris, Jr. |
CM
Commodity Index Fund (Portfolio Manager) |
|
X |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
None |
$1
to $10,000 |
$10,001
to $50,000 |
$50,001
to $100,000 |
$100,001
to $500,000 |
$500,001
to $1,000,000 |
Over
$1,000,000 |
Shawn
Reynolds |
Global
Resources Fund (Portfolio Manager) |
|
|
|
|
|
X |
|
Environmental
Sustainability Fund (Portfolio Manager) |
|
|
|
|
X |
|
|
David
Semple |
Emerging
Markets Fund (Portfolio Manager) |
|
|
|
|
|
|
X |
Angus
Shillington |
Emerging
Markets Fund (Deputy Portfolio Manager) |
|
|
|
|
X |
|
|
Veronica
Zhang |
|
Environmental
Sustainability Fund (Deputy Portfolio Manager) |
|
|
X |
|
|
|
|
OTHER
ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
The
following table provides the number of other accounts managed (excluding the
Fund) and the total assets managed of such accounts by each Fund’s portfolio
manager(s) and deputy portfolio manager (if any) within each category of
accounts, as of December 31, 2021. Because the Emerging Markets Leaders Fund
commenced operations on March 1, 2022, it is not reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Name
of Portfolio Manager/Deputy Portfolio Manager |
Category
of Account |
Other
Accounts Managed (As of December 31, 2021) |
Accounts
with respect to which the advisory fee is based on the performance
of the account |
Number
of Accounts |
Total
Assets in Accounts |
Number
of Accounts |
Total
Assets in Accounts |
CM
Commodity Index Fund |
Roland
Morris, Jr. (Portfolio Manager) |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
CM
Commodity Index Fund and |
Gregory
F. Krenzer, CFA (Deputy Portfolio Manager) |
Registered
investment companies |
2 |
$34.12
Million |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
VanEck
Morningstar Wide Moat Fund |
Gregory
F. Krenzer, CFA (Deputy Portfolio Manager) |
Registered
investment companies |
2 |
$675.76
Million |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
Emerging
Markets Fund |
David
Semple (Portfolio Manager) |
Registered
investment companies |
3 |
$432.88
Million |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$190.01
Million |
0 |
$0 |
Other
accounts |
1 |
$47.49
Million |
0 |
$0 |
Emerging
Markets Fund |
Angus
Shillington (Deputy Portfolio Manager) |
Registered
investment companies |
3 |
$432.88
Million |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$190.01
Million |
0 |
$0 |
Other
accounts |
1 |
$47.49
Million |
0 |
$0 |
Environmental
Sustainability Fund |
Shawn
Reynolds (Portfolio Manager) |
Registered
investment companies |
4 |
$2,259.84
Million |
0 |
$0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Name
of Portfolio Manager/Deputy Portfolio Manager |
Category
of Account |
Other
Accounts Managed (As of December 31, 2021) |
Accounts
with respect to which the advisory fee is based on the performance
of the account |
Number
of Accounts |
Total
Assets in Accounts |
Number
of Accounts |
Total
Assets in Accounts |
|
|
Other
pooled investment vehicles |
1 |
$32.15
Million |
0 |
$0 |
|
|
Other
accounts |
0 |
$0 |
0 |
$0 |
Global
Resources Fund |
Charles
Cameron (Deputy Portfolio Manager) |
Registered
investment companies |
2 |
$1,472.95
Million |
0 |
$0 |
Other
pooled investment vehicles |
1 |
$32.15
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
Global
Resources Fund |
Shawn
Reynolds (Portfolio Manager) |
Registered
investment companies |
4 |
$1,480.50
Million |
0 |
$0 |
Other
pooled investment vehicles |
1 |
$32.15
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
International
Investors Gold Fund |
Joseph
Foster (Portfolio Manager) |
Registered
investment companies |
1 |
$51.21 |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$58.81
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
International
Investors Gold Fund |
Imaru
Casanova (Deputy Portfolio Manager) |
Registered
investment companies |
1 |
$51.21
Million |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$58.81
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
Emerging
Markets Bond Fund |
David
Austerweil (Deputy Portfolio Manager) |
Registered
investment companies |
1 |
$18.40 |
0 |
$0 |
Other
pooled investment vehicles |
3 |
$273.62
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
Emerging
Markets Bond Fund |
Eric
Fine (Portfolio Manager) |
Registered
investment companies |
1 |
$18.40 |
0 |
$0 |
Other
pooled investment vehicles |
3 |
$273.62
Million |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
Environmental
Sustainability Fund |
Veronica
Zhang (Portfolio Manager) |
Registered
investment companies |
0 |
$0 |
0 |
$0 |
|
|
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
|
|
Other
accounts |
0 |
$0 |
0 |
$0 |
VanEck
Morningstar Wide Moat Fund |
Peter
H. Liao (Portfolio Manager) |
Registered
investment companies |
42 |
$44,142.47
Million |
0 |
$0 |
Other
pooled investment vehicles |
0 |
$0 |
0 |
$0 |
Other
accounts |
0 |
$0 |
0 |
$0 |
SECURITIES
LENDING ARRANGEMENTS
Pursuant
to a securities lending agreement (the “Securities Lending Agreement”) between
the Funds and State Street (in such capacity, the “Securities Lending Agent”),
the Funds may lend their securities through the Securities Lending Agent to
certain qualified borrowers. The Securities Lending Agent administers the Funds’
securities lending program. During the fiscal year ended December 31, 201, these
services include arranging the securities loans with approved borrowers and
collecting fees and rebates due to the Funds from each borrower. The Securities
Lending Agent maintains records of loans made and income derived therefrom and
makes available such records that the Funds deem necessary to monitor the
securities lending program.
For
the fiscal year ended December 31, 2021, the Emerging Markets Leaders Fund did
not participate in securities lending.
For
the fiscal year ended December 31, 2021, each of the Funds listed below earned
income and incurred the following costs and expenses, during its respective
fiscal year, as a result of its securities lending activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund |
Gross
Income(1) |
Revenue
Split(2) |
Cash
Collateral Management Fees(3) |
Administrative
Fees(4) |
Indemnification
Fees(5) |
Rebates
to Borrowers |
Other
Fees |
Total
Costs of the Securities Lending Activities |
Net
Income from the Securities Lending Activities |
CM
Commodity Index Fund |
$ |
36,692 |
|
$ |
3,669 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
3,669 |
|
$ |
33,023 |
|
Emerging
Markets Bond Fund |
1,464 |
|
144 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
144 |
|
1,320 |
|
Emerging
Markets Fund |
591,439 |
|
58,564 |
|
— |
|
— |
|
— |
|
193 |
|
— |
|
58,757 |
|
532,682 |
|
Environmental
Sustainability Fund |
1,301 |
|
130 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
130 |
|
1,171 |
|
Global
Resources Fund |
1,287,994 |
|
128,747 |
|
— |
|
— |
|
— |
|
46 |
|
— |
|
128,793 |
|
1,159,201 |
|
International
Investors Gold Fund |
79,172 |
|
7,907 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
7,907 |
|
71,265 |
|
Morningstar
Wide Moat |
11 |
|
1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
10 |
|
1Gross
income includes income from the reinvestment of cash collateral and rebates paid
by the borrower.
2Revenue
split represents the share of revenue generated by the securities lending
program and paid to the Securities Lending Agent.
3Cash
collateral management fees include fees deducted from a pooled cash collateral
reinvestment vehicle that are not included in the revenue split.
4These
administrative fees are not included in the revenue split.
5These
indemnification fees are not included in the revenue split.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
When
selecting brokers and dealers to handle the purchase and sale of portfolio
securities, each Adviser looks for prompt execution of the order at a favorable
price. Generally, an Adviser works with recognized dealers in these securities,
except when a better price and execution of the order can be obtained elsewhere.
The Funds will not deal with affiliates in principal transactions unless
permitted by exemptive order or applicable rule or regulation. Each Adviser owes
a duty to its clients to provide best execution on trades effected.
Each
Adviser assumes general supervision over placing orders on behalf of the Trust
for the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Trust and one or more other investment companies or
clients supervised by an Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser. In
some cases, this procedure could have a detrimental effect on the price or
volume of the security so far as the Trust is concerned.
The
portfolio managers may deem it appropriate for one fund or account they manage
to sell a security while another fund or account they manage is purchasing the
same security. Under such circumstances, the portfolio managers may arrange to
have the purchase and sale transactions effected directly between the funds
and/or accounts (“cross transactions”). Cross transactions will be effected in
accordance with procedures adopted pursuant to Rule 17a-7 under the 1940
Act.
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by each Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable
services.
The
Advisers may cause the Funds to pay a broker-dealer who furnishes brokerage
and/or research services, a commission that is in excess of the commission
another broker-dealer would have received for executing the transaction, if it
is determined that such commission is reasonable in relation to the value of the
brokerage and/or research services as defined in Section 28(e) of the Securities
Exchange Act of 1934, as amended, which have been provided. Such research
services may include, among other things, analyses and reports concerning
issuers, industries, securities, economic factors and trends and portfolio
strategy. Any such research and other information provided by brokers to an
Adviser is considered to be in addition to and not in lieu of services required
to be performed by the Adviser under its Advisory Agreement with the Trust. The
research services provided by broker-dealers can be useful to an Adviser in
serving its other clients or clients of the Adviser’s affiliates. The Board
periodically reviews an Adviser’s performance of its responsibilities in
connection with the placement of portfolio transactions on behalf of the Funds.
The Board also reviews the commissions paid by the Funds over representative
periods of time to determine if they are reasonable in relation to the benefits
to the Funds.
Because
the Emerging Markets Leaders Fund commenced operations on March 1, 2022, it is
not reflected in the table below.
The
aggregate amount of brokerage transactions directed to a broker during the
fiscal year ended December 31, 2021 for, among other things, research services,
and the commissions and concessions related to such transactions were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Amount |
|
Commissions
and Concessions |
CM
Commodity Index Fund |
$0 |
|
$0 |
Emerging
Markets Fund |
$1,242,478,313 |
|
$1,887,220 |
Global
Resources Fund |
$213,161,620 |
|
$157,708 |
International
Investors Gold Fund |
$222,503,718 |
|
$291,881 |
Emerging
Markets Bond Fund |
$0 |
|
$0 |
Environmental
Sustainability Fund1 |
$11,310 |
|
$20 |
VanEck
Morningstar Wide Moat Fund |
$0 |
|
$0 |
1
Environmental Sustainability Fund commenced operations on July 14,
2021.
The
table below shows the aggregate amount of brokerage commissions paid on
purchases and sales of portfolio securities by each Fund during the Fund’s three
most recent fiscal years ended December 31. None of such amounts were paid to
brokers or dealers which furnished daily quotations to the Fund for the purpose
of calculating daily per share net asset value or to brokers and dealers which
sold shares of the Fund.
|
|
|
|
|
|
|
2021
COMMISSIONS |
|
|
CM
Commodity Index Fund |
$0 |
|
|
Emerging
Markets Fund |
$2,755,550 |
|
|
Global
Resources Fund |
$218,486 |
|
|
International
Investors Gold Fund |
$429,221 |
|
|
Emerging
Markets Bond Fund |
$0 |
|
|
Environmental
Sustainability Fund |
$1,618 |
|
|
VanEck
Morningstar Wide Moat Fund |
$3,955 |
|
|
|
2020
COMMISSIONS |
|
|
CM
Commodity Index Fund |
$0 |
|
|
Emerging
Markets Fund |
$2,181,053 |
|
|
Global
Resources Fund |
$459,587 |
|
|
International
Investors Gold Fund |
$599,347 |
|
|
Emerging
Markets Bond Fund |
$0 |
|
|
Environmental
Sustainability Fund |
N/A |
|
|
VanEck
Morningstar Wide Moat Fund |
$3,040 |
|
|
|
2019
COMMISSIONS |
|
|
CM
Commodity Index Fund |
$0 |
|
|
Emerging
Markets Fund |
$1,534,266 |
|
|
Global
Resources Fund |
$1,098,690 |
|
|
International
Investors Gold Fund |
$409,224 |
|
|
Emerging
Markets Bond Fund |
$0 |
|
|
Environmental
Sustainability Fund |
N/A |
|
|
VanEck
Morningstar Wide Moat Fund |
$2,896 |
Each
Adviser does not consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute portfolio transactions for the Funds.
Each Adviser has implemented policies and procedures pursuant to Rule 12b-1(h)
that are reasonably designed to prevent the consideration of the sales of fund
shares when selecting broker-dealers to execute trades.
Due
to the potentially high rate of turnover, the Funds may pay a greater amount in
brokerage commissions than a similar size fund with a lower turnover rate. The
portfolio turnover rates of all Funds may vary greatly from year to year. See
“Taxes” in the Prospectus and the SAI.
TRUSTEES
AND OFFICERS
LEADERSHIP
STRUCTURE AND THE BOARD
The
Board has general oversight responsibility with respect to the operation of the
Trust and the Funds. The Board has engaged VEAC to serve as the investment
adviser for the Emerging Markets Fund, Emerging Markets Leaders Fund,
Environmental Sustainabilty Fund, Global Resources Fund, International Investors
Gold Fund, Emerging Markets Bond Fund and VanEck Morningstar Wide Moat Fund, and
has engaged VEARA to serve as the investment adviser for the CM Commodity Index
Fund. The Board is responsible for overseeing the provision of services to the
Trust and the Funds by each Adviser and the other service providers in
accordance with the provisions of the 1940 Act and other applicable laws. The
Board is currently composed of five (5) Trustees, four of whom are Independent
Trustees. In addition to five (5) regularly scheduled meetings per year, the
Independent Trustees meet regularly in executive sessions among themselves and
with their counsel to consider a variety of matters affecting the Trust. These
sessions generally occur prior to, or during, scheduled Board meetings and at
such other times as the Trustees may deem necessary. Each Independent Trustee
attended at least 75% of the total number of meetings of the Board in the year
ending December 31, 2021. As discussed in further detail below, the Board has
established three (3) standing committees to assist the Board in performing its
oversight responsibilities.
The
Board believes that the Board’s leadership structure is appropriate in light of
the characteristics and circumstances of the Trust and each of the Funds,
including factors such as the number of Funds that comprise the Trust, the
variety of asset classes in which those Funds invest, the net assets of the
Funds, the committee structure of the Trust, and the management, distribution
and other service arrangements of the Funds. In connection with its
determination, the Board considered that the Board is comprised primarily of
Independent Trustees, and that the Chairperson of the Board and the Chairperson
of each of the Audit Committee and the Governance Committee is an Independent
Trustee. The Board believes having an interested trustee on the Board and as
Chairperson of the Investment Oversight Committee provides it with additional
access to the perspectives and resources of the Advisers and their affiliates.
In addition, to further align the Trustees’ interests with those of Fund
shareholders, the Board has, among other things, adopted a policy requiring each
Trustee to maintain a minimum direct or indirect investment in the
Funds.
The
Chairperson presides at all meetings of the Board and participates in the
preparation of the agenda for such meetings. She also serves as a liaison with
management, service providers, officers, attorneys, and the other Trustees
generally between meetings. The Chairperson may also perform other such
functions as may be delegated by the Board from time to time. The Trustees
believe that the Chairperson’s independence facilitates meaningful dialogue
between each Adviser and the Independent Trustees. Except for any duties
specified herein or pursuant to the Trust’s Master Trust Agreement, the
designation of Chairperson does not impose on such Independent Trustee any
duties, obligations or liability that is greater than the duties, obligations or
liability imposed on such person as a member of the Board,
generally.
The
Independent Trustees regularly meet outside the presence of management and are
advised by independent legal counsel. The Board believes that its Committees
help ensure that the Trust has effective and independent governance and
oversight. The Board also believes that its leadership structure facilitates the
orderly and efficient flow of information to the Trustees from management of the
Trust, and from the Advisers.
RISK
OVERSIGHT
The
Funds and the Trust are subject to a number of risks, including investment,
compliance, operational, and valuation risks. Day-to-day risk management
functions are within the responsibilities of the Advisers, the Distributor and
the other service providers (depending on the nature of the risk) that carry out
the Funds’ investment management, distribution and business affairs. Each of the
Advisers, the Distributor and the other service providers have their own,
independent interests and responsibilities in risk management, and their
policies and methods of carrying out risk management functions will depend, in
part, on their individual priorities, resources and controls.
Risk
oversight forms part of the Board’s general oversight of the Funds and the Trust
and is addressed through various activities of the Board and its Committees. As
part of its regular oversight of the Funds and Trust, the Board, directly or
through a Committee, meets with representatives of various service providers and
reviews reports from, among others, the Advisers, the Distributor, the Chief
Compliance Officer of the Funds, and the independent registered public
accounting firm for the Funds regarding risks faced by the Funds and relevant
risk management functions. The Board or Investment Oversight Committee, with the
assistance of management, reviews investment policies and related risks in
connection with its review of the Funds’ performance and its evaluation of the
nature and quality of the services provided by each Adviser. The Board has
appointed a Chief Compliance Officer for the Funds who oversees the
implementation and testing of the Funds’ compliance program and reports to the
Board regarding compliance matters for the Funds and their principal service
providers. The Chief Compliance Officer’s designation, removal and compensation
must be approved by the Board, including a majority of the Independent Trustees.
Material changes to the compliance program are reviewed by and approved by the
Board. In addition, as part of the Board’s periodic review of the Funds’
advisory, distribution and other service provider agreements, the Board may
consider risk management aspects of their operations and the functions for which
they are responsible, including the manner in which
such
service providers implement and administer their codes of ethics and related
policies and procedures. For certain of its service providers, such as the
Advisers and Distributor, the Board also receives reports periodically regarding
business continuity and disaster recovery plans, as well as actions being taken
to address cybersecurity and other information technology risks. With respect to
valuation, the Board approves and periodically reviews valuation policies and
procedures applicable to valuing the Funds’ shares. Each Adviser is responsible
for the implementation and day-to-day administration of these valuation policies
and procedures and provides reports periodically to the Board regarding these
and related matters. In addition, the Board or the Audit Committee of the Board
receives reports at least annually from the independent registered public
accounting firm for the Funds regarding tests performed by such firm on the
valuation of all securities. Reports received from the Advisers and the
independent registered public accounting firm assist the Board in performing its
oversight function of valuation activities and related risks.
The
Board recognizes that not all risks that may affect the Funds and the Trust can
be identified, that it may not be practical or cost-effective to eliminate or
mitigate certain risks, that it may be necessary to bear certain risks to
achieve the Funds’ or Trust’s goals, and that the processes, procedures and
controls employed to address certain risks may be limited in their
effectiveness. Moreover, reports received by the Board that may relate to risk
management matters are typically summaries of the relevant information. As a
result of the foregoing and other factors, the function of the Board with
respect to risk management is one of oversight and not active involvement in, or
coordination of, day-to-day risk management activities for the Funds or Trust.
The Board may, at any time and in its discretion, change the manner in which it
conducts its risk oversight role.
TRUSTEE
INFORMATION
The
Trustees of the Trust, their address, position with the Trust, age and principal
occupations during the past five years are set forth below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRUSTEE’S
NAME,
ADDRESS(1)
AND
YEAR
OF BIRTH |
POSITION(S)
HELD WITH TRUST,
TERM
OF OFFICE(2)
AND
LENGTH
OF TIME SERVED |
PRINCIPAL
OCCUPATION(S) DURING PAST FIVE YEARS |
NUMBER
OF
PORTFOLIOS
IN
FUND
COMPLEX(3)
OVERSEEN
BY
TRUSTEE |
OTHER
DIRECTORSHIPS
HELD
OUTSIDE THE
FUND
COMPLEX(3)
DURING
THE PAST FIVE
YEARS |
INDEPENDENT
TRUSTEES: |
Jon
Lukomnik 1956 (A)(G)(I) |
Trustee
(since 2006); Chairperson of the Audit Committee (since 2021) |
Managing
Partner, Sinclair Capital LLC (consulting firm). Formerly, Executive
Director, Investor Responsibility Research Center Institute; Pembroke
Visiting Professor of International Finance, Judge Business School,
Cambridge. |
12 |
Member
of the Deloitte Audit Quality Advisory Committee; Director, The
Shareholder Commons; Director of VanEck ICAV (an Irish UCITS); VanEck
Vectors UCITS ETF plc (an Irish UCITS). Formerly, Director of VanEck (a
Luxembourg UCITS); Member of the Standing Advisory Group to the Public
Company Accounting Oversight Board; Chairman of the Advisory Committee of
Legion Partners. |
Jane
DiRenzo Pigott 1957(A)(G) (I) |
Trustee
(since 2007); Chairperson of the Board (since 2020) |
Managing
Director, R3 Group LLC (consulting firm). |
12 |
Trustee
of Northwestern University, Lyric Opera of Chicago and the Chicago
Symphony Orchestra.
Formerly,
Director and Chair of Audit Committee of 3E Company (services relating to
hazardous material safety); Director of MetLife Investment Funds,
Inc. |
R.
Alastair Short 1953 (A)(G)(I) |
Trustee
(since 2004) |
President,
Apex Capital Corporation (personal investment vehicle). |
75 |
Chairman
and Independent Director, EULAV Asset Management; Lead Independent
Director, Total Fund Solution; Independent Director,
Contingency Capital, LLC;Trustee, Kenyon Review; Trustee, Children's
Village. Formerly, Independent Director, Tremont offshore
funds. |
Richard
D. Stamberger 1959 (A)(G)(I) |
Trustee
(since 1995); Chairperson of the Governance Committee (since
2022) |
Senior
Vice President, B2B, Future Plc (global media company). Formerly,
President, CEO and co-founder, SmartBrief, Inc. |
75 |
Director,
Food and Friends, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRUSTEE’S
NAME,
ADDRESS(1)
AND
YEAR
OF BIRTH |
POSITION(S)
HELD WITH TRUST,
TERM
OF OFFICE(2)
AND
LENGTH
OF TIME SERVED |
PRINCIPAL
OCCUPATION(S) DURING PAST FIVE YEARS |
NUMBER
OF
PORTFOLIOS
IN
FUND
COMPLEX(3)
OVERSEEN
BY
TRUSTEE |
OTHER
DIRECTORSHIPS
HELD
OUTSIDE THE
FUND
COMPLEX(3)
DURING
THE PAST FIVE
YEARS |
INTERESTED
TRUSTEE: |
Jan
F. van Eck(4)
1963
(I) |
Trustee
(Since 2019); Chairperson of the Investment Oversight Committee (since
2020); Chief Executive Officer and President (Since 2010) |
Director,
President and Chief Executive Officer of VEAC, VEARA and VESC; Officer
and/or Director of other companies affiliated with VEAC and/or the
Trust. |
75 |
Director,
National Committee on US-China Relations. |
(1)The
address for each Trustee and officer is 666 Third Avenue, 9th Floor, New York,
New York 10017.
(2)Trustee
serves until resignation, death, retirement or removal.
(3) The
Fund Complex consists of VanEck Funds, VanEck VIP Trust and VanEck ETF
Trust.
(4) “Interested
person” of the Trust within the meaning of the 1940 Act. Mr. van Eck is an
officer of VEAC, VEARA and VESC. In addition, Mr. van Eck and members of his
family own 100% of the voting stock of VEAC, which in turns owns 100% of the
voting stock of each of VEARA and VESC.
(A) Member
of the Audit Committee.
(G) Member
of the Governance Committee.
(I) Member
of the Investment Oversight Committee.
Set
forth below is additional information relating to the professional experience,
attributes and skills of each Trustee relevant to such individual’s
qualifications to serve as a Trustee:
Jon
Lukomnik
has extensive business and financial experience, particularly in the investment
management industry. He currently serves as: Managing Partner of Sinclair
Capital LLC, a consulting firm to the investment management industry; and is a
member of Deloitte LLP’s Audit Quality Advisory Council. He previously served as
chairman of the Advisory Committee of Legion Partners Asset Management, a
registered investment advisor that provides investment management and consulting
services to various institutional clients; and was a member of the Standing
Advisory Group to the Public Company Accounting Oversight Board.
Jane
DiRenzo Pigott
has extensive business and financial experience and serves as Managing Director
of R3 Group LLC, a firm specializing in talent retention, development and
matriculation consulting services. Ms. Pigott has prior experience as an
independent trustee of other mutual funds and previously served as chair of the
global Environmental Law practice group at Winston & Strawn
LLP.
R.
Alastair Short
has extensive business and financial experience, particularly in the investment
management industry. He has served as a president, board member or executive
officer of various businesses, including asset management and private equity
investment firms.
Richard
D. Stamberger
has extensive business and financial experience and serves as the Senior Vice
President of B2B, Future Plc, a global media company. Mr. Stamberger has
experience as a member of the board of directors of numerous not-for-profit
organizations and has more than 20 years of experience as a member of the Board
of the Trust.
Jan
F. van Eck
has extensive business and financial experience, particularly in the investment
management industry. He currently serves as president, executive officer
and/or board member of various businesses, including VEAC, VESC, and
VEARA.
The
forgoing information regarding the experience, qualifications, attributes and
skills of each Trustee is provided pursuant to requirements of the SEC, and does
not constitute holding out of the Board or any Trustee as having any special
expertise or experience, and shall not impose any greater responsibility or
liability on any such person or on the Board by reason thereof.
COMMITTEE
STRUCTURE
The
Board has established a standing Audit Committee, a standing Governance
Committee, and a standing Investment Oversight Committee to assist the Board in
the oversight and direction of the business and affairs of the Trust.
Audit
Committee.
The duties of this Committee include meeting with representatives of the Trust’s
independent registered public accounting firm to review fees, services,
procedures, conclusions and recommendations of independent registered public
accounting firm and to discuss the Trust’s system of internal controls.
Thereafter, the Committee reports to the Board the Committee’s findings and
recommendations concerning internal accounting matters as well as its
recommendation for retention or dismissal of the auditing firm. Except for any
duties specified herein or pursuant to the Trust’s charter document, the
designation of Chairperson of the Audit Committee does not impose on such
Independent Trustee any duties, obligations or liability that is greater than
the duties, obligations or liability imposed on such person as a member of the
Board, generally. The Audit Committee met three times during the last fiscal
year, and currently consists of the following Trustees: Mr. Lukomnik
(Chairperson), Mr. Short, Mr. Stamberger and Ms. Pigott.
Governance
Committee.
The duties of this Committee include the consideration of recommendations to the
Trustees for the Board nominations for Trustees, review of the composition of
the Board, compensation and similar matters. In addition, the Governance
Committee periodically reviews the performance of the Board and its Committees,
including the effectiveness and composition of the overall Board, Board’s
Committees, and the Chairperson of the Board and other related matters. When
considering potential nominees for election to the Board and to fill vacancies
occurring on the Board, where shareholder approval is not required, and as part
of the annual self-evaluation, the Governance Committee reviews the mix of
skills and other relevant experiences of the Trustees. The Governance Committee
met four times during the last fiscal year, and currently consists of the
following Trustees: Mr. Stamberger (Chairperson), Mr. Lukomnik, Mr. Short and
Ms. Pigott.
The
Independent Trustees shall, when identifying candidates for the position of
Independent Trustee, consider candidates recommended by a shareholder of a Fund
if such recommendation provides sufficient background information concerning the
candidate and evidence that the candidate is willing to serve as an Independent
Trustee if selected, and is received in a sufficiently timely manner.
Shareholders should address recommendations in writing to the attention of the
Governance Committee, c/o the Secretary of the Trust, at 666 Third Avenue, 9th
Floor, New York, NY 10017. The Secretary shall retain copies of any shareholder
recommendations which meet the foregoing requirements for a period of not more
than 12 months following receipt. The Secretary shall have no obligation to
acknowledge receipt of any shareholder recommendations.
Investment
Oversight Committee.
The
duties of this Committee include the review of investment performance of the
Funds, meeting with relevant Adviser personnel and outside experts, and
overseeing the provision of investment-related services for the Funds. In
addition, the Committee will review on a periodic basis and consider a variety
of matters, such as proposed material changes to, each Fund’s investment
strategy (if applicable), investment processes, investment personnel,
non-personnel resources, and relevant investment markets. The Investment
Oversight Committee was established by vote of the Board, effective January 1,
2020. This Committee currently consists of all the Trustees, and Mr. van Eck
serves as Chairperson.
OFFICER
INFORMATION
The
executive officers of the Trust, their age and address, the positions they hold
with the Trust, their term of office and length of time served and their
principal business occupations during the past five years are shown
below:
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|
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|
|
|
|
|
OFFICER’S
NAME,
ADDRESS(1)
AND
YEAR OF BIRTH |
POSITION(S)
HELD WITH TRUST |
TERM
OF OFFICE AND
LENGTH
OF TIME
SERVED(2) |
PRINCIPAL
OCCUPATIONS DURING THE PAST FIVE YEARS |
Matthew
A. Babinsky, 1983 |
Assistant
Vice President and Assistant Secretary |
Since
2016 |
Assistant
Vice President, Assistant General Counsel and Assistant Secretary of VEAC,
VEARA and Van Eck Securities Corporation (VESC); Officer of other
investment companies advised by VEAC and VEARA. Formerly, Associate,
Clifford Chance US LLP.
|
Russell
G. Brennan, 1964 |
Assistant
Vice President and Assistant Treasurer |
Since
2008 |
Assistant
Vice President of VEAC; Officer of other investment companies advised by
VEAC and VEARA. |
Charles
T. Cameron, 1960 |
Vice
President |
Since
1996 |
Portfolio
Manager for VEAC; Officer and/or Portfolio Manager of other investment
companies advised by VEAC and VEARA. Formerly, Director of Trading of
VEAC.
|
John
J. Crimmins, 1957 |
Vice
President, Treasurer, Chief Financial Officer and Principal Accounting
Officer |
Vice
President, Chief Financial Officer and Principal Accounting Officer (since
2012); Treasurer (since 2009) |
Vice
President of VEAC and VEARA; Officer of other investment companies advised
by VEAC and VEARA. Formerly, Vice President of VESC.
|
F.
Michael Gozzillo, 1965 |
Chief
Compliance Officer |
Since
2018 |
Vice
President and Chief Compliance Officer of VEAC and VEARA; Chief Compliance
Officer of VESC; Officer of other investment companies advised by VEAC and
VEARA. Formerly, Chief Compliance Officer of City National Rochdale, LLC
and City National Rochdale Funds.
|
Laura
Hamilton, 1977
|
Vice
President |
Since
2019 |
Assistant
Vice President of VEAC and VESC; Officer of other investment companies
advised by VEAC and VEARA. Formerly, Operations Manager of Royce &
Associates.
|
Laura
I. Martínez, 1980 |
Vice
President and Assistant Secretary |
Vice
President (since 2016); Assistant Secretary (since 2008)
|
Vice
President, Associate General Counsel and Assistant Secretary of VEAC,
VEARA and VESC; Officer of other investment companies advised by VEAC and
VEARA. Formerly, Assistant Vice President VEAC, VEARA and
VESC.
|
James
Parker, 1969 |
Assistant
Treasurer |
Since
2014 |
Assistant
Vice President of VEAC and VEARA; Manager, Portfolio Administration of
VEAC and VEARA; Officer of other investment companies advised by VEAC and
VEARA.
|
Jonathan
R. Simon, 1974 |
Senior
Vice President; Secretary and Chief Legal Officer |
Senior
Vice President (since 2016); Secretary and Chief Legal Officer (since
2014) |
Senior
Vice President, General Counsel and Secretary of VEAC, VEARA and VESC;
Officer and/or Director of other companies affiliated with VEAC and/or the
Trust. Formerly, Vice President of VEAC, VEARA and VESC.
|
Andrew
Tilzer, 1972 |
Assistant
Vice President |
Since
2021 |
Vice
President of VEAC and VEARA; Vice President of Portfolio Administration
of VEAC. Formerly, Assistant Vice President, Portfolio Operations of
VEAC. |
(1)The
address for each Executive Officer is 666 Third Avenue, 9th Floor, New York, NY
10017.
(2)Officers
are elected yearly by the Board.
TRUSTEE
SHARE OWNERSHIP
For
each Trustee, the dollar range of equity securities beneficially owned by the
Trustee in the Funds and in all registered investment companies advised by the
Advisers or their affiliates (“Family of Investment Companies”) that are
overseen by the Trustee is shown below:
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|
Name
of Trustee |
|
Dollar
Range of Equity Securities in CM Commodity Index Fund (As of
December 31, 2021) |
|
Dollar
Range of Equity Securities in Emerging Markets Bond Fund (As
of December 31, 2021) |
|
Dollar
Range of Equity Securities in Emerging Markets Fund (As of
December 31, 2021) |
|
Dollar
Range of Equity Securities in Emerging Markets Leaders Fund (As of
December 31, 2021) |
|
|
Jon
Lukomnik |
|
None |
|
Over $100,000* |
|
Over
$100,000* |
|
None |
|
|
Jane
DiRenzo Pigott |
|
None |
|
Over
$100,000* |
|
Over
$100,000 |
|
None |
|
|
R.
Alastair Short |
|
None |
|
None |
|
$10,001
- $50,000 |
|
None |
|
|
Richard
D. Stamberger |
|
$50,001
- $100,000* |
|
None |
|
Over
$100,000* |
|
None |
|
|
Jan
F. van Eck |
|
$50,001
- $100,000 |
|
Over
$100,000 |
|
Over
$100,000 |
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Trustee |
|
Dollar
Range of Equity Securities in Environmental Sustainability Fund (As
of December 31, 2021) |
|
Dollar
Range of Equity Securities in Global Resources Fund (As of
December 31, 2021) |
|
Dollar
Range of Equity Securities in International Investors Gold
Fund (As of December 31, 2021) |
|
Dollar
Range of Equity Securities in VanEck Morningstar Wide Moat
Fund (As of December 31, 2021) |
|
|
Jon
Lukomnik |
|
Over
$100,000* |
|
None |
|
Over
$100,000* |
|
Over
$100,000* |
|
|
Jane
DiRenzo Pigott |
|
None |
|
$50,001
- $100,000 |
|
Over
$100,000 |
|
Over
$100,000* |
|
|
R.
Alastair Short |
|
None |
|
$10,001
- $50,000 |
|
$1
- $10,000 |
|
$50,001
- $100,000 |
|
|
Richard
D. Stamberger |
|
None |
|
$1
- $10,000 |
|
Over
$100,000* |
|
Over
$100,000* |
|
|
Jan
F. van Eck |
|
None |
|
Over
$100,000 |
|
Over
$100,000 |
|
Over
$100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Trustee |
|
Aggregate
Dollar Range of Equity Securities in all Registered
Investment Companies Overseen By Trustee In Family of Investment
Companies (As of December 31, 2021) |
|
|
Jon
Lukomnik |
|
Over
$100,000* |
|
|
Jane
DiRenzo Pigott |
|
Over
$100,000* |
|
|
R.
Alastair Short |
|
Over
$100,000 |
|
|
Richard
D. Stamberger |
|
Over
$100,000* |
|
|
Jan
F. van Eck |
|
Over
$100,000 |
|
* Includes
ownership through the Trust's deferred compensation plan as of December 31,
2021.
As
of March 31, 2022, the Trustees and officers, as a group, (i) owned less than 1%
of each Fund, except for Emerging Markets Bond Fund (5.24%), Environmental
Sustainability Fund (9.63%) and VanEck Morningstar Wide Moat Fund (8.97%) and
(ii) owned less than 1% of each class of each Fund, except for Class A and Class
I shares of Emerging Markets Bond Fund (3.99% and 9.52%, respectively), Class A
shares of Emerging Markets Fund (6.71%), Class I shares of Environmental
Sustainability Fund (22.83%) and Class I and Class Z shares of VanEck
Morningstar Wide Moat Fund (34.01% and 2.67%, respectively).
As
to each Independent Trustee and his/her immediate family members, no person
owned beneficially or of record securities in an investment manager or principal
underwriter of the Funds, or a person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with the investment manager or principal underwriter of the
Funds.
2021
COMPENSATION TABLE
The
Trustees are paid for services rendered to the Trust and VanEck VIP Trust (the
“VanEck Trusts”), each a registered investment company managed by the Advisers
or their affiliates, which are allocated to each series of the VanEck Trusts
based on their average daily net assets. Each Independent Trustee is paid an
annual retainer of $80,000, a per meeting fee of $10,000 for regularly scheduled
meetings of the Board and a per meeting fee of $5,000 for special Board and/or
Committee meetings. The VanEck Trusts pay the Chairperson of the Board an annual
retainer of $30,000, the Chairperson of the Audit Committee an annual retainer
of $15,000 and the Chairperson of the Governance Committee an annual retainer of
$15,000. The VanEck Trusts also reimburse each Trustee for travel and other
out-of-pocket expenses incurred in attending such meetings. No pension or
retirement benefits are accrued as part of Trustee compensation.
The
table below shows the compensation paid to the Independent Trustees for the
fiscal year ended December 31, 2021. Annual Independent Trustee fees may be
reviewed periodically and changed by the Board.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jon
Lukomnik(1) |
|
Jane
DiRenzo
Pigott(2) |
|
|
R.
Alastair Short |
|
Richard
D.
Stamberger(3) |
Aggregate
Compensation from the VanEck Trusts |
$125,000 |
|
$140,000 |
|
|
$110,000 |
|
$110,000 |
Aggregate
Deferred Compensation from the VanEck Trusts |
$62,500 |
|
$— |
|
|
$— |
|
$22,000 |
Pension
or Retirement Benefits Accrued as Part of the VanEck Trusts’
Expenses |
N/A |
|
N/A |
|
|
N/A |
|
N/A |
Estimated
Annual Benefits Upon Retirement |
N/A |
|
N/A |
|
|
N/A |
|
N/A |
Total
Compensation From the VanEck Trusts and the Fund Complex(4)
Paid to Trustee |
$125,000 |
|
$140,000 |
|
|
$356,000 |
|
$348,000 |
(1)As
of December 31, 2021, the value of Mr. Lukomnik’s account under the deferred
compensation plan was $1,318,392.
(2)As
of December 31, 2021, the value of Ms. Pigott’s account under the deferred
compensation plan was $799,421.
(3)As
of December 31, 2021, the value of Mr. Stamberger’s account under the deferred
compensation plan was $964,232.
(4) The
“Fund Complex” consists of the VanEck Trusts and VanEck ETF Trust.
PRINCIPAL
SHAREHOLDERS
Principal
Holders Ownership
As
of March 31, 2022, shareholders of record of 5% or more of the outstanding
shares of each class of each such Fund were as follows:
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
|
|
Emerging
Markets Fund |
|
|
Class
A |
Merrill
Lynch Pierce Fenner & Smith |
34.21% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
A |
Wells
Fargo Clearing Services LLC |
13.32 |
% |
|
Special
Custody Omnibus Account |
|
|
For
Exclusive Benefit of Customers |
|
|
2810
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
A |
Morgan
Stanley Smith Barney LLC |
9.80% |
|
for
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza FL 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
A |
National
Financial Services LLC |
5.22% |
|
for
the Exclusive Benefit of its Customers |
|
|
Attn:
Mutual Funds Dept., 4th FL. |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
C |
Wells
Fargo Clearing Services LLC |
24.26% |
|
Special
Custody Omnibus Account |
|
|
for
the Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
C |
Raymond
James |
23.46% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
|
|
Emerging
Markets Fund |
|
|
Class
C |
Morgan
Stanley Smith Barney LLC |
18.44% |
|
for
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza Fl. 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
C |
Merrill
Lynch Pierce Fenner & Smith |
12.94% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
C |
UBS
Financial Services Inc. |
5.45% |
|
Special
Custody Account FEBO |
|
|
Attn:
Department Manager |
|
|
1000
Harbor Blvd., 5th Floor |
|
|
Weehawken,
NJ 07086-6761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
Emerging
Markets Fund |
|
|
Class
I |
National
Financial Services LLC |
33.94% |
|
For
the Exclusive Benefit of Its Customers |
|
|
Attn:
Mutual Funds Dept., 4th Fl. |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
I |
Charles
Schwab & Co. Inc. |
12.23% |
|
Special
Custody Acct FBO Customers INSTL |
|
|
211
Main St. |
|
|
San
Francisco, CA 94105-1905 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
I |
Wells
Fargo Bank NA |
8.44% |
|
FBO
Omnibus Account Cash/Cash |
|
|
PO
Box 1533 |
|
|
Minneapolis,
MN 55480-1533 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Y |
Morgan
Stanley Smith Barney LLC |
38.41% |
|
for
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza, Fl 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Y |
Merrill
Lynch Pierce Fenner & Smith |
25.19% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 2nd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
|
|
Emerging
Markets Fund |
|
|
Class
Y |
Wells
Fargo Clearing Services LLC |
8.81% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Y |
Raymond
James |
7.65 |
% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Z |
Arvest
Bank - Trust Division |
47.02 |
% |
|
P.O.
Box 1156 |
|
|
Bartlesville,
OK 74005-1156 |
|
|
|
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Z |
DCGT
As Trustee and/or Custodian |
30.29 |
% |
|
Fbo
Plic Various Retirement Plans |
|
|
Attn:
NPIO Trade Desk |
|
|
Omnibus |
|
|
711
High Street |
|
|
Des
Moines, IA 50392-0001 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Z |
State
Street Bank & Trust Co., TR and/or CUST |
9.15% |
|
FBO
ADP Access Product |
|
|
Attn:
Retirement Services |
|
|
1
Lincoln Street |
|
|
Boston,
MA 02111-2901 |
|
|
|
|
Emerging
Markets Fund |
|
|
Class
Z |
Charles
Schwab & Co. Inc. |
6.08% |
|
Special
Custody A/C FBO Customers |
|
|
Attn:
Mutual Funds |
|
|
211
Main St. |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
Global
Resources Fund |
|
|
Class
A |
Merrill
Lynch Pierce Fenner & Smith |
13.87 |
% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
4800
Deer Lake Dr. East, 2nd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Global
Resources Fund |
National
Financial Services LLC |
10.04 |
% |
Class
A |
for
the Exclusive Benefit of Its Customers |
|
|
Attn:
Mutual Funds Dept., 4th
FL |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Global
Resources Fund |
|
|
Class
A |
Pershing
LLC |
9.60% |
|
Omnibus
Account - Mutual Fund OPS |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
Global
Resources Fund |
|
|
Class
A |
Charles
Schwab & Co. Inc. |
9.33% |
|
Special
Custody A/C FBO Customers |
|
|
Attn:
Mutual Funds |
|
|
211
Main Street |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
Global
Resources Fund |
|
|
Class
A |
Morgan
Stanley Smith Barney LLC |
9.20% |
|
For
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza, Fl.12 |
|
|
New
York, New York 10004-1932 |
|
|
|
|
Global
Resources Fund |
|
|
Class
A |
Wells
Fargo Clearing Services LLC |
8.55 |
% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
LPL
Financial |
5.71 |
% |
|
9785
Towne Centre Drive |
|
|
San
Diego, CA 92121-1968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF CLASS OF FUND OWNED |
|
|
|
Global
Resources Fund |
|
|
Class
C |
Wells
Fargo Clearing Services LLC |
23.67% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
Raymond
James |
16.52 |
% |
|
Omni
Account M/F |
|
|
880
Carillon PKWY |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
Global
Resources Fund |
Morgan
Stanley Smith Barney LLC |
14.38 |
% |
Class
C |
For
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza, Fl.12 |
|
|
New
York, New York 10004-1932 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
Merrill
Lynch Pierce Fenner & Smith |
10.31 |
% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
LPL
Financial |
8.00% |
|
9785
Towne Centre Drive |
|
|
San
Diego, CA 92121-1968 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
National
Financial Services LLC |
7.32% |
|
for
the Exclusive Benefit of Its Customers |
|
|
Attn:
Mutual Funds Dept., 4th
FL |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Global
Resources Fund |
|
|
Class
C |
Charles
Schwab & Co. Inc. |
6.33% |
|
Special
Custody A/C FBO Customers |
|
|
Attn:
Mutual Funds |
|
|
211
Main Street |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF CLASS OF FUND OWNED |
|
|
|
Global
Resources Fund |
|
|
Class
I |
SEI
Private Trust Company |
15.91% |
|
c/o
SunTrust Bank ID 866 |
|
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
Global
Resources Fund |
|
|
Class
I |
Merrill
Lynch Pierce Fenner & Smith |
11.67% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Global
Resources Fund |
|
|
Class
I |
Charles
Schwab & Co., Inc. |
11.12% |
|
Special
Custody Acct. FBO |
|
|
Customers
LMF Clearing Services |
|
|
211
Main St. |
|
|
San
Francisco, CA 94105-1905 |
|
|
|
|
Global
Resources Fund |
SEI
Private Trust Company |
10.76% |
Class
I |
c/o
Regions Bank |
|
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
Global
Resources Fund |
|
|
Class
I |
Saxon
& Co. |
8.27 |
% |
|
P.O.
Box 94597 |
|
|
Cleveland,
OH 44101-4597 |
|
|
|
|
Global
Resources Fund |
|
|
Class
I |
National
Financial Services LLC |
6.61 |
% |
|
For
the Exclusive Benefit of its Customers |
|
|
Attn:
Mutual Funds Dept., 4th
FL |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Global
Resources Fund |
|
|
Class
I |
MAC
& CO. |
5.17 |
% |
|
Attn.
Mutual Fund Ops |
|
|
PO
Box 3198 |
|
|
525
William Penn Pl |
|
|
Pittsburgh,
PA 15230-3198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF CLASS OF FUND OWNED |
|
|
|
Global
Resources Fund |
|
|
Class
Y |
Wells
Fargo Clearing Services LLC |
21.76% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
Global
Resources Fund |
|
|
Class
Y |
Merrill
Lynch Pierce Fenner & Smith |
18.53 |
% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
Global
Resources Fund |
|
|
Class
Y |
Morgan
Stanley Smith Barney LLC |
12.64% |
|
for
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza Fl. 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
Global
Resources Fund |
|
|
Class
Y |
Pershing
LLC |
11.88% |
|
Omnibus
Acct-Mutual Fund OPS |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
|
|
|
Global
Resources Fund |
|
|
Class
Y |
Raymond
James |
8.04% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
Global
Resources Fund |
|
|
Class
Y |
LPL
Financial |
5.47% |
|
9785
Towne Centre Drive |
|
|
San
Diego, CA 92121-1968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF CLASS OF FUND OWNED |
International
Investors Gold Fund |
|
|
Class
A |
National
Financial Services LLC |
10.75% |
|
For
the Exclusive Benefit of Our Customers |
|
|
Attn:
Mutual Funds Dept., 4th
FL |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
A |
Raymond
James |
9.41 |
% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
A |
Morgan
Stanley Smith Barney LLC |
8.07% |
|
For
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza, Fl. 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
A |
Pershing
LLC |
6.51% |
|
Omnibus
Acct-Mutual Funds OPS |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
A |
Wells
Fargo Clearing Services LLC |
6.32 |
% |
|
Special
Custody Omnibus Account |
|
|
For
the Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
International
Investors Gold Fund |
American
Enterprise Investment Service |
5.02 |
% |
Class
A |
707
2nd Avenue S |
|
|
Minneapolis,
MN 55402-2405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
|
|
International
Investors Gold Fund |
|
|
Class
C |
Raymond
James |
26.07% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
C |
Wells
Fargo Clearing Services LLC |
17.26% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
C |
Charles
Schwab & Co. Inc. |
17.11 |
% |
|
Special
Custody Acct FBO |
|
|
Customers
Loan Non-Clearing |
|
|
211
Main St |
|
|
San
Francisco, CA 94105-1901 |
|
International
Investors Gold Fund |
|
|
Class
C |
Morgan
Stanley Smith Barney LLC |
9.53% |
|
for
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza Fl. 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
C |
Pershing
LLC |
6.62% |
|
Omnibus
Account - Mutual Fund OPS |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
C |
American
Enterprise Investment Service |
5.36 |
% |
|
707
2nd Avenue S |
|
|
Minneapolis,
MN 55402-2405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
International
Investors Gold Fund |
|
|
Class
I |
Charles
Schwab & Co Inc. |
28.22 |
% |
|
Special
Custody Acct FBO |
|
|
Customers
Instl |
|
|
211
Main St. |
|
|
San
Francisco, CA 94105-1905 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
I |
National
Financial Services LLC |
16.23% |
|
For
the Exclusive Benefit of Our Customers |
|
|
Attn:
Mutual Funds Dept. 4th
FL |
|
|
499
Washington Blvd |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
I |
J.P.
Morgan Securities LLC |
10.34% |
|
4
Chase Metrotech Center |
|
|
Brooklyn,
NY 11245-0001 |
|
International
Investors Gold Fund |
|
|
Class
I |
The
Northern Trust Company Custodian |
8.77% |
|
HRW
Trust |
|
|
PO
Box 92956 |
|
|
Chicago,
IL 60675-2956 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
I |
The
Northern Trust Company Custodian |
6.59% |
|
HRW
Trust |
|
|
PO
Box 92956 |
|
|
Chicago,
IL 60675-2956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Investors Gold Fund |
|
|
Class
I |
State
Street Bank & Trust Co. TR and/or CUST |
5.36% |
|
FBO
ADP Access Product |
|
|
Attn
Retirement Services |
|
|
1
Lincoln St |
|
|
Boston,
MA 02111-2901 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
I |
The
Northern Trust Company Custodian |
5.21% |
|
HRW
Testamentary Trust |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
PO
Box 92956 |
|
|
Chicago,
IL 60675-2956 |
|
International
Investors Gold Fund |
|
|
Class
Y |
Morgan
Stanley Smith Barney LLC |
15.89% |
|
For
the Exclusive Benefit of its Customers |
|
|
1
New York Plaza FL 12 |
|
|
New
York, NY 10004-1932 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
Y |
National
Financial Services LLC |
11.70% |
|
For
the Exclusive Benefit of Our Customers |
|
|
Attn:
Mutual Funds Dept., 4th
FL |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
Y |
Raymond
James |
11.42 |
% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
International
Investors Gold Fund |
|
|
Class
Y |
Merrill
Lynch Pierce Fenner & Smith |
10.53% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Drive East, 2nd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
Y |
UBS
Financial Services Inc. |
6.66% |
|
Special
Custody Account for the Exclusive Benefit of its Customers |
|
|
Attn:
Department Manager |
|
|
1000
Harbo Blvd., 5th Floor |
|
|
Weehawken,
NJ 07086-6761 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
Y |
LPL
Financial |
6.29 |
% |
|
9785
Towne Centre Drive |
|
|
San
Diego, CA 92121-1968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
International
Investors Gold Fund |
|
|
Class
Y |
Charles
Schwab & Co., Inc. |
5.35 |
% |
|
Special
Custody Acct. FBO Customer INSTL |
|
|
211
Main St. |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
International
Investors Gold Fund |
|
|
Class
Y |
Wells
Fargo Clearing Services LLC |
5.19 |
% |
|
Special
Custody Omnibus Account |
|
|
for
Exclusive Benefit of Customers |
|
|
2801
Market Street |
|
|
Saint
Louis, MO 63103-2523 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
A |
Merrill
Lynch Pierce Fenner & Smith |
38.46 |
% |
|
for
the Sole Benefit of its Customers |
|
|
Attn:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
A |
Charles
Schwab & Co Inc. |
16.22% |
|
Special
Custody Acct FBO |
|
|
Customers
Instl |
|
|
211
Main St |
|
|
San
Francisco, CA 94105-1905 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
A |
National
Financial Services LLC |
15.19 |
% |
|
for
the Exclusive Benefit of Its Customers |
|
|
Attn:
Mutual Funds Dept., 4th Fl. |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
A |
Great-West
Trust Company LLC |
6.69 |
% |
|
Employee
Benefits Clients 401K |
|
|
8515
E Orchard Rd. 2T2 |
|
|
Greenwood
Vlg, CO 80111-5002 |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
|
|
CM
Commodity Index Fund |
|
|
Class
I |
SEI
Private Trust Company |
35.35 |
% |
|
Attn:
Mutual Fund Administrator |
|
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
I |
SEI
Private Trust Company |
18.12% |
|
Attn:
Mutual Fund Administrator |
|
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
I |
Merrill
Lynch Pierce Fenner & Smith |
11.07% |
|
for
the Sole Benefit of its Customers |
|
|
Att:
Fund Administration |
|
|
4800
Deer Lake Dr. East, 3rd Floor |
|
|
Jacksonville,
FL 32246-6484 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
I |
National
Financial Services LLC |
10.54 |
% |
|
for
the Exclusive Benefit of Its Customers |
|
|
Attn:
Mutual Funds Dept., 4th Fl. |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
I |
SEI
Private Trust Company |
7.25% |
|
Attn:
Mutual Fund Administrator |
|
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
Y |
Pershing
LLC |
77.50% |
|
Omnibus
Acct-Mutual Fund OPS |
|
|
1
Pershing Plz |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
CM
Commodity Index Fund |
|
|
Class
Y |
National
Financial Services LLC |
7.45% |
|
for
the Exclusive Benefit of Its Customers |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
Attn:
Mutual Funds Dept., 4th Fl. |
|
|
499
Washington Blvd. |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
VanEck
Morningstar Wide Moat Fund |
|
|
Class
I |
Van
Eck Securities Corporation |
53.65% |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Morningstar Wide Moat Fund |
Charles
Schwab & Co Inc. |
46.35 |
% |
Class
I |
Special
Custody Acct FBO |
|
|
Customers
Instl |
|
|
211
Main St |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
VanEck
Morningstar Wide Moat Fund |
|
|
Class
Z |
Van
Eck Securities Corporation |
53.53 |
% |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Morningstar Wide Moat Fund |
|
|
Class
Z |
State
Street Bank & Trust Co. TR and/or CUST |
29.46 |
% |
|
FBO
ADP Access Product |
|
|
Attn:
Retirement Services |
|
|
1
Lincoln St |
|
|
Boston,
MA 02111-2901 |
|
|
|
|
VanEck
Morningstar Wide Moat Fund |
|
|
Class
Z |
National
Financial Services LLC |
6.93 |
% |
|
for
the Exclusive Benefit of Our Customers |
|
|
Attn:
Mutual Funds Dept., 4th Fl |
|
|
499
Washington Blvd |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
Emerging
Markets Bond Fund |
|
|
Class
A |
National
Financial Services LLC |
27.24% |
|
For
the Exclusive Benefit of Our Customers |
|
|
Attn:
Mutual Funds Dept., 4th Fl. |
|
|
499
Washington Blvd |
|
|
Jersey
City, NJ 07310-1995 |
|
Emerging
Markets Bond Fund |
|
|
Class
A |
Sigrid
S Van Eck TR |
19.27 |
% |
|
Sigrid
S Van Eck Revocable Trust |
|
|
Palm
Beach, FL 33480-6704 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
A |
Pershing
LLC |
17.71% |
|
Omnibus
Account-Mutual Fund OPS |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
Emerging
Markets Bond Fund |
|
|
Class
A |
LPL
Financial |
10.98 |
% |
|
9785
Towne Centre Drive |
|
|
San
Diego, CA 92121-1968 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
A |
Raymond
James |
10.74% |
|
Omni
Account M/F |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
I |
Charles
Schwab & Co., Inc. |
60.26 |
% |
|
Special
Custody Acct. FBO Customers Instl |
|
|
211
Main St |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
I |
State
Street Bank & Trust Co. TR and/or CUST |
23.57 |
% |
|
FBO
ADP Access Product |
|
|
Attn:
Retirement Services |
|
|
1
Lincoln St |
|
|
Boston,
MA 02111-2901 |
|
Emerging
Markets Bond Fund |
|
|
Class
I |
SEI
Private Trust Company |
15.81 |
% |
|
c/o
Regions Bank |
|
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
One
Freedom Valley Drive |
|
|
Oaks,
PA 19456-9989 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
Y |
Raymond
James |
46.36% |
|
Omni
Account M/F |
|
|
Attn:
Courtney Waller |
|
|
880
Carillon Pkwy |
|
|
Saint
Petersburg, FL 33716-1102 |
|
Emerging
Markets Bond Fund |
|
|
Class
Y |
Charles
Schwab & Co Inc. |
13.88% |
|
Special
Custody Acct. FBO Customers Instl |
|
|
211
Main Street |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
|
|
|
|
|
|
Emerging
Markets Bond Fund |
National
Financial Services LLC |
12.06 |
% |
Class
Y |
For
The Exclusive Benefit Of Our Customers |
|
|
Attn
Mutual Funds Dept 4th Fl |
|
|
499
Washington Blvd |
|
|
Jersey
City, NJ 07310-1995 |
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
Y |
Charles
Schwab & Co Inc. |
10.45% |
|
Special
Custody Acct. FBO Customers MF Clearing Services |
|
|
211
Main Street |
|
|
San
Francisco, CA 94105-1901 |
|
|
|
|
|
|
|
Emerging
Markets Bond Fund |
|
|
Class
Y |
Pershing
LLC |
5.64% |
|
Omnibus
Account-Mutual Fund Ops |
|
|
1
Pershing Plaza |
|
|
Jersey
City, NJ 07399-0002 |
|
|
|
|
VanEck
Environmental Sustainability Fund |
|
|
Class
A |
Van
Eck Associates Corporation |
92.53 |
% |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Environmental Sustainability Fund |
|
|
Class
I |
Van
Eck Associates Corporation |
88.93 |
% |
|
|
|
|
|
|
|
|
|
FUND
AND CLASS |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
CLASS OF
FUND
OWNED |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Environmental Sustainability Fund |
|
|
Class
I |
State
Street Bank & Trust Co TR and/or CUST |
11.07 |
% |
|
FBO
ADP Access Product |
|
|
Attn
Retirement Services |
|
|
1
Lincoln St |
|
|
Boston
MA 02111-2901 |
|
|
|
|
VanEck
Environmental Sustainability Fund |
|
|
Class
Y |
Van
Eck Associates Corporation |
100 |
% |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Emerging Markets Leaders Fund |
|
|
Class
A |
Van
Eck Associates Corporation |
100 |
% |
|
Attn:
Lee Rappaport |
|
|
666
3rd Avenue, FL 8 |
|
|
New
York, NY 10017-4033 |
|
|
|
|
VanEck
Emerging Markets Leaders Fund |
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Class
I |
Van
Eck Associates Corporation |
100 |
% |
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Attn:
Lee Rappaport |
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666
3rd Avenue, FL 8 |
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New
York, NY 10017-4033 |
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VanEck
Emerging Markets Leaders Fund |
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Class
Y |
Van
Eck Associates Corporation |
100 |
% |
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Attn:
Lee Rappaport |
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666
3rd Avenue, FL 8 |
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New
York, NY 10017-4033 |
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Control
Person Ownership
As
of March 31, 2022, no person owned directly or through one or more controlled
companies more than 25% of the voting securities of a Fund, except for Emerging
Markets Bond Fund, Emerging Markets Leaders Fund, Environmental Sustainability
Fund, CM Commodity Index Fund and VanEck Morningstar Wide Moat Fund. For
Emerging Markets Bond Fund, Emerging Markets Leaders Fund, Environmental
Sustainability Fund, CM Commodity Index Fund and VanEck Morningstar Wide Moat
Fund, a shareholder who may be deemed to be a “control person” (as that term is
defined in the 1940 Act) because the shareholder owns of record more than 25% of
the outstanding shares of the Fund by virtue of its fiduciary roles with respect
to its clients or otherwise, is shown below. A control person may be able to
facilitate shareholder approval of proposals it approves and to impede
shareholder approval of proposals it opposes. If a control person’s record
ownership of the Fund’s outstanding shares exceeds 50%, then, for certain
shareholder proposals, such control person may be able to approve, or prevent
approval, of such proposals without regard to votes by other Fund shareholders.
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FUND |
NAME
AND ADDRESS OF OWNER |
PERCENTAGE
OF
FUND
OWNED |
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Emerging
Markets Leaders Fund |
Van
Eck Associates Corp. Attn: Lee Rappaport 666 3rd Avenue New York,
NY 10017-4033 |
100% |
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Emerging
Markets Bond Fund |
Charles
Schwab & Co. Inc. Special Custody Account FBO Customers
Instl 211 Main St San Francisco, CA 94105-1901 |
27.81% |
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Environmental
Sustainability Fund |
Van
Eck Associates Corp. Attn: Lee Rappaport 666 3rd Avenue New York,
NY 10017-4033 |
93.81% |
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CM
Commodity Index Fund |
Pershing
LLC Omnibus Acct- Mutual Fund OPS 1 Pershing Plaza Jersey City,
NJ 07399-0002 |
41.78% |
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VanEck
Morningstar Wide Moat Fund |
Van
Eck Securities Corp. Attn: Lee Rappaport 666 3rd Avenue New York,
NY 10017-4033 |
53.56% |
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POTENTIAL
CONFLICTS OF INTEREST
Each
Adviser (and its principals, affiliates or employees) may serve as investment
adviser to other client accounts and conduct investment activities for their own
accounts. Such “Other Clients” may have investment objectives or may implement
investment strategies similar to those of the Funds. When an Adviser implements
investment strategies for Other Clients that are similar or directly contrary to
the positions taken by a Fund, the prices of the Fund’s securities may be
negatively affected. For example, when purchase or sales orders for a Fund are
aggregated with those of other Funds and/or Other Clients and allocated among
them, the price that the Fund pays or receives may be more in the case of a
purchase or less in a sale than if the Adviser served as adviser to only the
Fund. When Other Clients are selling a security that a Fund owns, the price of
that security may decline as a result of the sales. The compensation that an
Adviser receives from Other Clients may be higher than the compensation paid by
a Fund to the Adviser. Each Adviser has implemented procedures to monitor
trading across the Funds and its Other Clients. Furthermore, each Adviser may
recommend a Fund purchase securities of issues to which it, or its affiliate,
acts as adviser, manager, sponsor, distributor, marketing agent, or in another
capacity and for which it receives advisory or other fees. While this practice
may create conflicts of interest, the Adviser has adopted procedures to minimize
such conflicts.
PROXY
VOTING POLICIES AND PROCEDURES
The
Funds’ proxy voting record is available upon request and on the SEC’s website at
http://www.sec.gov. Proxies for each Fund’s portfolio securities are voted in
accordance with the applicable Adviser’s proxy voting policies and procedures,
which are set forth in Appendix A to this SAI.
The
Trust is required to disclose annually each Fund’s complete proxy voting record
on Form N-PX covering the period July 1 through June 30 and file it with the SEC
no later than August 31. Form N-PX for the Funds is available through the Funds’
website, at vaneck.com, or by writing to 666 Third Avenue, 9th Floor, New York,
New York 10017. The Funds’ Form N-PX is also available on the SEC’s website at
www.sec.gov.
CODE
OF ETHICS
The
Funds, each Adviser and the Distributor have each adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 Act (“Rule 17j-1”). Such Codes of
Ethics require, among other things, that “access persons” (as defined in Rule
17j-1) conduct personal securities transactions in a manner that avoids any
actual or potential conflict of interest or any abuse of a position of trust and
responsibility. The Codes of Ethics allow such access persons to invest in
securities that may be purchased and held by a Fund, provided such investments
are done consistently with the provisions of the Codes of Ethics.
PURCHASE
OF SHARES
The
Funds may invest in securities or futures contracts listed on foreign exchanges
which trade on Saturdays or other customary United States national business
holidays (i.e., days on which the Funds are not open for business).
Consequently, since the Funds will compute their net asset values only Monday
through Friday, exclusive of national business holidays, the net asset values of
shares of the Funds may be significantly affected on days when an investor has
no access to the Funds. The sale of shares will be suspended during any period
when the determination of net asset value is suspended, and may be suspended by
the Board whenever the Board judges it is in a Fund’s best interest to do
so.
Certificates
for shares of the Funds will not be issued.
The
Funds may reject a purchase order for any reason, including an exchange
purchase, either before or after the purchase.
If
you purchase shares through a financial intermediary, different purchase
minimums than those set forth herein may apply. VanEck reserves the right to
waive the investment minimums under certain circumstances.
VanEck
reserves the right to allow a financial intermediary that has a Class I
Agreement with VanEck to purchase shares for its own account and for its
clients’ accounts in Class I shares of a Fund on behalf of its eligible clients
which are Employer-Sponsored Retirement Plans with plan assets of $3 million or
more.
AVAILABILITY
OF DISCOUNTS
An
investor or the Broker or Agent must notify DST Systems, Inc., the Funds’
transfer agent (“DST”), or the Distributor at the time of purchase whenever a
quantity discount or reduced or waived sales charge is applicable to a purchase.
Quantity discounts described above may be modified or terminated at any time
without prior notice.
VALUATION
OF SHARES
The
net asset value per share of each of the Funds is computed by dividing the value
of all of a Fund’s securities plus cash and other assets, less liabilities, by
the number of shares outstanding. The net asset value per share is computed as
of the close of the NYSE, usually 4:00 p.m. New York time, Monday through
Friday, exclusive of national business holidays. The Funds will be closed on the
following national business holidays: New Year’s Day, Martin Luther King Jr.
Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth National
Independence Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day (or the days on which these holidays are observed).
Shares
of the Funds are sold at the public offering price, which is determined once
each day the Funds are open for business and is the net asset value per share.
The net asset values need not be computed on a day in which no orders to
purchase, sell or redeem shares of the Funds have been received.
Dividends
paid by a Fund with respect to Class A, Class C, Class I, Class Y and Class Z
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except that the higher distribution services
fee and any incremental transfer agency and registration costs relating to Class
C shares will be borne exclusively by that Class. The Board has determined that
currently no conflict of interest exists between the Class A, Class C, Class I,
Class Y and Class Z shares. On an ongoing basis, the Board, pursuant to their
fiduciary duties under the 1940 Act and state laws, will seek to ensure that no
such conflict arises.
Class
A shares of the Funds are sold at the public offering price, which is determined
once each day the Funds are open for business and is the net asset value per
share plus a sales charge in accordance with the schedule set forth in the
Prospectuses.
Set
forth below is an example of the computation of the public offering price for a
Class A share of each Fund (which offers Class A shares) on December 31, 2021,
under the then-current maximum sales charge:
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CM Commodity Index
Fund - Class A |
Emerging Markets Fund
- Class A |
Global Resources Fund
- Class A |
International Investors Gold
Fund - Class A |
Emerging Markets
Bond Fund - Class A |
Emerging
Markets Leaders Fund - Class A |
Environmental
Sustainability Fund - Class A |
Net
assets value and repurchase price per share on $.001 par value capital
shares outstanding |
$5.05 |
$17.02 |
$39.21 |
$10.32 |
$6.07 |
N/A |
$24.24 |
Maximum
sales charge (as described in the Prospectus) |
$0.30 |
$1.04 |
$2.39 |
$0.63 |
$0.37 |
N/A |
$1.48 |
Maximum
offering price per share |
$5.35 |
$18.06 |
$41.60 |
$10.95 |
$6.44 |
N/A |
$25.72 |
In
determining whether a deferred sales charge is applicable to Class C shares, the
calculation will be determined in the manner that results in the lowest possible
rate being charged. Therefore, it will be assumed that the redemption is first
from any Class A shares in the shareholder’s Fund account (unless a specific
request is made to redeem a specific class of shares), Class C shares held for
over one year and shares attributable to appreciation or shares acquired
pursuant to reinvestment, and third of any Class C shares held longest during
the applicable period.
Each
Fund’s investments are generally valued based on market quotations which may be
based on quotes obtained from a quotation reporting system, established market
makers, broker dealers or by an independent pricing service. Short-term debt
investments having a maturity of 60 days or less are valued at amortized cost,
which approximates the fair value of the security. Assets or liabilities
denominated in currencies other than the U.S. dollar are converted into U.S.
dollars at the current market rates on the date of valuation as quoted by one or
more sources. When market quotations are not readily available for a portfolio
security or other asset, or, in the opinion of its Adviser, are deemed
unreliable, a Fund will use the security’s or asset’s “fair value” as determined
in good faith in accordance with the Funds’ Fair Value Pricing Policies and
Procedures, which have been approved by the Board. As a general principle, the
current fair value of a security or other asset is the amount which a Fund might
reasonably expect to receive for the security or asset upon its current sale.
The Funds’ Pricing Committee, whose members are selected by the senior
management of the Advisers and reported to the Board, is responsible for
recommending fair value procedures to the Board and for administering the
process used to arrive at fair value prices. Factors
that
may cause a Fund’s Pricing Committee to fair value a security include, but are
not limited to: (1) market quotations are not readily available because a
portfolio security is not traded in a public market, trading in the security has
been suspended, or the principal market in which the security trades is closed,
(2) trading in a portfolio security is limited or suspended and not resumed
prior to the time at which the Fund calculates its NAV, (3) the market for the
relevant security is thin, or the price for the security is “stale” because its
price has not changed for 5 consecutive business days, (4) an Adviser determines
that a market quotation is not reliable, for example, because price movements
are highly volatile and cannot be verified by a reliable alternative pricing
source, or (5) a significant event affecting the value of a portfolio security
is determined to have occurred between the time of the market quotation provided
for a portfolio security and the time at which the Fund calculates its
NAV.
In
determining the fair value of securities, the Pricing Committee will consider,
among other factors, the fundamental analytical data relating to the security,
the nature and duration of any restrictions on the disposition of the security,
and the forces influencing the market in which the security is
traded.
Foreign
equity securities in which the Funds invest may be traded in markets that close
before the time that each Fund calculates its NAV. Foreign equity securities are
normally priced based upon the market quotation of such securities as of the
close of their respective principal markets, as adjusted to reflect an Adviser’s
determination of the impact of events, such as a significant movement in the
U.S. markets occurring subsequent to the close of such markets but prior to the
time at which the Fund calculates its NAV. In such cases, the Pricing Committee
may apply a fair valuation formula to those foreign equity securities based on
the Committee’s determination of the effect of the U.S. significant event with
respect to each local market.
Certain
of the Funds’ portfolio securities are valued by an independent pricing service
approved by the Board. The independent pricing service may utilize an automated
system incorporating a model based on multiple parameters, including a
security’s local closing price (in the case of foreign securities), relevant
general and sector indices, currency fluctuations, and trading in depositary
receipts and futures, if applicable, and/or research evaluations by its staff,
in determining what it believes is the fair valuation of the portfolio
securities valued by such independent pricing service.
There
can be no assurance that the Funds could purchase or sell a portfolio security
or other asset at the price used to calculate the Funds’ NAV. Because of the
inherent uncertainty in fair valuations, and the various factors considered in
determining value pursuant to the Funds’ fair value procedures, there can be
material differences between a fair value price at which a portfolio security or
other asset is being carried and the price at which it is purchased or sold.
Furthermore, changes in the fair valuation of portfolio securities or other
assets may be less frequent, and of greater magnitude, than changes in the price
of portfolio securities or other assets valued by an independent pricing
service, or based on market quotations.
In
December 2020, the SEC adopted Rule 2a-5 under the Investment Company Act of
1940, as amended (“Rule 2a-5”), which is intended to address valuation practices
and the role of a fund’s board with respect to the fair value of the investments
of a registered investment company. Rule 2a-5, among other things, establishes
an updated regulatory framework for registered investment company valuation
practices. The Funds will not be required to comply with Rule 2a-5 until
September 8, 2022.
EXCHANGE
PRIVILEGE
Shareholders
of a Fund may exchange their shares for shares of the same class of other funds
in the Trust that offer an Exchange Privilege for that class. The Exchange
Privilege will not be available if the proceeds from a redemption of shares of a
Fund whose shares qualify are paid directly to the shareholder. The Exchange
Privilege is not available for shares which are not on deposit with DST or UMB
Bank (“UMB”), or shares which are held in escrow pursuant to a Letter of Intent.
If certificates representing shares of a Fund accompany a written exchange
request, such shares will be deposited into an account with the same
registration as the certificates upon receipt by DST.
The
Funds each reserve the right to (i) charge a fee of not more than $5.00 per
exchange payable to a Fund or charge a fee reasonably intended to cover the
costs incurred in connection with the exchange; (ii) establish a limit on the
number and amount of exchanges made pursuant to the Exchange Privilege, as
disclosed in the Prospectuses and (iii) terminate the Exchange Privilege without
written notice. In the event of such termination, shareholders who have acquired
their shares pursuant to the Exchange Privilege will be afforded the opportunity
to re-exchange such shares for shares of the Fund originally purchased without
sales charge, for a period of not less than three (3) months.
By
exercising the Exchange Privilege, each shareholder whose shares are subject to
the Exchange Privilege will be deemed to have agreed to indemnify and hold
harmless the Trust and each of its series, their Adviser, sub-investment adviser
(if any), distributor, transfer agent, UMB and the officers, directors,
employees and agents thereof against any liability, damage, claim or loss,
including reasonable costs and attorneys’ fees, resulting from acceptance of, or
acting or failure to act upon, or acceptance of unauthorized instructions or
non-authentic telephone instructions given in connection with, the Exchange
Privilege, so long as reasonable procedures are employed to confirm the
authenticity of such communications. (For more information on the Exchange
Privilege, see the Prospectuses).
CLASS
CONVERSIONS
Eligible
shareholders may convert their shares from one class to another class within the
same Fund, without any conversion fee, upon request by such shareholders or
their financial intermediaries. For federal income tax purposes, a same-fund
conversion from one class to another is not expected to result in the
realization by the shareholder of a capital gain or loss (non-taxable
conversion). Generally, Class A shares subject to a contingent deferred sales
charge (“CDSC”) and Class C shares subject to a contingent deferred redemption
charge (“CDRC”) are not eligible for conversion until the applicable CDSC or
CDRC period has expired. However, some waivers of the CDSC or CDRC may apply as
specified in the Prospectus. Shares eligible for conversion are exchanged
between classes of the same fund on a dollar-for-dollar basis at NAV. Not all
share classes are available through all financial intermediaries or all their
account types or programs. To determine whether you are eligible to invest in a
specific class of shares, see the section of the Prospectuses entitled
“Shareholder Information - How to Choose a Class of Shares” and contact your
financial intermediary for additional information.
INVESTMENT
PROGRAMS
Dividend
Reinvestment Plan.
Reinvestments of dividends of the Funds will occur on a date selected by the
Board.
Automatic
Exchange Plan.
Investors with accounts held directly at the Fund may arrange under the
Automatic Exchange Plan to have DST collect a specified amount once a month or
quarter from the investor’s account in one of the Funds and purchase full and
fractional shares of another Fund in the same class at the public offering price
next computed after receipt of the proceeds. Further details of the Automatic
Exchange Plan are given in the application which is available from DST or the
Funds. Class C shares are not eligible. Accounts opened through a financial
intermediary may be eligible for a similar plan offered by that financial
intermediary. Please contact your financial intermediary for
details.
An
investor should realize that he is investing his funds in securities subject to
market fluctuations, and accordingly the Automatic Exchange Plan does not assure
a profit or protect against depreciation in declining markets. The Automatic
Exchange Plan contemplates the systematic purchase of securities at regular
intervals regardless of price levels.
The
expenses of the Automatic Exchange Plan are general expenses of a Fund and will
not involve any direct charge to the participating shareholder. The Automatic
Exchange Plan is completely voluntary and may be terminated on fifteen days’
notice to DST.
Letter
of Intent (“LOI” or “Letter”).
For LOIs, out of an initial purchase (or subsequent purchases if necessary), 5%
of the specified dollar amount of an LOI will be held in escrow by DST in a
shareholder’s account until the shareholder’s total purchases of the VanEck
Funds pursuant to the LOI plus a shareholder’s accumulation credit (if any)
equal the amount specified in the Letter. A purchase not originally made
pursuant to an LOI may be included under a backdated Letter executed within 90
days of such purchase (accumulation credit). If total purchases pursuant to the
Letter plus any accumulation credit are less than the specified amount of the
Letter, the shareholder must remit to the Distributor an amount equal to the
difference in
the
dollar amount of the sales charge the shareholder actually paid and the amount
of the sales charge which the shareholder would have paid on the aggregate
purchases if the total of such purchases had been made at a single time. If the
shareholder does not, within 20 business days after written request by the
dealer or bank or by the Distributor, pay such difference in sales charge, DST,
upon instructions from the Distributor, is authorized to cause to be repurchased
(liquidated) an appropriate number of the escrowed shares in order to realize
such difference. A shareholder irrevocably constitutes and appoints DST, as
escrow agent, to surrender for repurchase any or all escrowed shares with full
power of substitution in the premises and agree to the terms and conditions set
forth in the Prospectuses and SAI. A LOI is not effective until it is accepted
by the Distributor.
Automatic
Investment Plan.
Investors with accounts held directly at the Fund may arrange under the
Automatic Investment Plan to have DST collect a specified amount once a month or
quarter from the investor’s checking account and purchase full and fractional
shares of a Fund at the public offering price next computed after receipt of the
proceeds. Further details of the Automatic Investment Plan are given in the
application which is available from DST or the Funds. Accounts opened through a
financial intermediary may be eligible for a similar plan offered by that
financial intermediary. Please contact your financial intermediary for
details.
An
investor should realize that he is investing his funds in securities subject to
market fluctuations, and accordingly the Automatic Investment Plan does not
assure a profit or protect against depreciation in declining markets. The
Automatic Investment Plan contemplates the systematic purchase of securities at
regular intervals regardless of price levels.
The
expenses of the Automatic Investment Plan are general expenses of a Fund and
will not involve any direct charge to the participating shareholder. The
Automatic Investment Plan is completely voluntary. The Automatic Investment Plan
may be terminated on thirty days’ notice to DST.
Automatic
Withdrawal Plan.
Investors with accounts held directly at the Fund may establish the Automatic
Withdrawal Plan which is designed to provide a convenient method of receiving
fixed redemption proceeds at regular intervals from shares of a Fund deposited
by the investor under this Plan. Class C shares are not eligible, except for
automatic withdrawals for the purpose of retirement account distributions.
Further details of the Automatic Withdrawal Plan are given in the application,
which is available from DST or the Funds. Accounts opened through a financial
intermediary may be eligible for a similar plan offered by that financial
intermediary. Please contact your financial intermediary for
details.
In
order to open an Automatic Withdrawal Plan, the investor must complete the
Application and deposit or purchase for deposit, with DST, the agent for the
Automatic Withdrawal Plan, shares of a Fund having a total value of not less
than $10,000 based on the offering price on the date the Application is
accepted, except for automatic withdrawals for the purpose of retirement account
distributions.
Income
dividends and capital gains distributions on shares under an Automatic
Withdrawal Plan will be credited to the investor’s Automatic Withdrawal Plan
account in full and fractional shares at the net asset value in effect on the
reinvestment date.
Periodic
checks for a specified amount will be sent to the investor, or any person
designated by him, monthly or quarterly. A Fund will bear the cost of
administering the Automatic Withdrawal Plan.
Redemption
of shares of a Fund deposited under the Automatic Withdrawal Plan may deplete or
possibly use up the initial investment plus income dividends and distributions
reinvested, particularly in the event of a market decline. In addition, the
amounts received by an investor cannot be considered an actual yield or income
on his investment, since part of such payments may be a return of his capital.
The redemption of shares under the Automatic Withdrawal Plan may give rise to a
taxable event.
The
maintenance of an Automatic Withdrawal Plan concurrently with purchases of
additional shares of a Fund would be disadvantageous because of the sales charge
payable with respect to such purchases. An investor may not have an Automatic
Withdrawal Plan in effect and at the same time have in effect an Automatic
Investment Plan or an Automatic Exchange Plan. If an investor has an Automatic
Investment Plan or an Automatic Exchange Plan, such service must be terminated
before an Automatic Withdrawal Plan may take effect.
The
Automatic Withdrawal Plan may be terminated at any time (1) on 30 days notice to
DST or from DST to the investor, (2) upon receipt by DST of appropriate evidence
of the investor’s death or (3) when all shares under the Automatic Withdrawal
Plan have been redeemed. Upon termination, unless otherwise requested,
certificates representing remaining full shares, if any, will be delivered to
the investor or his duly appointed legal representatives.
TAXES
The
following summary outlines certain federal income tax considerations relating to
an investment in the Funds by a taxable U.S. investor (as defined below). This
summary is intended only to provide general information to U.S. investors that
hold the shares as a capital asset, is not intended as a substitute for careful
tax planning, does not address any foreign, state or local tax consequences of
an investment in the Fund, and does not address the tax considerations that may
be relevant to investors subject to special treatment under the Code, including,
without limitation, U.S. expatriates, brokers or dealers in securities, traders
in securities that use the mark-to-market method of accounting, tax-exempt
entities, Non-U.S. investors (except to the limited extent discussed below),
regulated investment companies, REITs, grantor trusts, U.S. investors that have
a functional currency other than the U.S. dollar, financial institutions,
insurance companies, personal holding companies, or persons who acquire an
interest in the Funds in connection with the performance of services. This
summary should not be construed as legal or tax advice. This summary is based on
the provisions of the Code, applicable U.S. Treasury regulations, administrative
pronouncements of the IRS and judicial decisions in effect as of the date of
this SAI. Those authorities may be changed, possibly retroactively, or may be
subject to differing interpretations so as to result in U.S. federal income tax
consequences different from those summarized herein. Prospective investors
should consult their own tax advisors concerning the potential federal, state,
local and foreign tax consequences of an investment in the Fund, with specific
reference to their own tax situation.
As
used herein, the term “U.S. investor” means an investor that, for U.S. federal
income tax purposes, is (1) an individual who is a citizen or resident of the
U.S., (2) a corporation, or other entity taxable as a corporation, that is
created or organized in or under the laws of the U.S. or of any political
subdivision thereof, (3) an estate, the income of which is subject to U.S.
federal income tax regardless of its source, or (4) a trust if (i) it is subject
to the primary supervision of a court within the U.S. and one or more U.S.
persons as described in Code Section 7701(a)(30) have the authority to control
all substantial decisions of the trust or (ii) it has a valid election in effect
under applicable U.S. Treasury regulations to be treated as a U.S. person. The
term “Non-U.S. investor” means any investor that is not a U.S. investor, and
who, in addition, is not a partnership or other fiscally transparent entity. If
a partnership or other entity treated as a partnership for U.S. federal income
tax purposes holds the shares, the tax treatment of a partner in such
partnership or equity owner in such other entity generally will depend on the
status of the partner or equity owner and the activities of the partnership or
other entity.
TAXATION
OF THE FUNDS IN GENERAL
Each
of the Funds has elected and intends to operate in a manner that will permit it
to qualify to be treated each taxable year as a “regulated investment company”
under Subchapter M of the Code. To qualify, each Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stock, securities or foreign currencies, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) satisfy certain
diversification requirements.
As
a regulated investment company, a Fund will not be subject to federal income tax
on its net investment income and capital gain net income (net long-term capital
gains in excess of net short-term capital losses) that it distributes to
shareholders if at least 90% of its investment company taxable income for the
taxable year is distributed. However, if for any taxable year a Fund does not
satisfy the requirements of Subchapter M of the Code, all of its taxable income
will be subject to tax at the corporate income tax rate without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as dividend income to the extent of the Fund’s current or
accumulated earnings or profits. In lieu of potential disqualification, a Fund
is permitted to pay a tax for certain failures to satisfy the above
requirements, which, in general, are limited to those due to reasonable cause
and not willful neglect.
Each
Fund will be liable for a nondeductible 4% excise tax on amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement.
To avoid the excise tax, during each calendar year the Fund must distribute, or
be deemed to have distributed, (i) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (ii) at
least 98.2% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for the twelve month period ending on October 31 (or
December 31, if the Fund so elects), and (iii) all ordinary income and capital
gains for previous years that were not distributed during such years. For this
purpose, any income or gain retained by the Fund that is subject to corporate
tax will be considered to have been distributed by year-end. The Funds intend to
make sufficient distributions to avoid this 4% excise tax.
The
capital losses of a Fund, if any, do not flow through to shareholders. Rather,
the Fund may use its capital losses, subject to applicable limitations, to
offset its capital gains without being required to pay taxes on or distribute to
shareholders such gains that are offset by the losses. Any net capital losses of
a Fund realized that are not used to offset capital gains may be carried forward
indefinitely to reduce any future capital gains realized by the Fund in
succeeding taxable years.
TAXATION
OF THE FUNDS’ INVESTMENTS
Original
Issue Discount and Market Discount.
For federal income tax purposes, debt securities purchased by a Fund may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as income earned by the Funds, whether or not any income is actually received,
and therefore is subject to the distribution requirements of the Code.
Generally, the amount of original issue discount included in the income of the
Fund each year is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Because the Funds must
include original issue discount in income regardless of whether they actually
receive income, investment in original issue discount securities will make it
more difficult for the Funds to make the distributions required for them to
maintain their status as a regulated investment company under Subchapter M of
the Code or to avoid the 4% excise tax described above.
Debt
securities may be purchased by the Funds at a discount which exceeds the
original issue discount remaining on the securities, if any, at the time the
Funds purchased the securities. This additional discount represents market
discount for federal income tax purposes. In the case of any debt security
issued after July 18, 1984, having a fixed maturity date of more than one year
from the date of issue and having market discount, the gain realized on
disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless the Funds elect to include such
accrued market discount in income in the tax year to which it is attributable).
Generally, market discount is accrued on a daily basis. The Funds may be
required to capitalize, rather than deduct currently, part or all of any direct
interest expense incurred or continued to purchase or carry any debt security
having market discount, unless they make the election to include market discount
currently.
Options,
Futures, Forward Contracts, Swap Agreements and Hedging
Transactions.
In general, option premiums received by a Fund are not immediately included in
the income of the Fund. Instead, the premiums are recognized when the option
contract expires, the option is exercised by the holder, or the Fund transfers
or otherwise terminates the option (e.g., through a closing transaction). If an
option written by a Fund is exercised and the Fund sells or delivers the
underlying stock, the Fund generally will recognize capital gain or loss equal
to (a) the sum of the strike price and the option premium received by the Fund
minus (b) the Fund’s basis in the stock. Such gain or loss generally will be
short-term or long-term depending upon the holding period of the underlying
stock. If securities are purchased by a Fund pursuant to the exercise of a put
option written by it, the Fund generally will subtract the premium received from
its cost basis in the securities purchased. The gain or loss with respect to any
termination of a Fund’s obligation under an option other than through the
exercise of the option and related sale or delivery of the underlying stock
generally will be short-term gain or loss depending on whether the premium
income received by the Fund is greater or less than the amount paid by the Fund
(if any) in terminating the transaction. Thus, for example, if an option written
by a Fund expires unexercised, the Fund generally will recognize short-term gain
equal to the premium received.
The
tax treatment of certain futures contracts entered into by a Fund as well as
listed non-equity options written or purchased by the Fund on U.S. exchanges
(including options on futures contracts, broad-based equity indices and debt
securities) may be governed by section 1256 of the Code (“section 1256
contracts”). Gains or losses on section 1256 contracts generally are considered
60% long-term and 40% short-term capital gains or losses (“60/40”), although
certain foreign currency gains and losses from such contracts may be treated as
ordinary in character. Also, any section 1256 contracts held by a Fund at the
end of each taxable year (and, for purposes of the 4% excise tax, on certain
other dates as prescribed under the Code) are “marked to market” with the result
that unrealized gains or losses are treated as though they were realized and the
resulting gain or loss is treated as ordinary or 60/40 gain or loss, as
applicable. Section 1256 contracts do not include any interest rate swap,
currency swap, basis swap, interest rate cap, interest rate floor, commodity
swap, equity swap, equity index swap, credit default swap, or similar
agreement.
In
addition to the special rules described above in respect of options and futures
transactions, a Fund’s transactions in other derivatives instruments (including
options, forward contracts and swap agreements) as well as its other hedging,
short sale, or similar transactions, may be subject to one or more special tax
rules (including the constructive sale, notional principal contract, straddle,
wash sale and short sale rules). These rules may affect whether gains and losses
recognized by a Fund are treated as ordinary or capital or as short-term or
long-term, accelerate the recognition of income or gains to the Fund, defer
losses to the Fund, and cause adjustments in the holding periods of the Fund’s
securities. These rules, therefore, could affect the amount, timing and/or
character of distributions to shareholders. Moreover, because the tax rules
applicable to derivatives instruments are in some cases uncertain under current
law, an adverse determination or future guidance by the IRS with respect to
these rules (which determination or guidance could be retroactive) may affect
whether a Fund has made sufficient distributions, and otherwise satisfied the
relevant requirements, to maintain its qualification as a regulated investment
company and avoid a Fund-level tax.
Certain
of a Fund’s investments in derivatives and foreign currency-denominated
instruments, and the Fund’s transactions in foreign currencies and hedging
activities, may produce a difference between its book income and its taxable
income. If a Fund’s book income is less than the sum of its taxable income and
net tax-exempt income (if any), the Fund could
be
required to make distributions exceeding book income to qualify as a regulated
investment company. If a Fund’s book income exceeds the sum of its taxable
income and net tax-exempt income (if any), the distribution of any such excess
will be treated as (i) a dividend to the extent of the Fund’s remaining earnings
and profits (including current earnings and profits arising from tax-exempt
income, reduced by related deductions), (ii) thereafter, as a return of capital
to the extent of the recipient’s basis in the shares, and (iii) thereafter, as
gain from the sale or exchange of a capital asset.
Foreign
Currency Transactions.
Under Section 988 of the Code, special rules are provided for certain foreign
currency transactions. Foreign currency gains or losses from foreign currency
contracts (whether or not traded in the interbank market), from futures
contracts on foreign currencies that are not “regulated futures contracts,” and
from unlisted or equity options are treated as ordinary income or loss under
Section 988 of the Code. The Funds may elect to have foreign currency-related
regulated futures contracts and listed non-equity options be subject to ordinary
income or loss treatment under Section 988 of the Code. In addition, in certain
circumstances, the Funds may elect capital gain or loss treatment for foreign
currency transactions. The rules under Section 988 of the Code may also affect
the timing of income recognized by the Funds. The Treasury Department is
authorized to issue regulations excluding foreign currency gains that are not
directly related to a regulated investment company’s investment in stock or
securities (or its options contracts or futures contracts with respect to stock
or securities) for purposes of the qualifying income test described above, and
so the Funds may have to limit their investments in order to enable them to
satisfy this test.
PFIC
investments.
A Fund may invest in securities of foreign companies that may be classified
under the Code as PFICs. In general, a foreign company 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, a Fund generally intends to mark-to-market these securities under
certain provisions of the Code and recognize any unrealized gains as ordinary
income at the end of the Fund’s fiscal and excise 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 a Fund is required to distribute, even though it has not sold or received
dividends from these securities. You should also be aware that the designation
of a foreign security as a PFIC security will cause its income dividends to fall
outside of the definition of qualified foreign corporation dividends. These
dividends generally will not qualify for the reduced rate of taxation on
qualified dividends when distributed to you by a Fund. Foreign companies are not
required to identify themselves as PFICs. Due to various complexities in
identifying PFICs, a Fund can give no assurances that it will be able to
identify portfolio securities in foreign corporations that are PFICs in time for
the Fund to make a mark-to-market or other appropriate election. If a Fund is
unable to identify an investment as a PFIC and thus does not make a
mark-to-market election, the Fund may be subject to U.S. federal income tax on a
portion of any “excess distribution” or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be imposed on a
Fund in respect of deferred taxes arising from such distributions or
gains.
Investments
in Commodities and Commodity-Linked Derivatives.
The Funds may gain exposure to the commodities markets through investments in
commodity index-linked derivative instruments and, in the case of the
International Investors Gold Fund, through its investment in the Subsidiary
(discussed below). Commodities, including precious metals, are not qualifying
assets for purposes of satisfying the diversification requirements and gains
from these investments are not considered qualifying income for purposes of
satisfying the income requirement for treatment as a regulated investment
company. An IRS revenue ruling holds that income derived from commodity-linked
swaps also is not qualifying income for purposes of the income requirement. In
September 2016 the Internal Revenue Service announced that it will no longer
issue private letter rulings on questions relating to the treatment of a
corporation as a regulated investment company that require a determination of
whether a financial instrument or position is a security under section 2(a)(36)
of the 1940 Act. (A financial instrument or position that constitutes a security
under section 2(a)(36) of the 1940 Act generates qualifying income for a
corporation taxed as a regulated investment company.) The IRS also revoked
private letter rulings issued to some funds regarding the treatment of income
from commodity-linked notes held directly by such funds. Given the uncertainty
surrounding the treatment of certain commodity-linked derivative instruments
under the qualification tests for a regulated investment company, the Fund may
face limits on its ability to invest directly in such derivative
instruments.
Subsidiary.
Each of CM Commodity Index Fund and International Investors Gold Fund intends to
invest a portion of its assets in the CMCI Subsidiary and Gold Subsidiary, which
will each be classified as a corporation for U.S. federal income tax purposes.
For U.S. federal income tax purposes, each of the CMCI Subsidiary and the Gold
Subsidiary will be treated as a controlled foreign corporation (“CFC”) and each
of the CM Commodity Index Fund and International Investors Gold Fund will be
treated as a “U.S. shareholder” of the Subsidiary. As a result, each of the CM
Commodity Index Fund and International Investors Gold Fund will be required to
include in gross income for U.S. federal income tax purposes all of its
Subsidiary’s “subpart F income,” whether or not such income is distributed to
the Fund (deemed inclusions). Recently released Treasury Regulations permit the
Fund to treat deemed inclusions as satisfying the Income Requirement even if the
Subsidiary does not make a distribution of such income. It is expected that all
of the CMCI Subsidiary and Gold Subsidiary’s income will be “subpart F income.”
CM Commodity Index Fund and International Investors Gold Fund’s recognition of
their Subsidiary’s “subpart F income” will increase the Fund’s tax basis in the
Subsidiary. Distributions by the CMCI Subsidiary and the Gold
Subsidiary
to CM Commodity Index Fund and International Investors Gold Fund, respectively
will be tax-free, to the extent of its previously undistributed “subpart F
income,” and will correspondingly reduce each of CM Commodity Index Fund and
International Investors Gold Fund’s tax basis in its respective Subsidiary.
“Subpart F income” is generally treated as ordinary income, regardless of the
character of the CMCI Subsidiary or Gold Subsidiary’s underlying income. If a
net loss is realized by the CMCI Subsidiary or Gold Subsidiary, such loss is not
generally available to offset the income earned by the Subsidiary’s parent
Fund.
A
foreign corporation, such as the CMCI Subsidiary or the Gold Subsidiary, will
generally not be subject to U.S. federal income taxation unless it is deemed to
be engaged in a U.S. trade or business. It is expected that each of the CMCI
Subsidiary and the Gold Subsidiary will conduct its activities in a manner so as
to meet the requirements of a safe harbor under Section 864(b)(2) of the Code
under which the Subsidiary may engage in trading in stocks or securities or
certain commodities under certain circumstances without being deemed to be
engaged in a U.S. trade or business. However, if certain of the CMCI Subsidiary
or Gold Subsidiary’s activities were determined not to be of the type described
in the safe harbor (which the CM Commodity Index Fund and the International
Investor Gold Fund do not expect), then the activities of such Subsidiary may
constitute a U.S. trade or business, or be taxed as such.
In
general, foreign corporations, such as the CMCI Subsidiary and the Gold
Subsidiary, that do not conduct a U.S. trade or business are nonetheless subject
to tax at a flat rate of 30 percent (or lower tax treaty rate), generally
payable through withholding, on the gross amount of certain U.S.-source income
that is not effectively connected with a U.S. trade or business. There is
presently no tax treaty in force between the U.S. and the Cayman Islands, where
each of the CMCI Subsidiary and the Gold Subsidiary is a resident for U.S.
federal income tax purposes, that would reduce this rate of withholding tax. It
is not expected that the CMCI Subsidiary or the Gold Subsidiary will derive
income subject to such withholding tax.
Investments
in Chinese Bonds
The
Emerging Markets Bond Fund may invest in RMB-denominated bonds issued in the
PRC.
There
are some uncertainties in the PRC tax rules governing taxation of income and
gains from investments in the PRC due to the lack of formal guidance from the
PRC’s tax authorities that could result in unexpected tax liabilities. On the
basis that nonresidents enterprises (i) do not have places of business,
establishments or permanent establishments in the PRC; and (ii) are not PRC tax
resident enterprises, China generally may impose Withholding Income Tax
(“WHT”) at a rate of 10% (which may be reduced by the double taxation
agreement/arrangement) on interest derived by nonresidents, from issuers
resident in the PRC. However, on November 7, 2018, the PRC Ministry of
Finance (MOF) and PRC State Administration of Taxation (SAT) jointly issued
Caishui 2018 108 (Circular 108) to clarify the temporary three-year tax
exemption on bond interest derived by foreign institutional investors (FIIs).
Pursuant to Circular 108, FIIs are temporarily exempt from withholding income
tax and value added tax with respect to bond interest income derived in the
domestic bond market (via QFII, RQFII, CIBM and Hong Kong Bond Connect) from
November 7, 2018 to November 6, 2021. On November 26, 2021, the PRC Ministry of
Finance and PRC State Taxation Administration jointly issued Caishui [2021] No.
34 (“Circular 34”) to formally extend the tax exemption period provided in
Circular 108 to December 31, 2025.
Additionally,
prior to November 7, 2018, interest received by nonresidents from PRC government
bonds issued by the PRC Ministry of Finance (“MOF”) or local government bonds
was exempt from WHT. The term “local government bonds” refers to bonds which are
approved by the PRC State Council to be issued by governments of provinces,
autonomous regions, municipalities directly under the PRC government or
municipalities separately listed on the state plan.
Under
the PRC Corporate Income Tax regime, PRC also imposes WHT at a rate of 10%
(subject to treaty relief) on PRC-sourced capital gains derived by nonresident
enterprises, provided that the nonresident enterprises (i) do not have places of
business, establishments or permanent establishments in the PRC; and (ii) are
not PRC tax resident enterprises. The Emerging Markets Bond Fund currently
considers capital gains derived from bonds issued by PRC entities to be non
PRC-sourced income, and thus nonresident enterprises should not be subject to
WHT on such gains.
Gains
derived by nonresidents from the trading of bonds issued by PRC entities should
be exempt from value-added tax.
PRC
rules for taxation of RQFIIs (and QFIIs), as well as nonresidents trading bonds
via Bond Connect are evolving, and the PRC tax regulations to be issued by the
PRC State Administration of Taxation and/or PRC MOF to clarify the subject
matter may apply retrospectively, even if such rules are adverse to the
nonresident investors. If the PRC tax authorities were to issue differing formal
guidance or tax rules regarding the taxation of interest and capital gains
derived by QFIIs, RQFIIs and other nonresident investors from PRC bonds, and /
or begin collecting WHT on gains from such investments, the Emerging Markets
Bond Fund could be subject to additional tax liabilities.
TAXATION
OF U.S. INVESTORS
Fund
Distributions.
Distributions of net investment income generally are taxable as ordinary income
to the extent of a Fund’s earnings and profits, a portion of which may be
qualified dividends eligible to be taxed at reduced rates as discussed below.
Dividends of net investment income and the excess of net short-term capital gain
over net long-term capital loss are generally taxable as ordinary income to
shareholders. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) that are properly reported by the
Fund as such are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of the Fund have been held by such
shareholders, except to the extent of gain from a sale or disposition of
collectibles, such as precious metals, taxable currently at a maximum 24% rate.
Any loss incurred on a redemption or exchange of shares held for six months or
less will be treated as long-term capital loss to the extent of any long-term
capital gain distributed to you by the Fund on those shares. Distributions by a
Fund that are not paid from earnings and profits will be treated as a return of
capital to the extent of (and in reduction of) the shareholder’s tax basis in
his shares; any excess will be treated as gain from the sale of
shares.
Dividends
of net investment income and distributions of net capital gain will be taxable
as described above whether received in cash or reinvested in additional shares.
When distributions are received in the form of shares issued by the Funds, the
amount of the dividend/distribution deemed to have been received by
participating shareholders generally is the amount of cash which would otherwise
have been received. In such case, participating shareholders will have a tax
liability without a corresponding receipt of cash and will also have a basis for
federal income tax purposes in each share received from the Funds equal to such
amount of cash.
Dividends
and/or distributions by the Funds result in a reduction in the net asset value
of the Funds’ shares. Should a dividend/distribution reduce the net asset value
below a shareholder’s cost basis, such dividend/distribution nevertheless would
be taxable to the shareholder as ordinary income or long-term capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of capital. In particular, investors should be careful to
consider the tax implications of buying shares just prior to a
dividend/distribution. The price of shares purchased at that time includes the
amount of any forthcoming dividend/distribution. Those investors purchasing
shares just prior to a dividend/distribution will then receive a return of their
investment upon payment of such dividend/distribution which will nevertheless be
taxable to them.
Qualified
Dividend Income.
A portion of the dividend income received by a Fund may constitute qualified
dividend income eligible to be taxed at a maximum rate of 20% to individuals,
trusts and estates. If the aggregate amount of qualified dividend income
received by the Fund during any taxable year is less than 95% of the Fund’s
gross income (as specifically defined for that purpose), qualified dividend
treatment applies only if and to the extent reported by the Fund as qualified
dividend income. A Fund may report such dividends as qualified dividend income
only to the extent the Fund itself has qualified dividend income for the taxable
year with respect to which such dividends are made. Qualified dividend income is
generally dividend income from taxable domestic corporations and certain foreign
corporations (e.g., foreign corporations incorporated in a possession of the
United States or in certain countries with comprehensive tax treaties with the
United States, or whose stock is readily tradable on an established securities
market in the United States), provided the Fund has held the stock in such
corporations for more than 60 days during the 121 day period beginning on the
date which is 60 days before the date on which such stock becomes ex-dividend
with respect to such dividend (the “holding period requirement”). In order to be
eligible for the 20% maximum rate on dividends from the Fund attributable to
qualified dividends, shareholders must separately satisfy the holding period
requirement with respect to their Fund shares.
Dividends-Received
Deduction for Corporations.
For corporate shareholders, a portion of the dividends paid by a Fund may
qualify for the 50% corporate dividends-received deduction. The portion of
dividends paid by the Fund that so qualifies will be reported by the Fund to
shareholders each year and cannot exceed the gross amount of dividends received
by the Fund from domestic (U.S.) corporations. The availability of the
dividends-received deduction is subject to certain holding period and debt
financing restrictions that apply to both the Fund and the investor.
Specifically, the amount that the Fund may report as eligible for the
dividends-received deduction will be reduced or eliminated if the shares on
which the dividends earned by the Fund were debt-financed or held by the Fund
for less than a minimum period of time, generally 46 days during a 91-day period
beginning 45 days before the stock becomes ex-dividend. Similarly, if your Fund
shares are debt-financed or held by you for less than a 46-day period then the
dividends-received deduction for Fund dividends on your shares may also be
reduced or eliminated. Income derived by the Fund from investments in
derivatives, fixed income and foreign securities generally is not eligible for
this treatment.
Sales
Load.
If a shareholder (i) incurs a sales load in acquiring shares in the Funds, and
(ii) by reason of incurring such charge or making such acquisition acquires the
right to acquire shares of one or more regulated investment companies without
the payment of a load or with the payment of a reduced load (“reinvestment
right”), and (iii) disposes of the shares before the 91st day after the date on
which the shares were acquired, and (iv) subsequently acquires shares in that
regulated investment company or in another regulated investment company and the
otherwise applicable load charge is reduced pursuant to the reinvestment right,
then the load charge will not be taken into account for purposes of determining
the shareholder’s gain or loss on the disposition. For sales charges incurred in
taxable years beginning after December 22, 2010, this sales charge
deferral
rule shall apply only when a shareholder makes such new acquisition of Fund
shares or shares of a different regulated investment company during the period
beginning on the date the original Fund shares are disposed of and ending on
January 31 of the calendar year following the calendar year of the disposition
of the original Fund shares. To the extent such charge is not taken into account
in determining the amount of gain or loss, the charge will be treated as
incurred in connection with the subsequently acquired shares and will have a
corresponding effect on the shareholder’s basis in such shares.
Pass-through
of Foreign Tax Credits.
A Fund may be subject to a tax on dividend or interest income received from
securities of a non-U.S. issuer withheld by a foreign country at the source. The
U.S. has entered into tax treaties with many foreign countries that entitle a
Fund to a reduced rate of tax or exemption from tax on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of a Fund’s assets to be invested within various countries is not known.
If more than 50% of the value of a Fund’s total assets at the close of a taxable
year consists of stocks or securities in foreign corporations, and the Fund
satisfies the holding period requirements, the Fund may elect to pass through to
its shareholders the foreign income taxes paid thereby. A qualified fund of
funds, i.e. a Fund at least 50 percent of the value of the total assets of which
(at the close of each quarter of the taxable year) is represented by interests
in other RICs, is eligible to pass-through to shareholders foreign tax credits.
In such case, the shareholders would be treated as receiving, in addition to the
distributions actually received by the shareholders, their proportionate share
of foreign income taxes paid by the Fund or received from underlying funds, and
will be treated as having paid such foreign taxes. The shareholders generally
will be entitled to deduct or, subject to certain limitations, claim a foreign
tax credit with respect to such foreign income taxes. A foreign tax credit may
be allowed for shareholders who hold shares of the Fund for at least 16 days
during the 31-day period beginning on the date that is 15 days before the
ex-dividend date. Under certain circumstances, individual shareholders who have
been passed through foreign tax credits of no more than $300 ($600 in the case
of married couples filing jointly) during a tax year can elect to claim the
foreign tax credit for these amounts directly on their federal income tax
returns (IRS Forms 1040) without having to file a separate Form 1116 or having
to comply with most foreign tax credit limitations, provided certain other
requirements are met.
Backup
Withholding.
Each Fund may be required to backup withhold federal income tax at a current
rate of 24% from dividends paid to any shareholder who fails to furnish a
certified taxpayer identification number (“TIN”) or who fails to certify that he
or she is exempt from such withholding, or who the IRS notifies the Fund as
having provided the Fund with an incorrect TIN or failed to properly report
interest or dividends for federal income tax purposes. Any such withheld amount
will be fully creditable on the shareholder’s U.S. federal income tax return,
provided certain requirements are met. If a shareholder fails to furnish a valid
TIN upon request, the shareholder can also be subject to IRS
penalties.
Medicare
Tax.
A U.S. person that is an individual is subject to a 3.8% tax on the lesser of
(1) the U.S. person’s “net investment income” for the relevant taxable year and
(2) the excess of the U.S. person’s modified gross income for the taxable year
over a certain threshold (which currently is between $125,000 and $250,000,
depending on the individual’s circumstances). Estates and trusts that do not
fall into a special class of trusts that is exempt from such tax are subject to
the same 3.8% tax on the lesser of their undistributed net investment income and
the excess of their adjusted gross income over a certain threshold. Net
investment income generally includes dividends on our stock and gain from the
sale of our stock. A prospective investor that is a U.S. individual, estate or
trust is urged to consult a tax advisor regarding the applicability of this
tax.
Dividends
Declared in December and Paid in January.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year
in accordance with the guidance that has been provided by the IRS.
Wash
Sales.
All or a portion of any loss that you realize on a redemption of your Fund
shares will be disallowed to the extent that you buy other shares in the Fund
(through reinvestment of dividends or otherwise) within 30 days before or after
your share redemption. Any loss disallowed under these rules will be added to
your tax basis in the new shares.
Securities
lending.
While securities are loaned out by a Fund, the Fund generally will receive from
the borrower amounts equal to any dividends or interest paid on the borrowed
securities. For federal income tax purposes, payments made “in lieu of”
dividends are not considered dividend income. These distributions will neither
qualify for the reduced rate of taxation for individuals on qualified dividends
nor the 50% dividends-received deduction for corporations. Also, any foreign tax
withheld on payments made “in lieu of” dividends or interest will not qualify
for the pass-through of foreign tax credits to shareholders.
Reportable
Transactions.
Under Treasury regulations, if a shareholder recognizes a loss with respect to
the Fund’s shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on Form 8886. The fact
that
a loss is reportable under these regulations does not affect the legal
determination of whether the taxpayer’s treatment of the loss is proper.
Shareholders should consult their tax advisors to determine the applicability of
these regulations in light of their individual circumstances.
TAXATION
OF NON-U.S. INVESTORS
The
U.S. federal income tax treatment of a Non-U.S. investor investing in the Fund
is complex and will vary depending upon the circumstances of the Non-U.S.
investor and the activities of the Fund. Distributions of ordinary income paid
to Non-U.S. investors generally will be subject to a 30% U.S. withholding tax
unless a reduced rate of withholding or a withholding exemption is provided
under an applicable treaty. Exemptions from U.S. withholding tax are provided
for certain capital gain dividends paid by a Fund from net long-term capital
gains, interest-related dividends and short-term capital gain dividends, if such
amounts are reported by a Fund. However, notwithstanding such exemptions from
U.S. withholding at the source, any such dividends and distributions of income
and capital gains will be subject to backup withholding at a rate of 24% if you
fail to properly certify that you are not a U.S. person. Prospective Non-U.S.
investors are urged to consult their tax advisors regarding the specific tax
consequences applicable to them.
FOREIGN
ACCOUNT TAX COMPLIANCE ACT
As
part of the Foreign Account Tax Compliance Act, (“FATCA”), the Funds are
required to impose a 30% withholding tax on income dividends paid by the Fund to
(i) foreign financial institutions (“FFI’s”), including non-U.S. investment
funds, unless they agree to collect and disclose to the IRS information
regarding their direct and indirect U.S. account holders and (ii) certain
nonfinancial foreign entities (“NFFE’s”), unless they certify certain
information regarding their direct and indirect U.S. owners. After December 31,
2018, FATCA withholding also would have applied to certain capital gain
distributions, return of capital distributions and the proceeds arising from the
sale of Fund shares; however, based on proposed regulations recently issued by
the IRS, which can be relied on currently, such withholding is no longer
required unless final regulations provide otherwise (which is not expected). To
avoid possible withholding, FFI’s, other than FFIs subject to special treatment
under certain intergovernmental agreements, will need to enter into agreements
with the IRS which state that they will provide the IRS information, including
the names, account numbers and balances, addresses and taxpayer identification
numbers of U.S. account holders and comply with due diligence procedures with
respect to the identification of U.S. accounts as well as agree to withhold tax
on certain types of withholdable payments made to non-compliant foreign
financial institutions or to applicable foreign account holders who fail to
provide the required information to the IRS, or similar account information and
required documentation to a local revenue authority, should an applicable
intergovernmental agreement be implemented. NFFE’s will need to provide certain
information regarding each substantial U.S. owner or certifications of no
substantial U.S. ownership, unless certain exceptions apply, or agree to provide
certain information to the IRS.
The
Funds may be subject to the FATCA withholding obligation, and also will be
required to perform due diligence reviews to classify foreign entity investors
for FATCA purposes. Investors are required to agree to provide information
necessary to allow the Funds to comply with the FATCA rules. If the Funds are
required to withhold amounts from payments pursuant to FATCA, investors will
receive distributions that are reduced by such withholding amounts.
ADDITIONAL
PURCHASE AND REDEMPTION INFORMATION
PROCESSING
AND SERVICE FEES
Dealers
and intermediaries may charge their customers a processing or service fee in
connection with the purchase or redemption of fund shares. The amount and
applicability of such a fee is determined and disclosed to its customers by each
individual dealer. Processing or service fees typically are fixed, nominal
dollar amounts and are in addition to the sales and other charges described in
the Prospectuses and this SAI. Your dealer will provide you with specific
information about any processing or service fees you will be
charged.
REDEMPTIONS
IN KIND
The
Trust has reserved the right to redeem its shares in kind. With respect to
such reservation of rights, each of Global Resources Fund and International
Investors Gold Fund has committed itself to pay in cash all requests for
redemption by any shareholder of record limited in amount with respect to each
shareholder of record during any ninety-day period to the lesser of (i) $250,000
or (ii) 1% of the net asset value of such company at the beginning of such
period.
REDEMPTIONS
INITIATED BY A FUND
Each
Fund reserves the right to redeem your shares in the Fund if the Fund’s Board
determines that the failure to so redeem may have materially adverse
consequences to the shareholders of the Fund. For example, the Board may make
such a determination if a shareholder’s residence in a particular foreign
jurisdiction would cause the Fund to be subject to burdensome regulatory
restrictions.
DESCRIPTION
OF THE TRUST
The
Trust is an open-end management investment company organized as a business trust
under the laws of the Commonwealth of Massachusetts on April 3, 1985. On May 1,
2016, Van Eck Funds changed its name to VanEck Funds.
The
Board has authority to issue an unlimited number of shares of beneficial
interest of each Fund, $.001 par value. Eight separate series of the Trust are
currently being offered.
Emerging
Markets Bond Fund, Emerging Markets Leaders Fund, Environmental Sustainability
Fund and International Investors Gold Fund are classified as non-diversified
funds under the 1940 Act. CM Commodity Index Fund, Emerging Markets Fund, Global
Resources Fund and VanEck Morningstar Wide Moat Fund are classified as
diversified funds under the 1940 Act. A diversified fund is a fund which meets
the following requirements: At least 75% of the value of its total assets is
represented by cash and cash items (including receivables), Government
securities, securities of other investment companies and other securities for
the purpose of this calculation limited in respect of any one issuer to an
amount not greater than 5% of the value of the fund’s total assets, and to not
more than 10% of the outstanding voting securities of such issuer. A
non-diversified fund is any fund other than a diversified fund. This means that
the fund at the close of each quarter of its taxable year must, in general,
limit its investment in the securities of a single issuer to (i) no more than
25% of its assets, (ii) with respect to 50% of the fund’s assets, no more than
5% of its assets, and (iii) the fund will not own more than 10% of outstanding
voting securities. Each Fund is a separate pool of assets of the Trust which is
separately managed and which may have a different investment objective from that
of another Fund. The Board has the authority, without the necessity of a
shareholder vote, to create any number of new series.
Each
share of a Fund has equal dividend, redemption and liquidation rights and when
issued is fully paid and non-assessable by the Trust. Under the Trust’s Amended
and Restated Master Trust Agreement, as amended (the “Master Trust Agreement”),
no annual or regular meeting of shareholders is required. Thus, there will
ordinarily be no shareholder meetings unless required by the 1940 Act. The Board
is a self-perpetuating body unless and until fewer than 50% of the Trustees,
then serving as Trustees, are Trustees who were elected by shareholders. At that
time a meeting of shareholders will be called to elect additional trustees. On
any matter submitted to the shareholders, the holder of each Trust share is
entitled to one vote per share (with proportionate voting for fractional
shares). Under the Master Trust Agreement, any Trustee may be removed by vote of
two-thirds of the outstanding Trust shares, and holders of ten percent or more
of the outstanding shares of the Trust can require the Board to call a meeting
of shareholders for purposes of voting on the removal of one or more Trustees.
Shares of each Fund vote as a separate class, except with respect to the
election of Trustees and as otherwise required by the 1940 Act. On matters
affecting an individual Fund, a separate vote of that Fund is required.
Shareholders of a Fund are not entitled to vote on any matter not affecting that
Fund. In accordance with the 1940 Act, under certain circumstances, the Trust
will assist shareholders in communicating with other shareholders in connection
with calling a special meeting of shareholders.
Under
Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liability for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The Master Trust Agreement provides for indemnification out of
the Trust’s property of
all
losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Trust itself would be unable to meet its obligations. The Advisers believe
that, in view of the above, the risk of personal liability to shareholders is
remote.
ADDITIONAL
INFORMATION
Custodian.
State Street Bank and Trust Company, One Lincoln Street, Boston, MA 02111,
serves as the custodian of the Trust’s portfolio securities, cash, coins and
bullion. The Custodian is authorized, upon the approval of the Trust, to
establish credits or debits in dollars or foreign currencies with, and to cause
portfolio securities of a Fund to be held by its overseas branches or
subsidiaries, and foreign banks and foreign securities depositories which
qualify as eligible foreign custodians under the rules adopted by the
SEC.
Transfer
Agent.
DST Systems, Inc., 210 West 10th Street, 8th Floor, Kansas City, MO 64105,
serves as transfer agent for the Trust.
Independent
Registered Public Accounting Firm.
PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017, serves as
independent registered public accounting firm for the Trust.
Counsel.
Stradley Ronon Stevens and Young LLP, 2005 Market Street, Suite 2600,
Philadelphia, PA 19103, serves as counsel to the Trust.
FINANCIAL
STATEMENTS
The
audited
financial statements of the Funds for the fiscal year ended December 31,
2021
(except for Emerging Markets Leaders Fund) are incorporated by reference from
the Funds’ Annual Report to shareholders. The Funds’ Annual and Semi-Annual
Reports are available at no charge by visiting the VanEck website at vaneck.com,
or upon written or telephone request to the Trust at the address or telephone
number set forth on the first page of this SAI.
LICENSING
AGREEMENTS AND DISCLAIMERS
VEAC
has entered into a licensing agreement with Morningstar to use the Wide Moat
Index. VanEck Morningstar Wide Moat Fund is entitled to use the Wide Moat Index
pursuant to a sub-licensing arrangement with VEAC.
VanEck
Morningstar Wide Moat Fund is not sponsored, endorsed, sold or promoted by
Morningstar. Morningstar makes no representation or warranty, express or
implied, to the shareholders of VanEck Morningstar Wide Moat Fund or any member
of the public regarding the advisability of investing in securities generally or
in VanEck Morningstar Wide Moat Fund in particular or the ability of the Fund to
track general stock market performance. Morningstar’s only relationship to VEAC
is the licensing of certain service marks and service names of Morningstar and
of the Wide Moat Index, which are determined, composed and calculated by
Morningstar without regard to VEAC or VanEck Morningstar Wide Moat Fund.
Morningstar has no obligation to take the needs of VEAC or the shareholders of
the VanEck Morningstar Wide Moat Fund into consideration in determining,
composing or calculating the Wide Moat Index. Morningstar is not responsible for
and has not participated in the determination of the prices and amount of VanEck
Morningstar Wide Moat Fund or the timing of the issuance or sale of the Fund or
in the determination or calculation of the equation by which the Fund is
converted into cash. Morningstar has no obligation or liability in connection
with the administration, marketing or trading of VanEck Morningstar Wide Moat
Fund.
MORNINGSTAR
DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE WIDE MOAT INDEX
OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR SHALL HAVE NOT LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. MORNINGSTAR MAKES NO WARRANTY,
EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY VEAC, SHAREHOLDERS OF THE
VANECK MORNINGSTAR WIDE MOAT FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE WIDE MOAT INDEX OR ANY DATA INCLUDED THEREIN. MORNINGSTAR MAKES NO EXPRESS
OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE WIDE MOAT INDEX
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MORNINGSTAR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
VEAC
has also entered into a licensing agreement with UBS AG (“UBS”), London and
Bloomberg Finance L.P. (“Bloomberg”) to use the UBS Bloomberg Constant Maturity
Commodity Total Return Index (the “CMCI”). The CM Commodity Index Fund is
entitled to use the CMCI pursuant to a sub-licensing arrangement with
VEAC.
UBS
and Bloomberg own or exclusively license, solely or jointly as agreed between
them all proprietary rights with respect to the CMCI. Any third-party product
based on or related to the CMCI (“Product”) may only be issued upon the prior
joint written approval of UBS and Bloomberg and upon the execution of a license
agreement between UBS, Bloomberg and the party intending to launch a Product (a
“Licensee”). In no way do UBS or Bloomberg sponsor or endorse, nor are they
otherwise involved in the issuance and offering of a Product nor do either of
them make any representation or warranty, express or implied, to the holders of
the Product or any member of the public regarding the advisability of investing
in the Product or commodities generally or in futures particularly, or as to
results to be obtained from the use of the CMCI or from the Product. Further,
neither UBS nor Bloomberg provides investment advice to any Licensee specific to
the Product, other than providing the CMCI as agreed in the license agreement
with the Licensee, and which will be done without consideration of the
particular needs of the Product or the Licensee. UBS and Bloomberg each
specifically disclaim any liability to any party for any inaccuracy in the data
on which the CMCI is based, for any mistakes, errors, omissions or interruptions
in the calculation and/or dissemination of the CMCI, or for the manner in which
such is applied in connection with the issuance and offering of a Product. In no
event shall UBS or Bloomberg have any liability to any party for any lost
profits or indirect, punitive, special or consequential damages or
losses.
THIS
IS NOT AN OFFER OR SOLICITATION BY UBS OR BLOOMBERG OF AN OFFER TO BUY OR SELL
ANY SECURITY OR INVESTMENT. PAST PERFORMANCE OF THE UBS BLOOMBERG CONSTANT
MATURITY COMMODITY INDEX IS NOT NECESSARILY INDICATIVE OF FUTURE
RESULTS.
APPENDIX
A
VEAC
AND VEARA’S PROXY VOTING POLICIES
VANECK
PROXY VOTING POLICIES
VanEck
(the “Adviser” or “VanEck”) has adopted the following policies and procedures
which are reasonably designed to ensure that proxies are voted in a manner that
is consistent with the best interests of its clients in accordance with its
fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940.
When an adviser has been granted proxy voting authority by a client, the adviser
owes its clients the duties of care and loyalty in performing this service on
their behalf. The duty of care requires the adviser to monitor corporate actions
and vote client proxies. The duty of loyalty requires the adviser to cast the
proxy votes in a manner that is consistent with the best interests of the
client.
Rule
206(4)-6 also requires the Adviser to disclose information about the proxy
voting procedures to its clients and to inform clients how to obtain information
about how their proxies were voted. Additionally, Rule 204-2 under the Advisers
Act requires the Adviser to maintain certain proxy voting records.
An
adviser that exercises voting authority without complying with Rule 206(4)-6
will be deemed to have engaged in a “fraudulent, deceptive, or manipulative”
act, practice or course of business within the meaning of Section 206(4) of the
Advisers Act.
The
Adviser intends to vote all proxies in accordance with applicable rules and
regulations, and in the best interests of clients without influence by real or
apparent conflicts of interest. To assist in its responsibility for voting
proxies and the overall voting process, the Adviser has engaged an independent
third party proxy voting specialist, Glass Lewis & Co., LLC. The
services provided by Glass Lewis include in-depth research, global issuer
analysis, and voting recommendations as well as vote execution, reporting and
recordkeeping.
Resolving
Material Conflicts of Interest
When
a material conflict of interest exists, proxies will be voted in the following
manner:
1. Strict
adherence to the Glass Lewis guidelines, or
2.The
potential conflict will be disclosed to the client:
a.with
a request that the client vote the proxy,
b.with
a recommendation that the client engage another party to determine how the proxy
should be voted or
c.if
the foregoing are not acceptable to the client, disclosure of how VanEck intends
to vote and a written consent to that vote by the client.
Any
deviations from the foregoing voting mechanisms must be approved by the Chief
Compliance Officer with a written explanation of the reason for the
deviation.
A
material
conflict of interest
means the existence of a business relationship between a portfolio company or an
affiliate and the Adviser, any affiliate or subsidiary, or an “affiliated
person” of a VanEck mutual fund. Examples of when a material conflict of
interest exists include a situation where the adviser provides significant
investment advisory, brokerage or other services to a company whose management
is soliciting proxies; an officer of the Adviser serves on the board of a
charitable organization that receives charitable contributions from the
portfolio company and the charitable organization is a client of the Adviser; a
portfolio company that is a significant selling agent of the Adviser’s products
and services solicits proxies; a broker-dealer or insurance company that
controls 5% or more of the Adviser’s assets solicits proxies; the Adviser serves
as an investment adviser to the pension or other investment account of the
portfolio company; the Adviser and the portfolio company have a lending
relationship. In each of these situations voting against management may cause
the Adviser a loss of revenue or other benefit.
Client
Inquiries
All
inquiries by clients as to how the Adviser has voted proxies must immediately be
forwarded to Portfolio Administration.
Disclosure
to Clients:
1.Notification
of Availability of Information
a.Client
Brochure - The Client Brochure or Part II of Form ADV will inform clients that
they can obtain information from the Adviser on how their proxies were voted.
The Client Brochure or Part II of Form ADV will be mailed to each client
annually. The Legal Department will be responsible for coordinating the mailing
with Sales/Marketing Departments.
2.Availability
of Proxy Voting Information
a.At
the client’s request or if the information is not available on the Adviser’s
website, a hard copy of the account’s proxy votes will be mailed to each
client.
Recordkeeping
Requirements
1. VanEck
will retain the following documentation and information for each matter relating
to a portfolio security with respect to which a client was entitled to
vote:
a.proxy
statements received;
b.identifying
number for the portfolio security;
c.shareholder
meeting date;
d.brief
identification of the matter voted on;
e.whether
the vote was cast on the matter;
f.how
the vote was cast (e.g., for or against proposal, or abstain; for or withhold
regarding election of directors);
g.records
of written client requests for information on how the Adviser voted proxies on
behalf of the client;
h.a
copy of written responses from the Adviser to any written or oral client request
for information on how the Adviser voted proxies on behalf of the client; and
any documents prepared by the Adviser that were material to the decision on how
to vote or that memorialized the basis for the decision, if such documents were
prepared.
2.Copies
of proxy statements filed on EDGAR, and proxy statements and records of proxy
votes maintained with a third party (i.e., proxy voting service) need not be
maintained. The third party must agree in writing to provide a copy of the
documents promptly upon request.
3.If
applicable, any document memorializing that the costs of voting a proxy exceed
the benefit to the client or any other decision to refrain from voting, and that
such abstention was in the client’s best interest.
4.Proxy
voting records will be maintained in an easily accessible place for five years,
the first two at the office of the Adviser. Proxy statements on file with EDGAR
or maintained by a third party and proxy votes maintained by a third party are
not subject to these particular retention requirements.
Voting
Foreign Proxies
At
times the Adviser may determine that, in the best interests of its clients, a
particular proxy should not be voted. This may occur, for example, when the cost
of voting a foreign proxy (translation, transportation, etc.) would exceed the
benefit of voting the proxy or voting the foreign proxy may cause an
unacceptable limitation on the sale of the security. Any such instances will be
documented by the Portfolio Manager and reviewed by the Chief Compliance
Officer.
Securities
Lending
Certain
portfolios managed by the Adviser participate in securities lending programs to
generate additional revenue. Proxy voting rights generally pass to the borrower
when a security is on loan. The Adviser will use its best efforts to recall a
security on loan and vote such securities if the Portfolio Manager determines
that the proxy involves a material event.
Proxy
Voting Policy
The
Adviser has reviewed the Glass Lewis Proxy Guidelines (“Guidelines”) and has
determined that the Guidelines are consistent with the Adviser’s proxy voting
responsibilities and its fiduciary duty with respect to its clients. The Adviser
will review any material amendments to the Guidelines.
While
it is the Adviser’s policy to generally follow the Guidelines, the Adviser
retains the right, on any specific proxy, to vote differently from the
Guidelines, if the Adviser believes it is in the best interests of its clients.
Any such exceptions will be documented by the Adviser and reviewed by the Chief
Compliance Officer.
The
portfolio manager or analyst covering the security is responsible for making
proxy voting decisions. Portfolio Administration, in conjunction with the
portfolio manager and the custodian, is responsible for monitoring corporate
actions and ensuring that corporate actions are timely voted.
Table
of Contents
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Policy Guidelines — United States
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Policy Guidelines — United States
4
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Policy Guidelines — United States
5
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Policy Guidelines — United States
About
Glass Lewis
Glass
Lewis is the world’s choice for governance solutions. We enable
institutional investors and publicly listed companies to make sustainable
decisions based on research and data. We cover 30,000+ meetings each year,
across approximately 100 global markets. Our team has been providing
in-depth analysis of companies since 2003, relying solely on publicly available
information to inform its policies, research, and voting
recommendations.
Our
customers include the majority of the world’s largest pension plans, mutual
funds, and asset
managers, collectively managing over $40 trillion in
assets. We have teams located across the United States, Europe, and
Asia-Pacific giving us global reach with a local perspective on the important
governance issues.
Investors
around the world depend on Glass Lewis’ Viewpoint
platform to manage their proxy voting, policy implementation, recordkeeping, and
reporting. Our industry leading Proxy
Paper
product provides comprehensive environmental, social, and governance research
and voting recommendations weeks ahead of voting deadlines. Public companies can
also use our innovative Report
Feedback Statement
to deliver their opinion on our proxy research directly to the voting decision
makers at every investor client in time for voting decisions to be made or
changed.
The
research team engages extensively with public companies, investors, regulators,
and other industry stakeholders to gain relevant context into the realities
surrounding companies, sectors, and the market in general. This enables us to
provide the most comprehensive and pragmatic insights to our customers.
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the Conversation
Glass
Lewis is committed to ongoing engagement with all market
participants.
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2022
Policy Guidelines — United States
Guidelines
Introduction
Summary
of Changes for 2022
Glass
Lewis evaluates these guidelines on an ongoing basis and formally updates them
on an annual basis. This year we’ve made noteworthy revisions in the following
areas, which are summarized below but discussed in greater detail in the
relevant section of this document:
Board
Gender Diversity
We
have expanded our policy on board gender diversity. Beginning in 2022, we will
generally recommend voting against the chair of the nominating committee of a
board with fewer than two gender diverse directors, or the entire nominating
committee of a board with no gender diverse directors, at companies within the
Russell 3000 index. For companies outside of the Russell 3000 index, and all
boards with six or fewer total directors, our existing policy requiring a
minimum of one gender diverse director will remain in place.
Our
voting recommendations in 2022 will be based on the above requirements for the
number of gender diverse board members. However, beginning with shareholder
meetings held after January 1, 2023, we will transition from a fixed numerical
approach to a percentage-based approach and will generally recommend voting
against the nominating committee chair of a board that is not at least 30
percent gender diverse at companies within the Russell 3000 index.
Additionally,
when making these voting recommendations, we will carefully review a company’s
disclosure of its diversity considerations and may refrain from recommending
that shareholders vote against directors of companies when boards have provided
a sufficient rationale or plan to address the lack of diversity on the board.
We
have also replaced references in our guidelines to female directors with “gender
diverse directors,” defined as women and directors that identify with a gender
other than male or female.
State
Laws on Gender Diversity
We
have revised our discussion regarding state laws on diversity to include two
sections regarding state laws on gender diversity and state laws on
underrepresented community diversity. In addition to our standard policy on
board diversity, we will recommend in accordance with mandated board composition
requirements set forth in applicable state laws when they come into effect. We
have removed references to any state’s individual laws.
We
will generally refrain from recommending against directors when applicable state
laws do not mandate board composition requirements, are non-binding, or solely
impose disclosure or reporting requirements in filings made with each respective
state annually.
7
2022
Policy Guidelines — United States
State
Laws on Underrepresented Community Diversity
We
have included a new section discussing state laws on underrepresented community
diversity. In addition to board gender diversity, several states have also begun
to encourage board diversity beyond gender through legislation. We will
generally recommend in line with applicable state laws mandating board
composition requirements for underrepresented community diversity or other
diversity measures beyond gender when they come into effect.
Stock
Exchange Diversity Disclosure Requirements
We
have included a new section regarding our approach to a recent disclosure rule
adopted by the Nasdaq stock exchange. On August 6, 2021, the U.S. Securities and
Exchange Commission (SEC) approved new listing rules regarding board diversity
and disclosure for Nasdaq-listed companies. Beginning in 2022, companies listed
on the Nasdaq stock exchange will be required to disclose certain board
diversity statistics annually in a standardized format in the proxy statement or
on the company's website. Nasdaq-listed companies are required to provide this
disclosure by the later of (i) August 8, 2022, or (ii) the date the company
files its proxy statement for its 2022 annual meeting. Accordingly, for annual
meetings held after August 8, 2022, of applicable Nasdaq-listed companies, we
will recommend voting against the chair of the governance committee when the
required disclosure has not been provided.
Disclosure
of Director Diversity and Skills
We
have revised our discussion on disclosure of director diversity and skills in
company proxy statements. Beginning in 2022, for companies in the S&P 500
index with particularly poor disclosure (i.e., those failing to provide any
disclosure in each of the tracked categories), we may recommend voting against
the chair of the nominating and/or governance committee. Beginning in 2023, when
companies in the S&P 500 index have not provided any disclosure of
individual or aggregate racial/ethnic minority demographic information, we will
generally recommend voting against the chair of the governance committee.
Environmental
and Social Risk Oversight
We
have updated our guidelines with respect to board-level oversight of
environmental and social (E&S) issues. Beginning in 2022, Glass Lewis will
note as a concern when boards of companies in the Russell 1000 index do not
provide clear disclosure concerning the board-level oversight afforded to
environmental and/or social issues. For shareholder meetings held after January
1, 2022, we will generally recommend voting against the governance committee
chair of a company in the S&P 500 index who fails to provide explicit
disclosure concerning the board’s role in overseeing these issues. While we
believe that it is important that these issues are overseen at the board level
and that shareholders are afforded meaningful disclosure of these oversight
responsibilities, we believe that companies should determine the best structure
for this oversight. In our view, this oversight can be effectively conducted by
specific directors, the entire board, a separate committee, or combined with the
responsibilities of a key committee.
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Policy Guidelines — United States
The
Role of a Committee Chair
We
have revised our approach to the role of a committee chair in cases where there
is a designated committee chair and the recommendation is to vote against the
committee chair, but the chair is not up for election because the board is
staggered. Beginning in 2022, in cases where the committee chair is not up for
election due to a staggered board, and where we have identified multiple
concerns, we will generally recommend voting against other members of the
committee who are up for election, on a case-by-case basis.
Multi-Class
Share Structures with Unequal Voting Rights
We
have updated our approach to companies that have multi-class share structures
with unequal voting rights. Beginning in 2022, we will recommend voting against
the chair of the governance committee at companies with a multi-class share
structure and unequal voting rights when the company does not provide for a
reasonable sunset of the multi-class share structure (generally seven years or
less).
Governance
Following a Business Combination with a Special Purpose Acquisition
Company
We
have included a new section to address governance concerns at companies
following a business combination with a special purpose acquisition company
(SPAC). We believe that the business combination of a private company with a
publicly traded special purpose acquisition company facilitates the private
entity becoming a publicly traded corporation. Thus, the business combination
represents the private company’s de-facto IPO. We believe that some cases
warrant shareholder action against the board of a company that has completed a
business combination with a SPAC within the past year.
In
cases where Glass Lewis determines that the company has adopted overly
restrictive governing documents, where, preceding the company becoming publicly
traded, the board adopts a multi-class share structure where voting rights are
not aligned with economic interest, or an anti-takeover provision, such as a
poison pill or classified board, we will generally recommend voting against all
members of the board who served at the time of the company becoming publicly
traded if the board: (i) did not also submit these provisions to a shareholder
vote on an advisory basis at the prior meeting where shareholders voted on the
business combination; (ii) did not also commit to submitting these provisions to
a shareholder vote at the company’s first shareholder meeting following the
company becoming publicly traded; or (iii) did not provide for a reasonable
sunset of these provisions (generally three to five years in the case of a
classified board or poison pill; or seven years or less in the case of a
multi-class share structure).
Director
Commitments of SPAC Executives
We
have included a new discussion of our approach to director commitments for
directors when their only executive role is at a special purpose acquisition
company. We believe the primary role of executive officers at SPACs is
identifying acquisition targets for the SPAC and consummating a business
combination. Given the nature of these executive roles and the limited business
operations of SPACs, when a directors’ only executive role is at a SPAC, we will
generally apply our higher limit for
9
2022
Policy Guidelines — United States
company
directorships. As a result, we generally recommend that shareholders vote
against a director who serves in an executive role only at a SPAC while serving
on more than five public company boards.
Waiver
of Age and Tenure Policies
We
have revised our approach to boards waiving self-imposed age and/or tenure
policies. Beginning in 2022, in cases where the board has waived its term/age
limits for two or more consecutive years, Glass Lewis will generally recommend
shareholders vote against the nominating and or governance committee chair,
unless a compelling rationale is provided for why the board is proposing to
waive this rule, such as consummation of a corporate transaction.
Clarifying
Amendments
The
following clarifications of our existing policies are included this year:
Overall
Approach to Environmental, Social and Governance (ESG)
We
have expanded our discussion of environmental, social & governance
initiatives in a new section titled Glass Lewis’ Overall Approach to ESG. Here
we provide additional details of our considerations when evaluating these
topics. To summarize, Glass Lewis evaluates all environmental and social issues
through the lens of long-term shareholder value. We believe that companies
should be considering material environmental and social factors in all aspects
of their operations and that companies should provide shareholders with
disclosures that allow them to understand how these factors are being considered
and how attendant risks are being mitigated.
For
a detailed review of our policies concerning compensation, environmental,
social, and governance shareholder proposals, please refer to our comprehensive
Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives,
available at www.glasslewis.com/voting-policies-current/.
Shareholder
Proposals
In
the section titled Governance Structure and the Shareholder Franchise, we have
added a sub-section titled Shareholder Proposals, summarizing our existing
approach to analyzing these proposals. Specifically, we evaluate all shareholder
proposals on a case-by-case basis with a view to promoting long-term shareholder
value. While we are generally supportive of those that promote board
accountability, shareholder rights, and transparency, we consider all proposals
in the context of a company’s unique operations and risk profile.
Please
refer to our comprehensive Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives
for additional detail.
Linking
Executive Pay to Environmental and Social Criteria
We
have outlined our current approach to the use of E&S metrics in the variable
incentive programs for named executive officers. Glass Lewis highlights the use
of E&S metrics in our analysis of the advisory vote on executive
compensation. However, Glass Lewis does not maintain a policy on the inclusion
of such metrics or whether these metrics should be used in either a company's
short- or long-term
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incentive
program. As with other types of metrics, where E&S metrics are included, as
determined by the company, we expect robust disclosure on the metrics selected,
the rigor of performance targets, and the determination of corresponding payout
opportunities. For qualitative E&S metrics, the company should provide
shareholders with a thorough understanding of how these metrics will be or were
assessed.
Short-
and Long-Term Incentives
Our
guidance related to Glass Lewis' analysis of the short-term incentive awards has
been clarified to note that Glass Lewis will consider adjustments to GAAP
financial results in its assessment of the incentive’s effectiveness at tying
executive pay to performance. As with the short-term incentive awards, our
analysis of long-term incentive grants also considers the basis for any
adjustments to metrics or results. Thus, clear disclosure from companies is
equally important for long-term incentive awards.
Grants
of Front-Loaded Awards
We
have clarified our guidance related to Glass Lewis' analysis of so-called
front-loaded incentive awards. Specifically, while we continue to examine the
quantum of award on an annualized basis for the full vesting period of the
awards, Glass Lewis also considers the impact of the overall size of awards on
dilution of shareholder wealth.
Authorizations/Increases
in Authorized Preferred Stock
With
regard to authorizations of requested increases in authorized preferred stock,
we have clarified that we will generally recommend voting against preferred
stock authorizations or increases, unless the company discloses a commitment to
not use such shares as an anti-takeover defense or in a shareholder rights plan,
or discloses a commitment to submit any shareholder rights plan to a shareholder
vote prior to its adoption.
Federal
Forum Provisions
We
have clarified our approach to companies that have adopted federal exclusive
forum provisions designating federal courts as the sole jurisdiction for matters
arising under the Securities Act of 1933. When boards have adopted federal
exclusive forum provisions without seeking shareholder approval, we will
generally take the same approach as when boards have adopted exclusive forum
provisions designating state courts as exclusive jurisdiction for certain
matters and will generally recommend voting against chairs of governance
committees.
Governance
Following an IPO, Spin-off or Direct Listing
We
have clarified our approach to director recommendations on the basis of post-IPO
corporate governance concerns to include references to companies that have gone
public by way of direct listing. When evaluating governance following a direct
listing, we will apply the same approach as our existing policy on IPOs and
spin-offs.
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Director
Independence
In
the section outlining our approach to director independence, we have added a
sentence clarifying that for material financial transactions, we apply a
three-year look back, and for former employment relationships, we apply a
five-year look back.
Related-Party
Transaction Materiality Thresholds
In
the section defining “material” transactions, we added a sentence clarifying
that the $50,000 threshold for individual transactions also applies to directors
who are the majority or principal owner of a firm that receives such
payments.
Lastly,
we have made several minor edits of a housekeeping nature, including the removal
of several redundant and/or outdated footnotes.
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A
Board of Directors that Serves Shareholder Interest
Election
of Directors
The
purpose of Glass Lewis’ proxy research and advice is to facilitate shareholder
voting in favor of governance structures that will drive performance, create
shareholder value and maintain a proper tone at the top. Glass Lewis looks for
talented boards with a record of protecting shareholders and delivering value
over the medium- and long-term. We believe that a board can best protect and
enhance the interests of shareholders if it is sufficiently independent, has a
record of positive performance, and consists of individuals with diverse
backgrounds and a breadth and depth of relevant experience.
Independence
The
independence of directors, or lack thereof, is ultimately demonstrated through
the decisions they make. In assessing the independence of directors, we will
take into consideration, when appropriate, whether a director has a track record
indicative of making objective decisions. Likewise, when assessing the
independence of directors we will also examine when a director’s track record on
multiple boards indicates a lack of objective decision-making. Ultimately, we
believe the determination of whether a director is independent or not must take
into consideration both compliance with the applicable independence listing
requirements as well as judgments made by the director.
We
look at each director nominee to examine the director’s relationships with the
company, the company’s executives, and other directors. We do this to evaluate
whether personal, familial, or financial relationships (not including director
compensation) may impact the director’s decisions. We believe that such
relationships make it difficult for a director to put shareholders’ interests
above the director’s or the related party’s interests. We also believe that a
director who owns more than 20% of a company can exert disproportionate
influence on the board, and therefore believe such a director’s independence may
be hampered, in particular when serving on the audit committee.
Thus,
we put directors into three categories based on an examination of the type of
relationship they have with the company:
Independent
Director
— An independent director has no material financial, familial or other current
relationships with the company, its executives, or other board members, except
for board service and standard fees paid for that service. Relationships that
existed within three to five years1
before the inquiry are usually considered “current” for purposes of this test.
For material financial relationships with the company, we apply a three-year
look back, and for former employment relationships with the company, we apply a
five-year look back.
1
NASDAQ originally proposed a five-year look-back period but both it and the NYSE
ultimately settled on a three-year look-back prior to finalizing their rules. A
five-year standard for former employment relationships is more appropriate, in
our view, because we believe that the unwinding of conflicting relationships
between former management and board members is more likely to be complete and
final after five years. However, Glass Lewis does not apply the five-year
look-back period to directors who have previously served as executives of the
company on an interim basis for less than one year.
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Affiliated
Director
— An affiliated director has, (or within the past three years, had) a material
financial, familial or other relationship with the company or its executives,
but is not an employee of the company.2
This includes directors whose employers have a material financial relationship
with the company.3
In addition, we view a director who either owns or controls 20% or more of the
company’s voting stock, or is an employee or affiliate of an entity that
controls such amount, as an affiliate.4
We
view 20% shareholders as affiliates because they typically have access to and
involvement with the management of a company that is fundamentally different
from that of ordinary shareholders. More importantly, 20% holders may have
interests that diverge from those of ordinary holders, for reasons such as the
liquidity (or lack thereof) of their holdings, personal tax issues, etc.
Glass
Lewis applies a three-year look back period to all directors who have an
affiliation with the company other than former employment, for which we apply a
five-year look back.
Definition
of “Material”:
A material relationship is one in which the dollar value exceeds:
•$50,000
(or where no amount is disclosed) for directors who are paid for a service they
have agreed to perform for the company, outside of their service as a director,
including professional or other services. This threshold also applies to
directors who are the majority or principal owner of a firm that receives such
payments; or
•$120,000
(or where no amount is disclosed) for those directors employed by a professional
services firm such as a law firm, investment bank, or consulting firm and the
company pays the firm, not the individual, for services.5
This dollar limit would also apply to charitable contributions to schools where
a board member is a professor; or charities where a director serves on the board
or is an executive;6
and any aircraft and real estate dealings between the company and the director’s
firm; or
2
If a company does not consider a non-employee director to be independent, Glass
Lewis will classify that director as an affiliate.
3
We allow a five-year grace period for former executives of the company or merged
companies who have consulting agreements with the surviving company. (We do not
automatically recommend voting against directors in such cases for the first
five years.) If the consulting agreement persists after
this five-year grace
period, we apply the materiality thresholds outlined in the definition of
“material.”
4
This includes a director who serves on a board as a representative (as part of
his or her basic responsibilities) of an investment firm with greater than 20%
ownership. However, while we will generally consider him/her to be affiliated,
we will not recommend voting against unless (i) the investment firm has
disproportionate board representation or (ii) the director serves on the audit
committee.
5
We may deem such a transaction to be immaterial where the amount represents less
than 1% of the firm’s annual revenues and the board provides a compelling
rationale as to why the director’s independence is not affected by the
relationship.
6
We will generally take into consideration the size and nature of such charitable
entities in relation to the company’s size and industry along with any other
relevant factors such as the director’s role at the charity. However, unlike for
other types of related party transactions, Glass Lewis generally does not apply
a look-back period to affiliated relationships involving charitable
contributions; if the relationship between the director and the school or
charity ceases, or if the company discontinues its donations to the entity, we
will consider the director to be independent.
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•1%
of either company’s consolidated gross revenue for other business relationships
(e.g., where the director is an executive officer of a company that provides
services or products to or receives services or products from the
company).7
Definition
of “Familial”
— Familial relationships include a person’s spouse, parents, children, siblings,
grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and anyone
(other than domestic employees) who shares such person’s home. A director is an
affiliate if: i) he or she has a family member who is employed by the company
and receives more than $120,000 in annual compensation; or, ii) he or she has a
family member who is employed by the company and the company does not disclose
this individual’s compensation.
Definition
of “Company”
— A company includes any parent or subsidiary in a group with the company or any
entity that merged with, was acquired by, or acquired the company.
Inside
Director —
An inside director simultaneously serves as a director and as an employee of the
company. This category may include a board chair who acts as an employee of the
company or is paid as an employee of the company. In our view, an inside
director who derives a greater amount of income as a result of affiliated
transactions with the company rather than through compensation paid by the
company (i.e., salary, bonus, etc. as a company employee) faces a conflict
between making decisions that are in the best interests of the company versus
those in the director’s own best interests. Therefore, we will recommend voting
against such a director.
Additionally,
we believe a director who is currently serving in an interim management position
should be considered an insider, while a director who previously served in an
interim management position for less than one year and is no longer serving in
such capacity is considered independent. Moreover, a director who previously
served in an interim management position for over one year and is no longer
serving in such capacity is considered an affiliate for five years following the
date of the director’s resignation or departure from the interim management
position.
Voting
Recommendations on the Basis of Board Independence
Glass
Lewis believes a board will be most effective in protecting shareholders’
interests if it is at least two-thirds independent. We note that each of the
Business Roundtable, the Conference Board, and the Council of Institutional
Investors advocates that two-thirds of the board be independent. Where more than
one-third of the members are affiliated or inside directors, we
typically8
recommend voting against some of the inside and/or affiliated directors in order
to satisfy the two-thirds threshold.
In
the case of a less than two-thirds independent board, Glass Lewis strongly
supports the existence of a presiding or lead director with authority to set the
meeting agendas and to lead sessions outside the insider chair’s presence.
In
addition, we scrutinize avowedly “independent” chairs and lead directors. We
believe that they should be unquestionably independent or the company should not
tout them as such.
7
This includes cases where a director is employed by, or closely affiliated with,
a private equity firm that profits from an acquisition made by the company.
Unless disclosure suggests otherwise, we presume the director is
affiliated.
8
With a staggered board, if the affiliates or insiders that we believe should not
be on the board are not up for election, we will express our concern regarding
those directors, but we will not recommend voting against the other affiliates
or insiders who are up for election just to achieve two-thirds independence.
However, we will consider recommending voting against the directors subject to
our concern at their next election if the issue giving rise to the concern is
not resolved.
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Committee
Independence
We
believe that only independent directors should serve on a company’s audit,
compensation, nominating, and governance committees.9
We typically recommend that shareholders vote against any affiliated or inside
director seeking appointment to an audit, compensation, nominating, or
governance committee, or who has served in that capacity in the past year.
Pursuant
to Section 952 of the Dodd-Frank Act, as of January 11, 2013, the U.S.
Securities and Exchange Commission (SEC) approved new listing requirements for
both the NYSE and NASDAQ which require that boards apply enhanced standards of
independence when making an affirmative determination of the independence of
compensation committee members. Specifically, when making this determination, in
addition to the factors considered when assessing general director independence,
the board’s considerations must include: (i) the source of compensation of the
director, including any consulting, advisory or other compensatory fee paid by
the listed company to the director (the “Fees Factor”); and (ii) whether the
director is affiliated with the listing company, its subsidiaries, or affiliates
of its subsidiaries (the “Affiliation Factor”).
Glass
Lewis believes it is important for boards to consider these enhanced
independence factors when assessing compensation committee members. However, as
discussed above in the section titled Independence, we apply our own standards
when assessing the independence of directors, and these standards also take into
account consulting and advisory fees paid to the director, as well as the
director’s affiliations with the company and its subsidiaries and affiliates. We
may recommend voting against compensation committee members who are not
independent based on our standards.
Independent
Chair
Glass
Lewis believes that separating the roles of CEO (or, more rarely, another
executive position) and chair creates a better governance structure than a
combined CEO/chair position. An executive manages the business according to a
course the board charts. Executives should report to the board regarding their
performance in achieving goals set by the board. This is needlessly complicated
when a CEO chairs the board, since a CEO/chair presumably will have a
significant influence over the board.
While
many companies have an independent lead or presiding director who performs many
of the same functions of an independent chair (e.g., setting the board meeting
agenda), we do not believe this alternate form of independent board leadership
provides as robust protection for shareholders as an independent
chair.
It
can become difficult for a board to fulfill its role of overseer and policy
setter when a CEO/chair controls the agenda and the boardroom discussion. Such
control can allow a CEO to have an entrenched position, leading to
longer-than-optimal terms, fewer checks on management, less scrutiny of the
business operation, and limitations on independent, shareholder-focused
goal-setting by the board.
A
CEO should set the strategic course for the company, with the board’s approval,
and the board should enable the CEO to carry out the CEO’s vision for
accomplishing the board’s objectives. Failure
9
We will recommend voting against an audit committee member who owns 20% or more
of the company’s stock, and we believe that there should be a maximum of one
director (or no directors if the committee is composed of less than three
directors) who owns 20% or more of the company’s stock on the compensation,
nominating, and governance committees.
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to
achieve the board’s objectives should lead the board to replace that CEO with
someone in whom the board has confidence.
Likewise,
an independent chair can better oversee executives and set a pro-shareholder
agenda without the management conflicts that a CEO and other executive insiders
often face. Such oversight and concern for shareholders allows for a more
proactive and effective board of directors that is better able to look out for
the interests of shareholders.
Further,
it is the board’s responsibility to select a chief executive who can best serve
a company and its shareholders and to replace this person when his or her duties
have not been appropriately fulfilled. Such a replacement becomes more difficult
and happens less frequently when the chief executive is also in the position of
overseeing the board.
Glass
Lewis believes that the installation of an independent chair is almost always a
positive step from a corporate governance perspective and promotes the best
interests of shareholders. Further, the presence of an independent chair fosters
the creation of a thoughtful and dynamic board, not dominated by the views of
senior management. Encouragingly, many companies appear to be moving in this
direction — one study indicates that only 10 percent of incoming CEOs in 2014
were awarded the chair title, versus 48 percent in 2002.10
Another study finds that 53 percent of S&P 500 boards now separate the CEO
and chair roles, up from 37 percent in 2009, although the same study found that
only 34 percent of S&P 500 boards have truly independent chairs.11
We
do not recommend that shareholders vote against CEOs who chair the board.
However, we typically recommend that our clients support separating the roles of
chair and CEO whenever that question is posed in a proxy (typically in the form
of a shareholder proposal), as we believe that it is in the long-term best
interests of the company and its shareholders.
Further,
where the company has neither an independent chair nor independent lead
director, we will recommend voting against the chair of the governance
committee.
10
Ken Favaro, Per-Ola Karlsson and Gary L. Nelson. “The $112 Billion CEO
Succession Problem.” (Strategy+Business,
Issue 79, Summer 2015).
11
Spencer Stuart Board Index, 2019, p. 6.
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Performance
The
most crucial test of a board’s commitment to the company and its shareholders
lies in the actions of the board and its members. We look at the performance of
these individuals as directors and executives of the company and of other
companies where they have served.
We
find that a director’s past conduct is often indicative of future conduct and
performance. We often find directors with a history of overpaying executives or
of serving on boards where avoidable disasters have occurred serving on the
boards of companies with similar problems. Glass Lewis has a proprietary
database of directors serving at over 8,000 of the most widely held U.S.
companies. We use this database to track the performance of directors across
companies.
Voting
Recommendations on the Basis of Performance
We
typically recommend that shareholders vote against directors who have served on
boards or as executives of companies with records of poor performance,
inadequate risk oversight, excessive compensation, audit- or accounting-related
issues, and/or other indicators of mismanagement or actions against the
interests of shareholders. We will reevaluate such directors based on, among
other factors, the length of time passed since the incident giving rise to the
concern, shareholder support for the director, the severity of the issue, the
director’s role (e.g., committee membership), director tenure at the subject
company, whether ethical lapses accompanied the oversight lapse, and evidence of
strong oversight at other companies.
Likewise,
we examine the backgrounds of those who serve on key board committees to ensure
that they have the required skills and diverse backgrounds to make informed
judgments about the subject matter for which the committee is
responsible.
We
believe shareholders should avoid electing directors who have a record of not
fulfilling their responsibilities to shareholders at any company where they have
held a board or executive position. We typically recommend voting
against:
1.A
director who fails to attend a minimum of 75% of board and applicable committee
meetings, calculated in the aggregate.12
2.A
director who belatedly filed a significant form(s) 4 or 5, or who has a pattern
of late filings if the late filing was the director’s fault (we look at these
late filing situations on a case-by-case basis).
3.A
director who is also the CEO of a company where a serious and material
restatement has occurred after the CEO had previously certified the
pre-restatement financial statements.
4.A
director who has received two against recommendations from Glass Lewis for
identical reasons within the prior year at different companies (the same
situation must also apply at the company being analyzed).
Furthermore,
with consideration given to the company’s overall corporate governance,
pay-for-performance alignment and board responsiveness to shareholders, we may
recommend voting against directors who served throughout a period in which the
company performed significantly worse than peers and the directors have not
taken reasonable steps to address the poor performance.
12
However, where a director has served for less than one full year, we will
typically not recommend voting against for failure to attend 75% of meetings.
Rather, we will note the poor attendance with a recommendation to track this
issue going forward. We will also refrain from recommending to vote against
directors when the proxy discloses that the director missed the meetings due to
serious illness or other extenuating circumstances.
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Board
Responsiveness
Glass
Lewis believes that any time 20% or more of shareholders vote contrary to the
recommendation of management, the board should, depending on the issue,
demonstrate some level of responsiveness to address the concerns of
shareholders. These include instances when 20% or more of shareholders: (i)
withhold votes from (or vote against) a director nominee; (ii) vote against a
management-sponsored proposal; or (iii) vote for a shareholder proposal. In our
view, a 20% threshold is significant enough to warrant a close examination of
the underlying issues and an evaluation of whether or not a board response was
warranted and, if so, whether the board responded appropriately following the
vote, particularly in the case of a compensation or director election proposal.
While the 20% threshold alone will not automatically generate a negative vote
recommendation from Glass Lewis on a future proposal (e.g., to recommend against
a director nominee, against a say-on-pay proposal, etc.), it may be a
contributing factor to our recommendation to vote against management’s
recommendation in the event we determine that the board did not respond
appropriately. While Glass Lewis may note instances of significant support for
shareholder proposals, we believe clear action is warranted when such proposals
receive support from a majority of votes cast (excluding abstentions and broker
non-votes).
With
regard to companies where voting control is held through a multi-class share
structure with disproportionate voting and economic rights, we will carefully
examine the level of approval or disapproval attributed to unaffiliated
shareholders when determining whether board responsiveness is warranted. Where
vote results indicate that a majority of unaffiliated shareholders supported a
shareholder proposal or opposed a management proposal, we believe the board
should demonstrate an appropriate level of responsiveness.
As
a general framework, our evaluation of board responsiveness involves a review of
publicly available disclosures (e.g., the proxy statement, annual report, 8-Ks,
company website, etc.) released following the date of the company’s last annual
meeting up through the publication date of our most current Proxy Paper.
Depending on the specific issue, our focus typically includes, but is not
limited to, the following:
•At
the board level, any changes in directorships, committee memberships, disclosure
of related party transactions, meeting attendance, or other
responsibilities;
•Any
revisions made to the company’s articles of incorporation, bylaws or other
governance documents;
•Any
press or news releases indicating changes in, or the adoption of, new company
policies, business practices or special reports; and
•Any
modifications made to the design and structure of the company’s compensation
program, as well as an assessment of the company’s engagement with shareholders
on compensation issues as discussed in the Compensation Discussion &
Analysis (CD&A), particularly following a material vote against a company’s
say-on-pay.
Our
Proxy Paper analysis will include a case-by-case assessment of the specific
elements of board responsiveness that we examined along with an explanation of
how that assessment impacts our current voting recommendations.
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The
Role of a Committee Chair
Glass
Lewis believes that a designated committee chair maintains primary
responsibility for the actions of his or her respective committee. As such, many
of our committee-specific voting recommendations are against the applicable
committee chair rather than the entire committee (depending on the seriousness
of the issue). In cases where the committee chair is not up for election due to
a staggered board, and where we have identified multiple concerns, we will
generally recommend voting against other members of the committee who are up for
election, on a case-by-case basis.
In
cases where we would ordinarily recommend voting against a committee chair but
the chair is not specified, we apply the following general rules, which apply
throughout our guidelines:
•If
there is no committee chair, we recommend voting against the longest-serving
committee member or, if the longest-serving committee member cannot be
determined, the longest-serving board member serving on the committee (i.e., in
either case, the “senior director”); and
•If
there is no committee chair, but multiple senior directors serving on the
committee, we recommend voting against both (or all) such senior
directors.
In
our view, companies should provide clear disclosure of which director is charged
with overseeing each committee. In cases where that simple framework is ignored
and a reasonable analysis cannot determine which committee member is the
designated leader, we believe shareholder action against the longest serving
committee member(s) is warranted. Again, this only applies if we would
ordinarily recommend voting against the committee chair but there is either no
such position or no designated director in such role.
Audit
Committees and Performance
Audit
committees play an integral role in overseeing the financial reporting process
because stable capital markets depend on reliable, transparent, and objective
financial information to support an efficient and effective capital market
process. Audit committees play a vital role in providing this disclosure to
shareholders.
When
assessing an audit committee’s performance, we are aware that an audit committee
does not prepare financial statements, is not responsible for making the key
judgments and assumptions that affect the financial statements, and does not
audit the numbers or the disclosures provided to investors. Rather, an audit
committee member monitors and oversees the process and procedures that
management and auditors perform. The 1999 Report and Recommendations of the Blue
Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees
stated it best:
A
proper and well-functioning system exists, therefore, when the three main groups
responsible for financial reporting — the full board including the audit
committee, financial management including the internal auditors, and the outside
auditors — form a ‘three legged stool’ that supports responsible financial
disclosure and active participatory oversight. However, in the view of the
Committee, the audit committee must be ‘first among equals’ in this process,
since the audit committee is an extension of the full board and hence the
ultimate monitor of the process.
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Standards
for Assessing the Audit Committee
For
an audit committee to function effectively on investors’ behalf, it must include
members with sufficient knowledge to diligently carry out their
responsibilities. In its audit and accounting recommendations, the Conference
Board Commission on Public Trust and Private Enterprise said “members of the
audit committee must be independent and have both knowledge and experience in
auditing financial matters.”13
We
are skeptical of audit committees where there are members that lack expertise as
a Certified Public Accountant (CPA), Chief Financial Officer (CFO) or corporate
controller, or similar experience. While we will not necessarily recommend
voting against members of an audit committee when such expertise is lacking, we
are more likely to recommend voting against committee members when a problem
such as a restatement occurs and such expertise is lacking.
Glass
Lewis generally assesses audit committees against the decisions they make with
respect to their oversight and monitoring role. The quality and integrity of the
financial statements and earnings reports, the completeness of disclosures
necessary for investors to make informed decisions, and the effectiveness of the
internal controls should provide reasonable assurance that the financial
statements are materially free from errors. The independence of the external
auditors and the results of their work all provide useful information by which
to assess the audit committee.
When
assessing the decisions and actions of the audit committee, we typically defer
to its judgment and generally recommend voting in favor of its members. However,
we will consider recommending that shareholders vote against the
following:
1.All
members of the audit committee when options were backdated, there is a lack of
adequate controls in place, there was a resulting restatement, and disclosures
indicate there was a lack of documentation with respect to the option
grants.
2.The
audit committee chair, if the audit committee does not have a financial expert
or the committee’s financial expert does not have a demonstrable financial
background sufficient to understand the financial issues unique to public
companies.
3.The
audit committee chair, if the audit committee did not meet at least four times
during the year.
4.The
audit committee chair, if the committee has less than three
members.
5.Any
audit committee member who sits on more than three public company audit
committees, unless the audit committee member is a retired CPA, CFO, controller
or has similar experience, in which case the limit shall be four committees,
taking time and availability into consideration including a review of the audit
committee member’s attendance at all board and committee meetings.14
6.All
members of an audit committee who are up for election and who served on the
committee at the time of the audit, if audit and audit-related fees total
one-third or less of the total fees billed by the auditor.
13
Commission on Public Trust and Private Enterprise. The Conference Board.
2003.
14
Glass Lewis may exempt certain audit committee members from the above threshold
if, upon further analysis of relevant factors such as the director’s experience,
the size, industry-mix and location of the companies involved and the director’s
attendance at all the companies, we can reasonably determine that the audit
committee member is likely not hindered by multiple audit committee
commitments.
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7.The
audit committee chair when tax and/or other fees are greater than audit and
audit-related fees paid to the auditor for more than one year in a row (in which
case we also recommend against ratification of the auditor).
8.The
audit committee chair when fees paid to the auditor are not
disclosed.
9.All
members of an audit committee where non-audit fees include fees for tax services
(including, but not limited to, such things as tax avoidance or shelter schemes)
for senior executives of the company. Such services are prohibited by the Public
Company Accounting Oversight Board (PCAOB).
10.All
members of an audit committee that reappointed an auditor that we no longer
consider to be independent for reasons unrelated to fee
proportions.
11.All
members of an audit committee when audit fees are excessively low, especially
when compared with other companies in the same industry.
12.The
audit committee chair if the committee failed to put auditor ratification on the
ballot for shareholder approval. However, if the non-audit fees or tax fees
exceed audit plus audit-related fees in either the current or the prior year,
then Glass Lewis will recommend voting against the entire audit
committee.
13.All
members of an audit committee where the auditor has resigned and reported that a
section 10A15
letter has been issued.
14.All
members of an audit committee at a time when material accounting fraud occurred
at the company.16
15.All
members of an audit committee at a time when annual and/or multiple quarterly
financial statements had to be restated, and any of the following factors
apply:17
a.The
restatement involves fraud or manipulation by insiders;
b.The
restatement is accompanied by an SEC inquiry or investigation;
c.The
restatement involves revenue recognition;
d.The
restatement results in a greater than 5% adjustment to costs of goods sold,
operating expense, or operating cash flows; or
e.The
restatement results in a greater than 5% adjustment to net income, 10%
adjustment to assets or shareholders equity, or cash flows from financing or
investing activities.
16.All
members of an audit committee if the company repeatedly fails to file its
financial reports in a timely fashion. For example, the company has filed two or
more quarterly or annual financial statements late within the last five
quarters.
17.All
members of an audit committee when it has been disclosed that a law enforcement
agency
has charged the company and/or its employees with a violation of the
Foreign Corrupt Practices
Act (FCPA).
18.All
members of an audit committee when the company has aggressive accounting
policies and/or poor disclosure or lack of sufficient transparency in its
financial statements.
15
Auditors are required to report all potential illegal acts to management and the
audit committee unless they are clearly inconsequential in nature. If the audit
committee or the board fails to take appropriate action on an act that has been
determined to be a violation of the law, the independent auditor is required to
send a section 10A letter to the SEC. Such letters are rare and therefore we
believe should be taken seriously.
16
Research indicates that revenue fraud now accounts for over 60% of SEC fraud
cases, and that companies that engage in fraud experience significant negative
abnormal stock price declines—facing bankruptcy, delisting, and material asset
sales at much higher rates than do non-fraud firms (Committee of Sponsoring
Organizations of the Treadway Commission. “Fraudulent Financial Reporting:
1998-2007.” May 2010).
17
The
SEC issued guidance in March 2021 related to classification of warrants as
liabilities at special purpose acquisition companies (SPACs). We will generally
refrain from recommending against audit committee members when the restatement
in question is solely as a result of the aforementioned SEC
guidance.
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19.All
members of the audit committee when there is a disagreement with the auditor and
the auditor resigns or is dismissed (e.g., the company receives an adverse
opinion on its financial statements from the auditor).
20.All
members of the audit committee if the contract with the auditor specifically
limits the auditor’s liability to the company for damages.18
21.All
members of the audit committee who served since the date of the company’s last
annual meeting, and when, since the last annual meeting, the company has
reported a material weakness that has not yet been corrected, or, when the
company has an ongoing material weakness from a prior year that has not yet been
corrected.
We
also take a dim view of audit committee reports that are boilerplate, and which
provide little or no information or transparency to investors. When a problem
such as a material weakness, restatement or late filings occurs, we take into
consideration, in forming our judgment with respect to the audit committee, the
transparency of the audit committee report.
Compensation
Committee Performance
Compensation
committees have a critical role in determining the compensation of executives.
This includes deciding the basis on which compensation is determined, as well as
the amounts and types of compensation to be paid. This process begins with the
hiring and initial establishment of employment agreements, including the terms
for such items as pay, pensions and severance arrangements. It is important in
establishing compensation arrangements that compensation be consistent with, and
based on the long-term economic performance of, the business’s long-term
shareholders returns.
Compensation
committees are also responsible for the oversight of the transparency of
compensation. This oversight includes disclosure of compensation arrangements,
the matrix used in assessing pay for performance, and the use of compensation
consultants. In order to ensure the independence of the board’s compensation
consultant, we believe the compensation committee should only engage a
compensation consultant that is not also providing any services to the company
or management apart from their contract with the compensation committee. It is
important to investors that they have clear and complete disclosure of all the
significant terms of compensation arrangements in order to make informed
decisions with respect to the oversight and decisions of the compensation
committee.
Finally,
compensation committees are responsible for oversight of internal controls over
the executive compensation process. This includes controls over gathering
information used to determine compensation, establishment of equity award plans,
and granting of equity awards. For example, the use of a compensation consultant
who maintains a business relationship with company management may cause the
committee to make decisions based on information that is compromised by the
consultant’s conflict of interests. Lax controls can also contribute to improper
awards of compensation such as through granting of backdated or spring-loaded
options, or granting of bonuses when triggers for bonus payments have not been
met.
Central
to understanding the actions of compensation committee is a careful review of
the CD&A report included in each company’s proxy. We review the CD&A in
our evaluation of the overall compensation practices of a company, as overseen
by the compensation committee. The CD&A is also integral to the evaluation
of compensation proposals at companies, such as advisory votes on executive
18
The Council of Institutional Investors. “Corporate Governance Policies,” p. 4,
April 5, 2006; and “Letter from Council of Institutional Investors to the
AICPA,” November 8, 2006.
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compensation,
which allow shareholders to vote on the compensation paid to a company’s top
executives.
When
assessing the performance of compensation committees, we will consider
recommending that shareholders vote against the following:
1.All
members of a compensation committee during whose tenure the committee failed to
address shareholder concerns following majority shareholder rejection of the
say-on-pay proposal in the previous year. Where the proposal was approved but
there was a significant shareholder vote (i.e., greater than 20% of votes cast)
against the say-on-pay proposal in the prior year, if the board did not respond
sufficiently to the vote including actively engaging shareholders on this issue,
we will also consider recommending voting against the chair of the compensation
committee or all members of the compensation committee, depending on the
severity and history of the compensation problems and the level of shareholder
opposition.
2.All
members of the compensation committee who are up for election and served when
the company failed to align pay with performance if shareholders are not
provided with an advisory vote on executive compensation at the annual
meeting.19
3.Any
member of the compensation committee who has served on the compensation
committee of at least two other public companies that have consistently failed
to align pay with performance and whose oversight of compensation at the company
in question is suspect.
4.All
members of the compensation committee (during the relevant time period) if the
company entered into excessive employment agreements and/or severance
agreements.
5.All
members of the compensation committee when performance goals were changed (i.e.,
lowered) when employees failed or were unlikely to meet original goals, or
performance-based compensation was paid despite goals not being
attained.
6.All
members of the compensation committee if excessive employee perquisites and
benefits
were allowed.
7.The
compensation committee chair if the compensation committee did not meet during
the year.
8.All
members of the compensation committee when the company repriced options or
completed a “self tender offer” without shareholder approval within the past two
years.
9.All
members of the compensation committee when vesting of in-the-money options is
accelerated.
10.All
members of the compensation committee when option exercise prices were
backdated. Glass Lewis will recommend voting against an executive director who
played a role in and participated in option backdating.
11.All
members of the compensation committee when option exercise prices were
spring-loaded or otherwise timed around the release of material
information.
12.All
members of the compensation committee when a new employment contract is given to
an executive that does not include a clawback provision and the company had a
material restatement, especially if the restatement was due to
fraud.
13.The
chair of the compensation committee where the CD&A provides insufficient or
unclear information about performance metrics and goals, where the CD&A
indicates that pay is not tied to performance, or where the compensation
committee or management has excessive
19
If a company provides shareholders with a say-on-pay proposal, we will initially
only recommend voting against the company's say-on-pay proposal and will not
recommend voting against the members of the compensation committee unless there
is a pattern of failing to align pay and performance and/or the company exhibits
egregious compensation practices. For cases in which the disconnect between pay
and performance is marginal and the company has outperformed its peers, we will
consider not recommending against compensation committee members.
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discretion
to alter performance terms or increase amounts of awards in contravention of
previously defined targets.
14.All
members of the compensation committee during whose tenure the committee failed
to implement a shareholder proposal regarding a compensation-related issue,
where the proposal received the affirmative vote of a majority of the voting
shares at a shareholder meeting, and when a reasonable
analysis suggests
that the compensation committee (rather than the governance committee) should
have taken steps to implement the request.20
15.All
members of the compensation committee when the board has materially decreased
proxy statement disclosure regarding executive compensation policies and
procedures in a manner which substantially impacts shareholders’ ability to make
an informed assessment of the company’s executive pay practices.
16.All
members of the compensation committee when new excise tax gross-up provisions
are adopted in employment agreements with executives, particularly in cases
where the company previously committed not to provide any such entitlements in
the future.
17.All
members of the compensation committee when the board adopts a frequency for
future advisory votes on executive compensation that differs from the frequency
approved by shareholders.
Nominating
and Governance Committee Performance
The
nominating and governance committee is responsible for the governance by the
board of the company and its executives. In performing this role, the committee
is responsible and accountable for selection of objective and competent board
members. It is also responsible for providing leadership on governance policies
adopted by the company, such as decisions to implement shareholder proposals
that have received a majority vote. At most companies, a single committee is
charged with these oversight functions; at others, the governance and nominating
responsibilities are apportioned among two separate committees.
Consistent
with Glass Lewis’ philosophy that boards should have diverse backgrounds and
members with a breadth and depth of relevant experience, we believe that
nominating and governance committees should consider diversity when making
director nominations within the context of each specific company and its
industry. In our view, shareholders are best served when boards make an effort
to ensure a constituency that is not only reasonably diverse on the basis of
age, race, gender and ethnicity, but also on the basis of geographic knowledge,
industry experience, board tenure and culture.
Regarding
the committee responsible for governance, we will consider recommending that
shareholders vote against the following:
1.All
members of the governance committee21
during whose tenure a shareholder proposal relating to important shareholder
rights received support from a majority of the votes cast (excluding abstentions
and broker non-votes) and the board has not begun to implement or
20
In all other instances (i.e., a non-compensation-related shareholder proposal
should have been implemented) we recommend that shareholders vote against the
members of the governance committee.
21
If the board does not have a committee responsible for governance oversight and
the board did not implement a shareholder proposal that received the requisite
support, we will recommend voting against the entire board. If the shareholder
proposal at issue requested that the board adopt a declassified structure, we
will recommend voting against all director nominees up for
election.
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enact
the proposal’s subject matter.22
Examples of such shareholder proposals include those seeking a declassified
board structure, a majority vote standard for director elections, or a right to
call a special meeting. In determining whether a board has sufficiently
implemented such a proposal, we will examine the quality of the right enacted or
proffered by the board for any conditions that may unreasonably interfere with
the shareholders’ ability to exercise the right (e.g., overly restrictive
procedural requirements for calling a special meeting).
2.All
members of the governance committee when a shareholder resolution is excluded
from the meeting agenda but the SEC has declined to state a view on whether such
resolution should be excluded, or when the SEC has verbally permitted a company
to exclude a shareholder proposal but there is no written record provided by the
SEC about such determination and the company has not provided any disclosure
concerning this no-action relief.
3.The
governance committee chair when the chair is not independent and an independent
lead or presiding director has not been appointed.23
4.The
governance committee chair at companies with a multi-class share structure and
unequal voting rights when the company does not provide for a reasonable sunset
of the multi-class share structure (generally seven years or less).
5.In
the absence of a nominating committee, the governance committee chair when there
are fewer than five, or the whole governance committee when there are more than
20 members on the board.
6.The
governance committee chair when the committee fails to meet at all during the
year.
7.The
governance committee chair, when for two consecutive years the company provides
what we consider to be “inadequate” related party transaction disclosure (i.e.,
the nature of such transactions and/or the monetary amounts involved are unclear
or excessively vague, thereby preventing a share-
holder from being able to
reasonably interpret the independence status of multiple directors above and
beyond what the company maintains is compliant with SEC or applicable stock
exchange listing requirements).
8.The
governance committee chair, when during the past year the board adopted a forum
selection clause (i.e., an exclusive forum provision)24
designating either a state's courts for intra-corporate disputes, and/or federal
courts for matters arising under the Securities Act of 1933 without shareholder
approval,25
or if the board is currently seeking shareholder approval of a forum selection
clause pursuant to a bundled bylaw amendment rather than as a separate proposal.
22
Where a compensation-related shareholder proposal should have been implemented,
and when a reasonable analysis suggests that the members of the compensation
committee (rather than the governance committee) bear the responsibility for
failing to implement the request, we recommend that shareholders only vote
against members of the compensation committee.
23
We believe that one independent individual should be appointed to serve as the
lead or presiding director. When such a position is rotated among directors from
meeting to meeting, we will recommend voting against the governance committee
chair as we believe the lack of fixed lead or presiding director means that,
effectively, the board does not have an independent board leader.
24
A forum selection clause is a bylaw provision stipulating that a certain state
or federal jurisdiction is the exclusive forum for specified legal matters. Such
a clause effectively limits a shareholder's legal remedy regarding appropriate
choice of venue and related relief.
25
Glass Lewis will evaluate the circumstances surrounding the adoption of any
forum selection clause as well as the general provisions contained therein.
Where it can be reasonably determined that a forum selection clause is narrowly
crafted to suit the particular circumstances facing the company and/or a
reasonable sunset provision is included, we may make an exception to this
policy.
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9.All
members of the governance committee during whose tenure the board adopted,
without shareholder approval, provisions in its charter or bylaws that, through
rules on director compensation, may inhibit the ability of shareholders to
nominate directors.
10.The
governance committee chair when the board takes actions to limit shareholders’
ability to vote on matters material to shareholder rights (e.g., through the
practice of excluding a shareholder proposal by means of ratifying a management
proposal that is materially different from the shareholder
proposal).
11.The
governance committee chair when directors’ records for board and committee
meeting attendance are not disclosed, or when it is indicated that a director
attended less than 75% of board and committee meetings but disclosure is
sufficiently vague that it is not possible to determine which specific
director’s attendance was lacking.
12.The
governance committee chair when a detailed record of proxy voting results from
the prior annual meeting has not been disclosed.
In
addition, we may recommend that shareholders vote against the chair of the
governance committee, or the entire committee, where the board has amended the
company’s governing documents to reduce or remove important shareholder rights,
or to otherwise impede the ability of shareholders to exercise such right, and
has done so without seeking shareholder approval. Examples of board actions that
may cause such a recommendation include: the elimination of the ability of
shareholders to call a special meeting or to act by written consent; an increase
to the ownership threshold required for shareholders to call a special meeting;
an increase to vote requirements for charter or bylaw amendments; the adoption
of provisions that limit the ability of shareholders to pursue full legal
recourse — such as bylaws that require arbitration of shareholder claims or that
require shareholder plaintiffs to pay the company’s legal expenses in the
absence of a court victory (i.e., “fee-shifting” or “loser pays” bylaws); the
adoption of a classified board structure; and the elimination of the ability of
shareholders to remove a director without cause.
Regarding
the nominating committee, we will consider recommending that shareholders vote
against the following:
1.All
members of the nominating committee, when the committee nominated or renominated
an individual who had a significant conflict of interest or whose past
actions demonstrated a lack of integrity or inability to represent shareholder
interests.
2.The
nominating committee chair, if the nominating committee did not meet during the
year.
3.In
the absence of a governance committee, the nominating committee chair when the
chair is not independent, and an independent lead or presiding director has not
been appointed.
4.The
nominating committee chair, when there are fewer than five, or the whole
nominating committee when there are more than 20 members on the
board.
5.The
nominating committee chair, when a director received a greater than 50% against
vote the prior year and not only was the director not removed, but the issues
that raised shareholder concern were not corrected.26
26
Considering that shareholder disapproval clearly relates to the director who
received a greater than 50% against vote rather than the nominating chair, we
review the severity of the issue(s) that initially raised shareholder concern as
well as company responsiveness to such matters, and will only recommend voting
against the nominating chair if a reasonable analysis suggests that it would be
most appropriate. In rare cases, we will consider recommending against the
nominating chair when a director receives a substantial (i.e., 20% or more) vote
against based on the same analysis.
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6.The
chair of the nominating committee of a board with fewer than two gender diverse
directors,27
or all members of the nominating committee of a board with no gender diverse
directors, at companies within the Russell 3000 index. For companies outside of
the Russell 3000 index, and all boards with six or fewer total directors, we
will recommend voting against the chair of the nominating committee if there are
no gender diverse directors.
7.The
nominating committee chair when, alongside other governance or board performance
concerns, the average tenure of non-executive directors is 10 years or more and
no new independent directors have joined the board in the past five years. We
will not be making voting recommendations solely on this basis; rather,
insufficient board refreshment may be a contributing factor in our
recommendations when additional board-related concerns have been
identified.
In
addition, we may consider recommending shareholders vote against the chair of
the nominating committee where the board’s failure to ensure the board has
directors with relevant experience, either through periodic director assessment
or board refreshment, has contributed to a company’s poor performance. Where
these issues warrant an against vote in the absence of both a governance and a
nominating committee, we will recommend voting against the board chair, unless
the chair also serves as the CEO, in which case we will recommend voting against
the longest-serving director.
Board-level
Risk Management Oversight
Glass
Lewis evaluates the risk management function of a public company board on a
strictly case-by-case basis. Sound risk management, while necessary at all
companies, is particularly important at financial firms which inherently
maintain significant exposure to financial risk. We believe such financial firms
should have a chief risk officer reporting directly to the board and a dedicated
risk committee or a committee of the board charged with risk oversight.
Moreover, many non-financial firms maintain strategies which involve a high
level of exposure to financial risk. Similarly, since many non-financial firms
have complex hedging or trading strategies, those firms should also have a chief
risk officer and a risk committee.
Our
views on risk oversight are consistent with those expressed by various
regulatory bodies. In its December 2009 Final Rule release on Proxy Disclosure
Enhancements, the SEC noted that risk oversight is a key competence of the board
and that additional disclosures would improve investor and shareholder
understanding of the role of the board in the organization’s risk management
practices. The final rules, which became effective on February 28, 2010, now
explicitly require companies and mutual funds to describe (while allowing for
some degree of flexibility) the board’s role in the oversight of
risk.
When
analyzing the risk management practices of public companies, we take note of any
significant losses or writedowns on financial assets and/or structured
transactions. In cases where a company has disclosed a sizable loss or
writedown, and where we find that the company’s board-level risk committee’s
poor oversight contributed to the loss, we will recommend that shareholders vote
against such committee members on that basis. In addition, in cases where a
company maintains a significant level of financial risk exposure but fails to
disclose any explicit form of board-level risk oversight
27
Women and directors that identify with a gender other than male or
female.
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Policy Guidelines — United States
(committee
or otherwise),28
we will consider recommending to vote against the board chair on that basis.
However, we generally would not recommend voting against a combined chair/CEO,
except in egregious cases.
Board
Oversight of Environmental and Social Issues
Glass
Lewis recognizes the importance of ensuring the sustainability of companies’
operations. We believe that insufficient oversight of material environmental and
social issues can present direct legal, financial, regulatory and reputational
risks that could serve to harm shareholder interests. Therefore, we believe that
these issues should be carefully monitored and managed by companies, and that
all companies should have an appropriate oversight structure in place to ensure
that they are mitigating attendant risks and capitalizing on related
opportunities to the best extent possible.
To
that end, Glass Lewis believes that companies should ensure that boards maintain
clear oversight of material risks to their operations, including those that are
environmental and social in nature. These risks could include, but are not
limited to, matters related to climate change, human capital management,
diversity, stakeholder relations, and health, safety & environment.
For
companies in the Russell 1000 index and in instances where we identify material
oversight concerns, Glass Lewis will review a company’s overall governance
practices and identify which directors or board-level committees have been
charged with oversight of environmental and/or social issues. Furthermore, given
the importance of the board’s role in overseeing environmental and social risks,
Glass Lewis will generally recommend voting against the governance committee
chair of a company in the S&P 500 index that fails to provide explicit
disclosure concerning the board’s role in overseeing these issues.
While
we believe that it is important that these issues are overseen at the board
level and that shareholders are afforded meaningful disclosure of these
oversight responsibilities, we believe that companies should determine the best
structure for this oversight. In our view, this oversight can be effectively
conducted by specific directors, the entire board, a separate committee, or
combined with the responsibilities of a key committee.
When
evaluating the board’s role in overseeing environmental and/or social issues, we
will examine a company’s proxy statement and governing documents (such as
committee charters) to determine if directors maintain a meaningful level of
oversight of and accountability for a company’s material environmental and
social impacts.
28
A committee responsible for risk management could be a dedicated risk committee,
the audit committee, or the finance committee, depending on a given company’s
board structure and method of disclosure. At some companies, the entire board is
charged with risk management.
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Board
Accountability for Environmental and Social Performance
Glass
Lewis carefully monitors companies’ performance with respect to environmental
and social issues, including those related to climate and human capital
management. In situations where we believe that a company has not properly
managed or mitigated material environmental or social risks to the detriment of
shareholder value, or when such mismanagement has threatened shareholder value,
Glass Lewis may recommend that shareholders vote against the members of the
board who are responsible for oversight of environmental and social risks. In
the absence of explicit board oversight of environmental and social issues,
Glass Lewis may recommend that shareholders vote against members of the audit
committee. In making these determinations, Glass Lewis will carefully review the
situation, its effect on shareholder value, as well as any corrective action or
other response made by the company.
For
more information on how Glass Lewis evaluates environmental and social issues,
please see Glass Lewis’ Overall Approach to ESG as well as our comprehensive
Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives
available at www.glasslewis.com/voting-policies-current/.
Director
Commitments
We
believe that directors should have the necessary time to fulfill their duties to
shareholders. In our view, an overcommitted director can pose a material risk to
a company’s shareholders, particularly during periods of crisis. In addition,
recent research indicates that the time commitment associated with being a
director has been on a significant upward trend in the past decade.29
As a result, we generally recommend that shareholders vote against a director
who serves as an executive officer of any public company30
while serving on more than two public company boards and any other director who
serves on more than five public company boards.
Because
we believe that executives will primarily devote their attention to executive
duties, we generally will not recommend that shareholders vote against
overcommitted directors at the companies where they serve as an
executive.
When
determining whether a director’s service on an excessive number of boards may
limit the ability of the director to devote sufficient time to board duties, we
may consider relevant factors such as the size and location of the other
companies where the director serves on the board, the director’s board roles at
the companies in question, whether the director serves on the board of any large
privately-held companies, the director’s tenure on the boards in question, and
the director’s attendance record at all companies. In the case of directors who
serve in executive roles other than CEO (e.g., executive chair), we will
evaluate the specific duties and responsibilities of that role in determining
whether an exception is warranted.
29
For example, the 2015-2016 NACD Public Company Governance Survey states that, on
average, directors spent a total of 248.2 hours annual on board-related matters
during the past year, which it describes as a “historically high level” that is
significantly above the average hours recorded in 2006. Additionally, the 2020
Spencer Stuart Board Index indicates that, while 39% of S&P 500 CEOs serve
on one additional public board, just 2% of S&P 500 CEOs serve on two
additional public boards and only one CEO serves on three.
30
When
the executive officer in question serves only as an executive at a special
purpose acquisition company (SPAC) we will generally apply the higher threshold
of five public company directorships.
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We
may also refrain from recommending against certain directors if the company
provides sufficient rationale for their continued board service. The rationale
should allow shareholders to evaluate the scope of the directors’ other
commitments, as well as their contributions to the board including specialized
knowledge of the company’s industry, strategy or key markets, the diversity of
skills, perspective and background they provide, and other relevant factors. We
will also generally refrain from recommending to vote against a director who
serves on an excessive number of boards within a consolidated group of companies
or a director that represents a firm whose sole purpose is to manage a portfolio
of investments which include the company.
Other
Considerations
In
addition to the three key characteristics — independence, performance,
experience — that we use to evaluate board members, we consider
conflict-of-interest issues as well as the size of the board of directors when
making voting recommendations.
Conflicts
of Interest
We
believe board members should be wholly free of identifiable and substantial
conflicts of interest, regardless of the overall level of independent directors
on the board. Accordingly, we recommend that shareholders vote against the
following types of directors:
1.A
CFO who is on the board: In our view, the CFO holds a unique position relative
to financial reporting and disclosure to shareholders. Due to the critical
importance of financial disclosure and reporting, we believe the CFO should
report to the board and not be a member of it.
2.A
director who provides — or a director who has an immediate family member who
provides — material consulting or other material professional services to the
company. These services may include legal, consulting,31
or financial services. We question the need for the company to have consulting
relationships with its directors. We view such relationships as creating
conflicts for directors, since they may be forced to weigh their own interests
against shareholder interests when making board decisions. In addition, a
company’s decisions regarding where to turn for the best professional
services may be compromised when doing business with the professional
services firm of one of the company’s directors.
3.A
director, or a director who has an immediate family member, engaging in
airplane, real estate, or similar deals, including perquisite-type grants from
the company, amounting to more than $50,000. Directors who receive these sorts
of payments from the company will have to make unnecessarily complicated
decisions that may pit their interests against shareholder interests.
4.Interlocking
directorships: CEOs or other top executives who serve on each other’s boards
create an interlock that poses conflicts that should be avoided to ensure the
promotion of shareholder interests above all else.32
31
We will generally refrain from recommending against a director who provides
consulting services for the company if the director is excluded from membership
on the board’s key committees and we have not identified significant governance
concerns with the board.
32
We do not apply a look-back period for this situation. The interlock policy
applies to both public and private companies. We will also evaluate multiple
board interlocks among non-insiders (i.e., multiple directors serving on the
same boards at other companies), for evidence of a pattern of poor
oversight.
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5.All
board members who served at a time when a poison pill with a term of longer than
one year was adopted without shareholder approval within the prior twelve
months.33
In the event a board is classified and shareholders are therefore unable to vote
against all directors, we will recommend voting against the remaining directors
the next year they are up for a shareholder vote. If a poison pill with a term
of one year or less was adopted without shareholder approval, and without
adequate justification, we will consider recommending that shareholders vote
against all members of the governance committee. If the board has, without
seeking shareholder approval, and without adequate justification, extended the
term of a poison pill by one year or less in two consecutive years, we will
consider recommending that shareholders vote against the entire
board.
Size
of the Board of Directors
While
we do not believe there is a universally applicable optimal board size, we do
believe boards should have at least five directors to ensure sufficient
diversity in decision-making and to enable the formation of key board committees
with independent directors. Conversely, we believe that boards with more than 20
members will typically suffer under the weight of “too many cooks in the
kitchen” and have difficulty reaching consensus and making timely decisions.
Sometimes the presence of too many voices can make it difficult to draw on the
wisdom and experience in the room by virtue of the need to limit the discussion
so that each voice may be heard.
To
that end, we typically recommend voting against the chair of the nominating
committee (or the governance committee, in the absence of a nominating
committee) at a board with fewer than five directors or more than 20
directors.
Controlled
Companies
We
believe controlled companies warrant certain exceptions to our independence
standards. The board’s function is to protect shareholder interests; however,
when an individual, entity (or group of shareholders party to a formal
agreement) owns more than 50% of the voting shares, the interests of the
majority of shareholders are the interests of that entity or individual.
Consequently, Glass Lewis does not apply our usual two-thirds board independence
rule and therefore we will not recommend voting against boards whose composition
reflects the makeup of the shareholder population.
Independence
Exceptions
The
independence exceptions that we make for controlled companies are as follows:
1.We
do not require that controlled companies have boards that are at least
two-thirds independent. So long as the insiders and/or affiliates are connected
with the controlling entity, we accept the presence of non-independent board
members.
2.The
compensation committee and nominating and governance committees do not need to
consist solely of independent directors.
a.We
believe that standing nominating and corporate governance committees at
controlled companies are unnecessary. Although having a committee charged with
the duties of searching for, selecting, and nominating independent directors can
be beneficial, the
33
Refer to the “Governance Structure and the Shareholder Franchise” section for
further discussion of our policies regarding anti-takeover measures, including
poison pills.
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unique
composition of a controlled company’s shareholder base makes such committees
weak and irrelevant.
b.Likewise,
we believe that independent compensation committees at controlled companies are
unnecessary. Although independent directors are the best choice for approving
and monitoring senior executives’ pay, controlled companies serve a unique
shareholder population whose voting power ensures the protection of its
interests. As such, we believe that having affiliated directors on a controlled
company’s compensation committee is acceptable. However, given that a controlled
company has certain obligations to minority shareholders we feel that an insider
should not serve on the compensation committee. Therefore, Glass Lewis will
recommend voting against any insider (the CEO or otherwise) serving on the
compensation committee.
3.Controlled
companies do not need an independent chair or an independent lead or presiding
director. Although an independent director in a position of authority on the
board — such as chair or presiding director — can best carry out the board’s
duties, controlled companies serve a unique shareholder population whose voting
power ensures the protection of its interests.
Size
of the Board of Directors
We
have no board size requirements for controlled companies.
Audit
Committee Independence
Despite
a controlled company’s status, unlike for the other key committees, we
nevertheless believe that audit committees should consist solely of independent
directors. Regardless of a company’s controlled status, the interests of all
shareholders must be protected by ensuring the integrity and accuracy of the
company’s financial statements. Allowing affiliated directors to oversee the
preparation of financial reports could create an insurmountable conflict of
interest.
Board
Responsiveness at Multi-Class Companies
With
regard to companies where voting control is held through a multi-class share
structure with disproportionate voting and economic rights, we will carefully
examine the level of approval or disapproval attributed to unaffiliated
shareholders when determining whether board responsiveness is warranted. Where
vote results indicate that a majority of unaffiliated shareholders supported a
shareholder proposal or opposed a management proposal, we believe the board
should demonstrate an appropriate level of responsiveness.
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Significant
Shareholders
Where
an individual or entity holds between 20-50% of a company’s voting power, we
believe it is reasonable to allow proportional representation on the board and
committees (excluding the audit committee) based on the individual or entity’s
percentage of ownership.
Governance
Following an IPO, Spin-off, or Direct Listing
We
believe companies that have recently completed an initial public offering (IPO),
spin-off, or direct listing should be allowed adequate time to fully comply with
marketplace listing requirements and meet basic corporate governance standards.
Generally speaking, Glass Lewis refrains from making recommendations on the
basis of governance standards (e.g., board independence, committee membership
and structure, meeting attendance, etc.) during the one-year period following an
IPO.
However,
some cases warrant shareholder action against the board of a company that have
completed an IPO, spin-off, or direct listing within the past year. When
evaluating companies that have recently gone public, Glass Lewis will review the
terms of the applicable governing documents in order to determine whether
shareholder rights are being severely restricted indefinitely. We believe boards
that approve highly restrictive governing documents have demonstrated that they
may subvert shareholder interests following the IPO. In conducting this
evaluation, Glass Lewis will consider:
1.The
adoption of anti-takeover provisions such as a poison pill or classified
board
2.Supermajority
vote requirements to amend governing documents
3.The
presence of exclusive forum or fee-shifting provisions
4.Whether
shareholders can call special meetings or act by written consent
5.The
voting standard provided for the election of directors
6.The
ability of shareholders to remove directors without cause
7.The
presence of evergreen provisions in the company’s equity compensation
arrangements
8.The
presence of a multi-class share structure which does not afford common
shareholders voting power that is aligned with their economic
interest
In
cases where Glass Lewis determines that the board has approved overly
restrictive governing documents, we will generally recommend voting against
members of the governance committee. If there is no governance committee, or if
a portion of such committee members are not standing for election due to a
classified board structure, we will expand our recommendations to additional
director nominees, based on who is standing for election.
In
cases where, preceding an IPO, the board adopts a multi-class share structure
where voting rights are not aligned with economic interest, or an anti-takeover
provision, such as a poison pill or classified board, we will generally
recommend voting against all members of the board who served at the time of the
IPO if the board: (i) did not also commit to submitting these provisions to a
shareholder vote at the company’s first shareholder meeting following the IPO;
or (ii) did not provide for a reasonable sunset of these provisions (generally
three to five years in the case of a classified board or poison pill; or seven
years or less in the case of a multi-class share structure). In the case of a
multi-class share structure, if these provisions are put to a shareholder vote,
we will examine the level of approval or disapproval attributed to unaffiliated
shareholders when determining the vote outcome.
In
our view, adopting an anti-takeover device unfairly penalizes future
shareholders who (except for electing to buy or sell the stock) are unable to
weigh in on a matter that could potentially negatively
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impact
their ownership interest. This notion is strengthened when a board adopts a
classified board with an infinite duration or a poison pill with a five- to
ten-year term immediately prior to going public, thereby insulating management
for a substantial amount of time.
In
addition, shareholders should also be wary of companies that adopt supermajority
voting requirements before their IPO. Absent explicit provisions in the articles
or bylaws stipulating that certain policies will be phased out over a certain
period of time, long-term shareholders could find themselves in the predicament
of having to attain a supermajority vote to approve future proposals seeking to
eliminate such policies.
Governance
Following a Business Combination with a Special Purpose Acquisition
Company
The
business combination of a private company with a publicly traded special purpose
acquisition company (SPAC) facilitates the private entity becoming a publicly
traded corporation. Thus, the business combination represents the private
company’s de-facto IPO. We believe that some cases warrant shareholder action
against the board of a company that have completed a business combination with a
SPAC within the past year.
At
meetings where shareholders vote on the business combination of a SPAC with a
private company, shareholders are generally voting on a new corporate charter
for the post-combination company as a condition to approval of the business
combination. In many cases, shareholders are faced with the dilemma of having to
approve corporate charters that severely restrict shareholder rights to
facilitate the business combination. Therefore, when shareholders are required
to approve binding charters as a condition to approval of a business combination
with a SPAC, we believe shareholders should also be provided with advisory votes
on material charter amendments as a means to voice their opinions on such
restrictive governance provisions.
When
evaluating companies that have recently gone public via business combination
with a SPAC, Glass Lewis will review the terms of the applicable governing
documents to determine whether shareholder rights are being severely restricted
indefinitely and whether these restrictive provisions were put forth for a
shareholder vote on an advisory basis at the prior meeting where shareholders
voted on the business combination.
In
cases where, prior to the combined company becoming publicly traded, the board
adopts a multi-class share structure where voting rights are not aligned with
economic interest, or an anti-takeover provision, such as a poison pill or
classified board, we will generally recommend voting against all members of the
board who served at the time of the combined company becoming publicly traded if
the board: (i) did not also submit these provisions to a shareholder vote on an
advisory basis at the prior meeting where shareholders voted on the business
combination; (ii) did not also commit to submitting these provisions to a
shareholder vote at the company’s first shareholder meeting following the
company becoming publicly traded; or (iii) did not provide for a reasonable
sunset of these provisions (generally three to five years in the case of a
classified board or poison pill; or seven years or less in the case of a
multi-class share structure).
Consistent
with our view on IPOs, adopting an anti-takeover device unfairly penalizes
future shareholders who (except for electing to buy or sell the stock) are
unable to weigh in on a matter that could potentially negatively impact their
ownership interest.
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Dual-Listed
or Foreign-Incorporated Companies
For
companies that trade on multiple exchanges or are incorporated in foreign
jurisdictions but trade only in the U.S., we will apply the governance standard
most relevant in each situation. We will consider a number of factors in
determining which Glass Lewis country-specific policy to apply, including but
not limited to: (i) the corporate governance structure and features of the
company including whether the board structure is unique to a particular market;
(ii) the nature of the proposals; (iii) the location of the company’s primary
listing, if one can be determined; (iv) the regulatory/governance regime that
the board is reporting against; and (v) the availability and completeness of the
company’s SEC filings.
OTC-listed
Companies
Companies
trading on the OTC Bulletin Board are not considered “listed companies” under
SEC rules and therefore not subject to the same governance standards as listed
companies. However, we believe that more stringent corporate governance
standards should be applied to these companies given that their shares are still
publicly traded.
When
reviewing OTC companies, Glass Lewis will review the available disclosure
relating to the shareholder meeting to determine whether shareholders are able
to evaluate several key pieces of information, including: (i) the composition of
the board’s key committees, if any; (ii) the level of share ownership of company
insiders or directors; (iii) the board meeting attendance record of directors;
(iv) executive and non-employee director compensation; (v) related-party
transactions conducted during the past year; and (vi) the board’s leadership
structure and determinations regarding director independence.
We
are particularly concerned when company disclosure lacks any information
regarding the board’s key committees. We believe that committees of the board
are an essential tool for clarifying how the responsibilities of the board are
being delegated, and specifically for indicating which directors are accountable
for ensuring: (i) the independence and quality of directors, and the
transparency and integrity of the nominating process; (ii) compensation programs
that are fair and appropriate; (iii) proper oversight of the company’s
accounting, financial reporting, and internal and external audits; and (iv)
general adherence to principles of good corporate governance.
In
cases where shareholders are unable to identify which board members are
responsible for ensuring oversight of the above-mentioned responsibilities, we
may consider recommending against certain members of the board. Ordinarily, we
believe it is the responsibility of the corporate governance committee to
provide thorough disclosure of the board’s governance practices. In the absence
of such a committee, we believe it is appropriate to hold the board’s chair or,
if such individual is an executive of the company, the longest-serving
non-executive board member accountable.
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Mutual
Fund Boards
Mutual
funds, or investment companies, are structured differently from regular public
companies (i.e., operating companies). Typically, members of a fund’s advisor
are on the board and management takes on a different role from that of regular
public companies. Thus, we focus on a short list of requirements, although many
of our guidelines remain the same.
The
following mutual fund policies are similar to the policies for regular public
companies:
1.Size
of the board of directors
— The board should be made up of between five and twenty directors.
2.The
CFO on the board
— Neither the CFO of the fund nor the CFO of the fund’s registered investment
advisor should serve on the board.
3.Independence
of the audit committee
— The audit committee should consist solely of independent
directors.
4.Audit
committee financial expert
— At least one member of the audit committee should be designated as the audit
committee financial expert.
The
following differences from regular public companies apply at mutual funds:
1.Independence
of the board
— We believe that three-fourths of an investment company’s board should be made
up of independent directors. This is consistent with a proposed SEC rule on
investment company boards. The Investment Company Act requires 40% of the board
to be independent, but in 2001, the SEC amended the Exemptive Rules to require
that a majority of a mutual fund board be independent. In 2005, the SEC proposed
increasing the independence threshold to 75%. In 2006, a federal appeals court
ordered that this rule amendment be put back out for public comment, putting it
back into “proposed rule” status. Since mutual fund boards play a vital role in
overseeing the relationship between the fund and its investment manager, there
is greater need for independent oversight than there is for an operating company
board.
2.When
the auditor is not up for ratification
— We do not recommend voting against the audit committee if the auditor is not
up for ratification. Due to the different legal structure of an investment
company compared to an operating company, the auditor for the investment company
(i.e., mutual fund)
does not conduct the same level of financial review for
each investment company as for an
operating company.
3.Non-independent
chair
— The SEC has proposed that the chair of the fund board be independent. We agree
that the roles of a mutual fund’s chair and CEO should be separate. Although we
believe this would be best at all companies, we recommend voting against the
chair of an investment company’s nominating committee as well as the board chair
if the chair and CEO of a mutual fund are the same person and the fund does not
have an independent lead or presiding director. Seven former SEC commissioners
support the appointment of an independent chair and we agree with them that “an
independent board chair would be better able to create conditions favoring the
long-term interests of fund shareholders than would a chair who is an executive
of the advisor.” (See the comment letter sent to the SEC in support of the
proposed rule at http://www.sec.gov/news/studies/indchair.pdf.)
4.Multiple
funds overseen by the same director
— Unlike service on a public company board, mutual fund boards require much less
of a time commitment. Mutual fund directors typically serve on dozens of other
mutual fund boards, often within the same fund complex. The Investment Company
Institute’s (ICI) Overview of Fund Governance Practices, 1994-2012,
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indicates
that the average number of funds served by an independent director in 2012 was
53. Absent evidence that a specific director is hindered from being an effective
board member at a fund due to service on other funds’ boards, we refrain from
maintaining a cap on the number of outside mutual fund boards that we believe a
director can serve on.
Declassified
Boards
Glass
Lewis favors the repeal of staggered boards and the annual election of
directors. We believe staggered boards are less accountable to shareholders than
boards that are elected annually. Furthermore, we feel the annual election of
directors encourages board members to focus on shareholder
interests.
Empirical
studies have shown: (i) staggered boards are associated with a reduction in a
firm’s valuation; and (ii) in the context of hostile takeovers, staggered boards
operate as a takeover defense, which entrenches management, discourages
potential acquirers, and delivers a lower return to target
shareholders.
In
our view, there is no evidence to demonstrate that staggered boards improve
shareholder returns in a takeover context. Some research has indicated that
shareholders are worse off when a staggered board blocks a transaction; further,
when a staggered board negotiates a friendly transaction, no statistically
significant difference in premium occurs.34
Additional research found that charter-based staggered boards “reduce the market
value of a firm by 4% to 6% of its market capitalization” and that “staggered
boards bring about and not merely reflect this reduction in market
value.”35
A subsequent study reaffirmed that classified boards reduce shareholder value,
finding “that the ongoing process of dismantling staggered boards, encouraged by
institutional investors, could well contribute to increasing shareholder
wealth.”36
Shareholders
have increasingly come to agree with this view. In 2019, 90% of S&P 500
companies had declassified boards, up from 68% in 2009.37
Management proposals to declassify boards are approved with near unanimity and
shareholder proposals on the topic also receive strong shareholder support; in
2014, shareholder proposals requesting that companies declassify their boards
received average support of 84% (excluding abstentions and broker non-votes),
whereas in 1987, only 16.4% of votes cast favored board
declassification.38
Further, a growing number of companies, nearly half of all those targeted by
shareholder proposals requesting that all directors stand for election annually,
either recommended shareholders support the proposal or made no recommendation,
a departure from the more traditional management recommendation to vote against
shareholder proposals.
Given
our belief that declassified boards promote director accountability, the
empirical evidence suggesting staggered boards reduce a company’s value and the
established shareholder opposition to
34
Lucian Bebchuk, John Coates IV, Guhan Subramanian, “The Powerful Antitakeover
Force of Staggered Boards: Further Findings and a Reply to Symposium
Participants,” 55 Stanford Law Review 885-917 (2002).
35
Lucian Bebchuk, Alma Cohen, “The Costs of Entrenched Boards”
(2004).
36
Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, “Staggered Boards and the
Wealth of Shareholders: Evidence from a Natural Experiment,”
SSRN:
http://ssrn.com/abstract=1706806
(2010), p. 26.
37
Spencer Stuart Board Index, 2019, p. 15.
38
Lucian Bebchuk, John Coates IV and Guhan Subramanian, “The Powerful Antitakeover
Force of Staggered Boards: Theory, Evidence, and Policy”.
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such
a structure, Glass Lewis supports the declassification of boards and the annual
election of directors.
Board
Composition and Refreshment
Glass
Lewis strongly supports routine director evaluation, including independent
external reviews, and periodic board refreshment to foster the sharing of
diverse perspectives in the boardroom and the generation of new ideas and
business strategies. Further, we believe the board should evaluate the need for
changes to board composition based on an analysis of skills and experience
necessary for the company, as well as the results of
the director
evaluations, as opposed to relying solely on age or tenure limits. When
necessary, shareholders can address concerns regarding proper board composition
through director elections.
In
our view, a director’s experience can be a valuable asset to shareholders
because of the complex, critical issues that boards face. This said, we
recognize that in rare circumstances, a lack of refreshment can contribute to a
lack of board responsiveness to poor company performance.
We
will note as a potential concern instances where the average tenure of
non-executive directors is 10 years or more and no new directors have joined the
board in the past five years. While we will be highlighting this as a potential
area of concern, we will not be making voting recommendations strictly on this
basis, unless we have identified other governance or board performance
concerns.
On
occasion, age or term limits can be used as a means to remove a director for
boards that are unwilling to police their membership and enforce turnover. Some
shareholders support term limits as a way to force change in such circumstances.
While
we understand that age limits can aid board succession planning, the long-term
impact of age limits restricts experienced and potentially valuable board
members from service through an arbitrary means. We believe that shareholders
are better off monitoring the board’s overall composition, including the
diversity of its members, the alignment of the board’s areas of expertise with a
company’s strategy, the board’s approach to corporate governance, and its
stewardship of company performance, rather than imposing inflexible rules that
don’t necessarily correlate with returns or benefits for
shareholders.
However,
if a board adopts term/age limits, it should follow through and not waive such
limits. In cases where the board waives its term/age limits for two or more
consecutive years, Glass Lewis will generally recommend that shareholders vote
against the nominating and/or governance committee chair, unless a compelling
rationale is provided for why the board is proposing to waive this rule, such as
consummation of a corporate transaction.
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Board
Diversity
Glass
Lewis recognizes the importance of ensuring that the board is composed of
directors who have a diversity of skills, thought and experience, as such
diversity benefits companies by providing a broad range of perspectives and
insights. Glass Lewis closely reviews the composition of the board for
representation of diverse director candidates. Beginning in 2022, we will
generally recommend voting against the nominating committee chair of a board
that has fewer than two gender diverse directors, or the entire nominating
committee of a board with no gender diverse directors, at companies within the
Russell 3000 index. For companies outside the Russell 3000 index, and all boards
with six or fewer total directors, our existing policy requiring a minimum of
one gender diverse director will remain in place.
Beginning
with shareholder meetings held after January 1, 2023, we will transition from a
fixed numerical approach to a percentage-based approach and will generally
recommend against the chair of the nominating committee of a board that is not
at least 30 percent gender diverse at companies within the Russell 3000
index.
We
may extend our gender diversity recommendations to additional members of the
nominating committee in cases where the committee chair is not standing for
election due to a classified board, or based on other factors, including the
company’s size and industry, applicable laws in its state of headquarters, and
its overall governance profile. Additionally, when making these voting
recommendations, we will carefully review a company’s disclosure of its
diversity considerations and may refrain from recommending that shareholders
vote against directors when boards have provided a sufficient rationale or plan
to address the lack of diversity on the board.
State
Laws on Gender Diversity
Several
states have begun to encourage board diversity through legislation. For example,
companies headquartered in California are now subject to mandatory board
composition requirements. Other states have enacted or are considering
legislation that encourages companies to diversify their boards but does not
mandate board composition requirements. Furthermore, several states have enacted
or are considering legislation that mandates certain disclosure or reporting
requirements in filings made with each respective state annually.
Glass
Lewis will recommend in accordance with mandatory board composition requirements
set forth in applicable state laws when they come into effect. We will generally
refrain from recommending against directors when applicable state laws do not
mandate board composition requirements, are non-binding, or solely impose
disclosure or reporting requirements.
State
Laws on Underrepresented Community Diversity
Several
states have also begun to encourage board diversity beyond gender through
legislation. For example, companies headquartered in California are required to
have one director from an “underrepresented community” on their board by the end
of 2021 (defined as an individual who self-identifies as Black, African
American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native
Hawaiian, or Alaska Native, or who self-identifies as gay, lesbian, bisexual, or
transgender). And, by the end of 2022, California companies must have at least
two such individuals on boards of five to eight members, and three such
individuals on boards of nine or more members.
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Accordingly,
for meetings held after December 31, 2021, if a company headquartered in
California does not have at least one director from an underrepresented
community on its board or does not provide adequate disclosure to make this
determination, we will generally recommend voting against the chair of the
nominating committee.
Disclosure
of Director Diversity and Skills
Because
company disclosure is critical when measuring the mix of diverse attributes and
skills of directors, Glass Lewis assesses the quality of such disclosure in
companies’ proxy statements. Accordingly, we reflect how a company’s proxy
statement presents: (i) the board’s current percentage of racial/ethnic
diversity; (ii) whether the board’s definition of diversity explicitly includes
gender and/or race/ethnicity; (iii) whether the board has adopted a policy
requiring women and minorities to be included in the initial pool of candidates
when selecting new director nominees (aka “Rooney Rule”); and (iv) board skills
disclosure. Such ratings will help inform our assessment of a company’s overall
governance and may be a contributing factor in our recommendations when
additional board-related concerns have been identified.
Beginning
in 2022, for companies in the S&P 500 index with particularly poor
disclosure (i.e., those failing to provide any disclosure in each of the above
categories), we may recommend voting against the chair of the nominating and/or
governance committee. Beginning in 2023, when companies in the S&P 500 index
have not provided any disclosure of individual or aggregate racial/ethnic
minority board demographic information, we will generally recommend voting
against the chair of the nominating and/or governance committee.
Stock
Exchange Diversity Disclosure Requirements
On
August 6, 2021, the U.S. Securities and Exchange Commission (SEC) approved new
listing rules regarding board diversity and disclosure for Nasdaq-listed
companies. Beginning in 2022, companies listed on the Nasdaq stock exchange will
be required to disclose certain board diversity statistics annually in a
standardized format in the proxy statement or on the company's website.
Nasdaq-listed companies are required to provide this disclosure by the later of
(i) August 8, 2022, or (ii) the date the company files its proxy statement for
its 2022 annual meeting. Accordingly, for annual meetings held after August 8,
2022, of applicable Nasdaq-listed companies, we will recommend voting against
the chair of the governance committee when the required disclosure has not been
provided.
Proxy
Access
In
lieu of running their own contested election, proxy access would not only allow
certain shareholders to nominate directors to company boards but the shareholder
nominees would be included on the company’s ballot, significantly enhancing the
ability of shareholders to play a meaningful role in selecting their
representatives. Glass Lewis generally supports affording shareholders the right
to nominate director candidates to management’s proxy as a means to ensure that
significant, long-term shareholders have an ability to nominate candidates to
the board.
Companies
generally seek shareholder approval to amend company bylaws to adopt proxy
access in response to shareholder engagement or pressure, usually in the form of
a shareholder proposal requesting proxy access, although some companies may
adopt some elements of proxy access without
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prompting.
Glass Lewis considers several factors when evaluating whether to support
proposals for companies to adopt proxy access including the specified minimum
ownership and holding requirement for shareholders to nominate one or more
directors, as well as company size, performance and responsiveness to
shareholders.
For
a discussion of recent regulatory events in this area, along with a detailed
overview of the Glass Lewis approach to shareholder proposals regarding Proxy
Access, refer to Glass Lewis’ Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives,
available at www.glasslewis.com.
Majority
Vote for Election of Directors
Majority
voting for the election of directors is fast becoming the de facto standard in
corporate board elections. In our view, the majority voting proposals are an
effort to make the case for shareholder impact on director elections on a
company-specific basis.
While
this proposal would not give shareholders the opportunity to nominate directors
or lead to elections where shareholders have a choice among director candidates,
if implemented, the proposal would allow shareholders to have a voice in
determining whether the nominees proposed by the board should actually serve as
the overseer-representatives of shareholders in the boardroom. We believe this
would be a favorable outcome for shareholders.
The
number of shareholder proposals requesting that companies adopt a majority
voting standard has declined significantly during the past decade, largely as a
result of widespread adoption of majority voting or director resignation
policies at U.S. companies. In 2019, 89% of the S&P 500 Index had
implemented a resignation policy for directors failing to receive majority
shareholder support, compared to 65% in 2009.39
The
Plurality Vote Standard
Today,
most U.S. companies still elect directors by a plurality vote standard. Under
that standard, if one shareholder holding only one share votes in favor of a
nominee (including that director, if the director is a shareholder), that
nominee “wins” the election and assumes a seat on the board. The common concern
among companies with a plurality voting standard is the possibility that one or
more directors would not receive a majority of votes, resulting in “failed
elections.”
Advantages
of a Majority Vote Standard
If
a majority vote standard were implemented, a nominee would have to receive the
support of a majority of the shares voted in order to be elected. Thus,
shareholders could collectively vote to reject a director they believe will not
pursue their best interests. Given that so few directors (less than 100 a year)
do not receive majority support from shareholders, we think that a majority vote
standard is reasonable since it will neither result in many failed director
elections nor reduce the willingness of qualified, shareholder-focused directors
to serve in the future. Further, most directors who fail to receive a majority
shareholder vote in favor of their election do not step down, underscoring the
need for true majority voting.
39
Spencer Stuart Board Index, 2019, p. 15.
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We
believe that a majority vote standard will likely lead to more attentive
directors. Although shareholders only rarely fail to support directors, the
occasional majority vote against a director’s election will likely deter the
election of directors with a record of ignoring shareholder interests. Glass
Lewis will therefore generally support proposals calling for the election of
directors by a majority vote, excepting contested director elections.
In
response to the high level of support majority voting has garnered, many
companies have voluntarily taken steps to implement majority voting or modified
approaches to majority voting. These steps range from a modified approach
requiring directors that receive a majority of withheld votes to resign (i.e., a
resignation policy) to actually requiring a majority vote of outstanding shares
to elect directors.
We
feel that the modified approach does not go far enough because requiring a
director to resign is not the same as requiring a majority vote to elect a
director and does not allow shareholders a definitive voice in the election
process. Further, under the modified approach, the corporate governance
committee could reject a resignation and, even if it accepts the resignation,
the corporate governance committee decides on the director’s replacement. And
since the modified approach is usually adopted as a policy by the board or a
board committee, it could be altered by the same board or committee at any
time.
Conflicting
and Excluded Proposals
SEC
Rule 14a-8(i)(9) allows companies to exclude shareholder proposals “if the
proposal directly conflicts with one of the company’s own proposals to be
submitted to shareholders at the same meeting.” On October 22, 2015, the SEC
issued Staff Legal Bulletin No. 14H (SLB 14H) clarifying its rule concerning the
exclusion of certain shareholder proposals when similar items are also on the
ballot. SLB 14H increased the burden on companies to prove to SEC staff that a
conflict exists; therefore, many companies still chose to place management
proposals alongside similar shareholder proposals in many cases.
During
the 2018 proxy season, a new trend in the SEC’s interpretation of this rule
emerged. Upon submission of shareholder proposals requesting that companies
adopt a lower special meeting threshold, several companies petitioned the SEC
for no-action relief under the premise that the shareholder proposals conflicted
with management’s own special meeting proposals, even though the management
proposals set a higher threshold than those requested by the proponent.
No-action relief was granted to these companies; however, the SEC stipulated
that the companies must state in the rationale for the management proposals that
a vote in favor of management’s proposal was tantamount to a vote against the
adoption of a lower special meeting threshold. In certain instances, shareholder
proposals to lower an existing special meeting right threshold were excluded on
the basis that they conflicted with management proposals seeking to ratify the
existing special meeting rights. We find the exclusion of these shareholder
proposals to be especially problematic as, in these instances, shareholders are
not offered any enhanced shareholder right, nor would the approval (or
rejection) of the ratification proposal initiate any type of meaningful change
to shareholders’ rights.
In
instances where companies have excluded shareholder proposals, such as those
instances where special meeting shareholder proposals are excluded as a result
of “conflicting” management proposals, Glass Lewis will take a case-by-case
approach, taking into account the following issues:
•The
threshold proposed by the shareholder resolution;
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•The
threshold proposed or established by management and the attendant rationale for
the threshold;
•Whether
management’s proposal is seeking to ratify an existing special meeting right or
adopt a bylaw that would establish a special meeting right; and
•The
company’s overall governance profile, including its overall responsiveness to
and engagement with shareholders.
Glass
Lewis generally favors a 10-15% special meeting right. Accordingly, Glass Lewis
will generally recommend voting for management or shareholder proposals that
fall within this range. When faced with conflicting proposals, Glass Lewis will
generally recommend in favor of the lower special meeting right and will
recommend voting against the proposal with the higher threshold. However, in
instances where there are conflicting management and shareholder proposals and a
company has not established a special meeting right, Glass Lewis may recommend
that shareholders vote in favor of the shareholder proposal and that they
abstain from a management-proposed bylaw amendment seeking to establish a
special meeting right. We believe that an abstention is appropriate in this
instance in order to ensure that shareholders are sending a clear signal
regarding their preference for the appropriate threshold for a special meeting
right, while not directly opposing the establishment of such a right.
In
cases where the company excludes a shareholder proposal seeking a reduced
special meeting right by means of ratifying a management proposal that is
materially different from the shareholder proposal, we will generally recommend
voting against the chair or members of the governance committee.
In
other instances of conflicting management and shareholder proposals, Glass Lewis
will consider the following:
•The
nature of the underlying issue;
•The
benefit to shareholders of implementing the proposal;
•The
materiality of the differences between the terms of the shareholder proposal and
management proposal;
•The
context of a company’s shareholder base, corporate structure and other relevant
circumstances; and
•A
company’s overall governance profile and, specifically, its responsiveness to
shareholders as evidenced by a company’s response to previous shareholder
proposals and its adoption of progressive shareholder rights
provisions.
In
recent years, we have seen the dynamic nature of the considerations given by the
SEC when determining whether companies may exclude certain shareholder
proposals. We understand that not all shareholder proposals serve the long-term
interests of shareholders, and value and respect the limitations placed on
shareholder proponents, as certain shareholder proposals can unduly burden
companies. However, Glass Lewis believes that shareholders should be able to
vote on issues of material importance.
We
view the shareholder proposal process as an important part of advancing
shareholder rights and encouraging responsible and financially sustainable
business practices. While recognizing that certain proposals cross the line
between the purview of shareholders and that of the board, we generally believe
that companies should not limit investors’ ability to vote on shareholder
proposals that advance certain rights or promote beneficial disclosure.
Accordingly, Glass Lewis will make note of instances where a company has
successfully petitioned the SEC to exclude shareholder proposals. If after
review
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we
believe that the exclusion of a shareholder proposal is detrimental to
shareholders, we may, in certain very limited circumstances, recommend against
members of the governance committee.
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Transparency
and Integrity in Financial Reporting
Auditor
Ratification
The
auditor’s role as gatekeeper is crucial in ensuring the integrity and
transparency of the financial information necessary for protecting shareholder
value. Shareholders rely on the auditor to ask tough questions and to do a
thorough analysis of a company’s books to ensure that the information provided
to shareholders is complete, accurate, fair, and that it is a reasonable
representation of a company’s financial position. The only way shareholders can
make rational investment decisions is if the market is equipped with accurate
information about a company’s fiscal health. As stated in the October 6, 2008
Final Report of the Advisory Committee on the Auditing Profession to the U.S.
Department of the Treasury:
“The
auditor is expected to offer critical and objective judgment on the financial
matters under consideration, and actual and perceived absence of conflicts is
critical to that expectation. The Committee believes that auditors, investors,
public companies, and other market participants must understand the independence
requirements and their objectives, and that auditors must adopt a mindset of
skepticism when facing situations that may compromise their independence.”
As
such, shareholders should demand an objective, competent and diligent auditor
who performs at or above professional standards at every company in which the
investors hold an interest. Like directors, auditors should be free from
conflicts of interest and should avoid situations requiring a choice between the
auditor’s interests and the public’s interests. Almost without exception,
shareholders should be able to annually review an auditor’s performance and to
annually ratify a board’s auditor selection. Moreover, in October 2008, the
Advisory Committee on the Auditing Profession went even further, and recommended
that “to further enhance audit committee oversight and auditor accountability
... disclosure in the company proxy statement regarding shareholder ratification
[should] include the name(s) of the senior auditing partner(s) staffed on the
engagement.”40
On
August 16, 2011, the PCAOB issued a Concept Release seeking public comment on
ways that auditor independence, objectivity and professional skepticism could be
enhanced, with a specific emphasis on mandatory audit firm rotation. The PCAOB
convened several public roundtable meetings during 2012 to further discuss such
matters. Glass Lewis believes auditor rotation can ensure both the independence
of the auditor and the integrity of the audit; we will typically recommend
supporting proposals to require auditor rotation when the proposal uses a
reasonable period of time (usually not less than 5-7 years), particularly at
companies with a history of accounting problems.
On
June 1, 2017, the PCAOB adopted new standards to enhance auditor reports by
providing additional important information to investors. For companies with
fiscal year end dates on or after December 15, 2017, reports were required to
include the year in which the auditor began serving consecutively as the
company’s auditor. For large accelerated filers with fiscal year ends of June
30, 2019 or later, and for all other companies with fiscal year ends of December
15, 2020 or later,
40
“Final Report of the Advisory Committee on the Auditing Profession to the U.S.
Department of the Treasury.” p. VIII:20, October 6, 2008.
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communication
of critical audit matters (CAMs) will also be required. CAMs are matters that
have been communicated to the audit committee, are related to accounts or
disclosures that are material to the financial statements, and involve
especially challenging, subjective, or complex auditor judgment.
Glass
Lewis believes the additional reporting requirements are beneficial for
investors. The additional disclosures can provide investors with information
that is critical to making an informed judgment about an auditor’s independence
and performance. Furthermore, we believe the additional requirements are an
important step toward enhancing the relevance and usefulness of auditor reports,
which too often are seen as boilerplate compliance documents that lack the
relevant details to provide meaningful insight into a particular
audit.
Voting
Recommendations on Auditor Ratification
We
generally support management’s choice of auditor except when we believe the
auditor’s independence or audit integrity has been compromised. Where a board
has not allowed shareholders to review and ratify an auditor, we typically
recommend voting against the audit committee chair. When there have been
material restatements of annual financial statements or material weaknesses in
internal controls, we usually recommend voting against the entire audit
committee.
Reasons
why we may not recommend ratification of an auditor include:
1.When
audit fees plus audit-related fees total less than the tax fees and/or other
non-audit fees.
2.Recent
material restatements of annual financial statements, including those resulting
in the reporting of material weaknesses in internal controls and including late
filings by the company where the auditor bears some responsibility for the
restatement or late filing.41
3.When
the auditor performs prohibited services such as tax-shelter work, tax services
for the CEO or CFO, or contingent-fee work, such as a fee based on a percentage
of economic benefit to the company.
4.When
audit fees are excessively low, especially when compared with other companies in
the same industry.
5.When
the company has aggressive accounting policies.
6.When
the company has poor disclosure or lack of transparency in its financial
statements.
7.Where
the auditor limited its liability through its contract with the company or the
audit contract requires the corporation to use alternative dispute resolution
procedures without adequate justification.
8.We
also look for other relationships or concerns with the auditor that might
suggest a conflict between the auditor’s interests and shareholder
interests.
9.In
determining whether shareholders would benefit from rotating the company’s
auditor, where relevant we will consider factors that may call into question an
auditor’s effectiveness, including auditor tenure, a pattern of inaccurate
audits, and any ongoing litigation or significant controversies. When Glass
Lewis considers ongoing litigation and significant controversies, it is mindful
that such matters may involve unadjudicated allegations. Glass Lewis does not
assume the truth of such allegations or that the law has been violated. Instead,
Glass Lewis focuses more broadly on whether, under the particular facts and
circumstances presented, the nature
41
An auditor does not audit interim financial statements. Thus, we generally do
not believe that an auditor should be opposed due to a restatement of interim
financial statements unless the nature of the misstatement is clear from a
reading of the incorrect financial statements.
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and
number of such lawsuits or other significant controversies reflects on the risk
profile of the company or suggests that appropriate risk mitigation measures may
be warranted.”
Pension
Accounting Issues
A
pension accounting question occasionally raised in proxy proposals is what
effect, if any, projected returns on employee pension assets should have on a
company’s net income. This issue often arises in the executive-compensation
context in a discussion of the extent to which pension accounting should be
reflected in business performance for purposes of calculating payments to
executives.
Glass
Lewis believes that pension credits should not be included in measuring income
that is used to award performance-based compensation. Because many of the
assumptions used in accounting for retirement plans are subject to the company’s
discretion, management would have an obvious conflict of interest if pay were
tied to pension income. In our view, projected income from pensions does not
truly reflect a company’s performance.
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The
Link Between Compensation and Performance
Glass
Lewis carefully reviews the compensation awarded to senior executives, as we
believe that this is an important area in which the board’s priorities are
revealed. Glass Lewis strongly believes executive compensation should be linked
directly with the performance of the business the executive is charged with
managing. We believe the most effective compensation arrangements provide for an
appropriate mix of performance-based short- and long-term incentives in addition
to fixed pay elements while promoting a prudent and sustainable level of
risk-taking.
Glass
Lewis believes that comprehensive, timely and transparent disclosure of
executive pay is critical to allowing shareholders to evaluate the extent to
which pay is aligned with company performance. When reviewing proxy materials,
Glass Lewis examines whether the company discloses the performance metrics used
to determine executive compensation. We recognize performance metrics must
necessarily vary depending on the company and industry, among other factors, and
may include a wide variety of financial measures as well as industry-specific
performance indicators. However, we believe companies should disclose why the
specific performance metrics were selected and how the actions they are designed
to incentivize will lead to better corporate performance.
Moreover,
it is rarely in shareholders’ interests to disclose competitive data about
individual salaries below the senior executive level. Such disclosure could
create internal personnel discord that would be counterproductive for the
company and its shareholders. While we favor full disclosure for senior
executives and we view pay disclosure at the aggregate level (e.g., the number
of employees being paid over a certain amount or in certain categories) as
potentially useful, we do not believe shareholders need or will benefit from
detailed reports about individual management employees other than the most
senior executives.
Advisory
Vote on Executive Compensation
(Say-on-Pay)
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
required companies to hold an advisory vote on executive compensation at the
first shareholder meeting that occurs six months after enactment of the bill
(January 21, 2011).
This
practice of allowing shareholders a non-binding vote on a company’s compensation
report is standard practice in many non-U.S. countries, and has been a
requirement for most companies in the United Kingdom since 2003 and in Australia
since 2005. Although say-on-pay proposals are non-binding, a high level of
“against” or “abstain” votes indicates substantial shareholder concern about
a company’s compensation policies
and procedures.
Given
the complexity of most companies’ compensation programs, Glass Lewis applies a
highly nuanced approach when analyzing advisory votes on executive compensation.
We review each company’s compensation on a case-by-case basis, recognizing that
each company must be examined
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in
the context of industry, size, maturity, performance, financial condition, its
historic pay for performance practices, and any other relevant internal or
external factors.
We
believe that each company should design and apply specific compensation policies
and practices that are appropriate to the circumstances of the company and, in
particular, will attract and retain competent executives and other staff, while
motivating them to grow the company’s long-term shareholder value.
Where
we find those specific policies and practices serve to reasonably align
compensation with performance, and such practices are adequately disclosed,
Glass Lewis will recommend supporting the company’s approach. If, however, those
specific policies and practices fail to demonstrably link compensation with
performance, Glass Lewis will generally recommend voting against the say-on-pay
proposal.
Glass
Lewis reviews say-on-pay proposals on both a qualitative basis and a
quantitative basis, with a focus on several main areas:
•The
overall design and structure of the company’s executive compensation programs
including selection and challenging nature of performance metrics;
•The
implementation and effectiveness of the company’s executive compensation
programs including pay mix and use of performance metrics in determining pay
levels;
•The
quality and content of the company’s disclosure;
•The
quantum paid to executives; and
•The
link between compensation and performance as indicated by the company’s current
and past pay-for-performance grades.
We
also review any significant changes or modifications, including post fiscal
year-end changes and one-time awards, particularly where the changes touch upon
issues that are material to Glass Lewis recommendations.
Say-on-Pay
Voting Recommendations
In
cases where we find deficiencies in a company’s compensation program’s design,
implementation or management, we will recommend that shareholders vote against
the say-on-pay proposal. Generally such instances include evidence of a pattern
of poor pay-for-performance practices (i.e., deficient or failing
pay-for-performance grades), unclear or questionable disclosure regarding the
overall compensation structure (e.g., limited information regarding benchmarking
processes, limited rationale for bonus performance metrics and targets, etc.),
questionable adjustments to certain aspects of the overall compensation
structure (e.g., limited rationale for significant changes to performance
targets or metrics, the payout of guaranteed bonuses or sizable retention
grants, etc.), and/or other egregious compensation practices.
Although
not an exhaustive list, the following issues when weighed together may cause
Glass Lewis to recommend voting against a say-on-pay vote:
•Inappropriate
or outsized self-selected peer groups and/or benchmarking issues such as
compensation targets set well above the median without adequate
justification;
•Egregious
or excessive bonuses, equity awards or severance payments, including golden
handshakes and golden parachutes;
•Insufficient
response to low shareholder support;
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•Problematic
contractual payments, such as guaranteed bonuses;
•Insufficiently
challenging performance targets and/or high potential payout
opportunities;
•Performance
targets lowered without justification;
•Discretionary
bonuses paid when short- or long-term incentive plan targets were not
met;
•Executive
pay high relative to peers not justified by outstanding company performance;
and
•The
terms of the long-term incentive plans are inappropriate (please see “Long-Term
Incentives”).
The
aforementioned issues may also influence Glass Lewis’ assessment of the
structure of a company’s compensation program. We evaluate structure on a “Good,
Fair, Poor” rating scale whereby a “Good” rating represents a compensation
program with little to no concerns, a “Fair” rating represents a compensation
program with some concerns and a “Poor” rating represents a compensation program
that deviates significantly from best practice or contains one or more egregious
compensation practices.
We
believe that it is important for companies to provide investors with clear and
complete disclosure of all the significant terms of compensation arrangements.
Similar to structure, we evaluate disclosure on a “Good, Fair, Poor” rating
scale whereby a “Good” rating represents a thorough discussion of all elements
of compensation, a “Fair” rating represents an adequate discussion of all or
most elements of compensation and a “Poor” rating represents an incomplete or
absent discussion of compensation. In instances where a company has simply
failed to provide sufficient disclosure of its policies, we may recommend
shareholders vote against this proposal solely on this basis, regardless of the
appropriateness of compensation levels.
In
general, most companies will fall within the “Fair” range for both structure and
disclosure, and Glass Lewis largely uses the “Good” and “Poor” ratings to
highlight outliers.
Where
we identify egregious compensation practices, we may also recommend voting
against the compensation committee based on the practices or actions of its
members during the year. Such practices may include: approving large one-off
payments, the inappropriate, unjustified use of discretion, or sustained poor
pay for performance practices. (Refer to the section on "Compensation Committee
Performance" for more information.)
Company
Responsiveness
For
companies that receive a significant level of shareholder opposition (20% or
greater) to the say-on-pay proposal at the previous annual meeting, we believe
the board should demonstrate some level of engagement and responsiveness to the
shareholder concerns behind the disapproval, particularly in response to
shareholder feedback.
While
we recognize that sweeping changes cannot be made to a compensation program
without due consideration, and that often a majority of shareholders may have
voted in favor of the proposal, given that the average approval rate for
say-on-pay proposals is about 90%, we believe the compensation committee should
provide some level of response to a significant vote against. In general, our
expectations regarding the minimum appropriate levels of responsiveness will
correspond with the level of shareholder opposition, as expressed both through
the magnitude of opposition in a single year, and through the persistence of
shareholder disapproval over time.
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Responses
we consider appropriate include engaging with large shareholders to identify
their concerns, and, where reasonable, implementing changes that directly
address those concerns within the company’s compensation program. In the absence
of any evidence that the board is actively engaging shareholders on these issues
and responding accordingly, we may recommend holding compensation committee
members accountable for failing to adequately respond to shareholder opposition.
Regarding such recommendations, careful consideration will be given to the level
of shareholder protest and the severity and history of
compensation.
Pay
for Performance
Glass
Lewis believes an integral part of a well-structured compensation package is a
successful link between pay and performance. Our proprietary pay-for-performance
model was developed to better evaluate the link between pay and performance.
Generally, compensation and performance are measured against a peer group of
appropriate companies that may overlap, to a certain extent, with a company’s
self-disclosed peers. This quantitative analysis provides a consistent framework
and historical context for our clients to determine how well companies link
executive compensation to relative performance. Companies that demonstrate a
weaker link are more likely to receive a negative recommendation; however, other
qualitative factors such as overall incentive structure, significant forthcoming
changes to the compensation program or reasonable long-term payout levels may
mitigate our concerns to a certain extent.
While
we assign companies a letter grade of A, B, C, D or F based on the alignment
between pay and performance, the grades derived from the Glass Lewis
pay-for-performance analysis do not follow the traditional U.S. school letter
grade system. Rather, the grades are generally interpreted as
follows:
Grade
of A:
The company’s percentile rank for pay is significantly less than its percentile
rank for performance
Grade
of B:
The company’s percentile rank for pay is moderately less than its percentile
rank for performance
Grade
of C:
The company’s percentile rank for pay is approximately aligned with its
percentile rank for
performance
Grade
of D:
The company’s percentile rank for pay is higher than its percentile rank for
performance
Grade
of F:
The company’s percentile rank for pay is significantly higher than its
percentile rank for performance
For
the avoidance of confusion, the above grades encompass the relationship between
a company’s percentile rank for pay and its percentile rank in performance.
Separately, a specific comparison between the company’s executive pay and its
peers’ executive pay levels is discussed in the analysis for additional insight
into the grade. Likewise, a specific comparison between the company’s
performance and its peers’ performance is reflected in the analysis for further
context.
We
also use this analysis to inform our voting decisions on say-on-pay proposals.
As such, if a company receives a “D” or “F” from our proprietary model, we are
more likely to recommend that shareholders vote against the say-on-pay proposal.
However, other qualitative factors such as an effective overall incentive
structure, the relevance of selected performance metrics, significant
forthcoming enhancements or reasonable long-term payout levels may give us cause
to recommend in favor of a proposal even when we have identified a disconnect
between pay and performance.
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In
determining the peer groups used in our A-F pay-for-performance letter grades,
Glass Lewis utilizes a proprietary methodology that considers both country-based
and sector-based peers, along with each company’s network of self-disclosed
peers. Each component is considered on a weighted basis and is subject to
size-based ranking and screening. The peer groups used are provided to Glass
Lewis by Diligent Intel based on Glass Lewis’ methodology and using Diligent
Intel’s data.
Selecting
an appropriate peer group to analyze a company’s compensation program is a
subjective determination, requiring significant judgment and on which there is
not a “correct” answer. Since the peer group used is based on an independent,
proprietary technique, it will often differ from the one used by the company
which, in turn, will affect the resulting analyses. While Glass Lewis believes
that the independent, rigorous methodology it uses provides a valuable
perspective on the company’s compensation program, the company’s self-selected
peer group is also presented in the Proxy Paper for comparative
purposes.
Short-Term
Incentives
A
short-term bonus or incentive (STI) should be demonstrably tied to performance.
Whenever possible, we believe a mix of corporate and individual performance
measures is appropriate. We would normally expect performance measures for STIs
to be based on company-wide or divisional financial measures as well as
non-financial factors such as those related to safety, environmental issues, and
customer satisfaction. While we recognize that companies operating in different
sectors or markets may seek to utilize a wide range of metrics, we expect such
measures to be appropriately tied to a company’s business drivers.
Further,
the threshold, target and maximum performance goals and corresponding payout
levels that can be achieved under STI plans should be disclosed. Shareholders
should expect stretching performance targets for the maximum award to be
achieved. Any increase in the potential target and maximum award should be
clearly justified to shareholders, as should any decrease in target and maximum
performance levels from the previous year.
Glass
Lewis recognizes that disclosure of some measures or performance targets may
include commercially confidential information. Therefore, we believe it may be
reasonable to exclude such information in some cases as long as the company
provides sufficient justification for non-disclosure. However, where a
short-term bonus has been paid, companies should disclose the extent to which
performance has been achieved against relevant targets, including disclosure of
the actual target achieved.
Where
management has received significant short-term incentive payments but overall
performance and/or the shareholder experience over the measurement year prima
facie appears to be poor or negative, we believe the company should provide a
clear explanation of why these significant short-term payments were made. We
also believe any significant changes to the program structure should be
accompanied by rationalizing disclosure. Further, where a company has applied
upward discretion, which includes lowering goals mid-year, increasing calculated
payouts or retroactively pro-rating performance periods, we expect a robust
discussion of why the decision was necessary. In addition, we believe that where
companies use non-GAAP or bespoke metrics, clear reconciliations between these
figures and GAAP figures in audited financial statement should be provided.
Adjustments to GAAP figures may be considered in Glass Lewis’ assessment of the
effectiveness of the incentive at tying executive pay with
performance.
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Given
the pervasiveness of non-formulaic plans in this market, we do not generally
recommend against a pay program on this basis alone. If a company has chosen to
rely primarily on a subjective assessment or the board’s discretion in
determining short-term bonuses, we believe that the proxy statement should
provide a meaningful discussion of the board’s rationale in determining the
bonuses paid as well as a rationale for the use of a non-formulaic mechanism.
Particularly where the aforementioned disclosures are substantial and
satisfactory, such a structure will not provoke serious concern in our analysis
on its own. However, in conjunction with other significant issues in a program’s
design or operation, such as a disconnect between pay and performance, the
absence of a cap on payouts, or a lack of performance-based long-term awards,
the use of a non-formulaic bonus may help drive a negative
recommendation.
Long-Term
Incentives
Glass
Lewis recognizes the value of equity-based incentive programs, which are often
the primary long-term incentive for executives. When used appropriately, they
can provide a vehicle for linking an executive’s pay to company performance,
thereby aligning their interests with those of shareholders. In addition,
equity-based compensation can be an effective way to attract, retain and
motivate key employees.
There
are certain elements that Glass Lewis believes are common to most
well-structured long-term incentive (LTI) plans. These include:
•No
re-testing or lowering of performance conditions;
•Performance
metrics that cannot be easily manipulated by management;
•Two
or more performance metrics;
•At
least one relative performance metric that compares the company’s performance to
a relevant peer group or index;
•Performance
periods of at least three years;
•Stretching
metrics that incentivize executives to strive for outstanding performance while
not encouraging excessive risk-taking;
•Individual
award limits expressed as a percentage of base salary; and
•Equity
granting practices that are clearly disclosed.
In
evaluating long-term incentive grants, Glass Lewis generally believes that a
significant portion of the grant should consist of performance-based awards,
putting a portion of executive compensation at-risk and demonstrably linked to
the performance of the company. While we will consistently raise concern with
programs that do not meet this criterion, we may refrain from a negative
recommendation in the absence of other significant issues with the program’s
design or operation. However, in cases where performance-based awards are
significantly rolled back or eliminated from a company’s long-term incentive
plan, such decisions will generally be viewed negatively outside of exceptional
circumstances, and may lead to a recommendation against the proposal.
Performance
measures should be carefully selected and should relate to the specific
business/industry in which the company operates and, especially, to the key
value drivers of the company’s business. As with short-term incentive plans, the
basis for any adjustments to metrics or results should be clearly explained, as
should the company’s judgment on the use of discretion and any significant
changes to the performance program structure.
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While
cognizant of the inherent complexity of certain performance metrics, Glass Lewis
generally believes that measuring a company’s performance with multiple metrics
serves to provide a more complete picture of the company’s performance than a
single metric. Further, reliance on just one metric may focus too much
management attention on a single target and is therefore more susceptible to
manipulation. When utilized for relative measurements, external benchmarks such
as a sector index or peer group should be disclosed and transparent. The
rationale behind the selection of a specific index or peer group should also be
disclosed. Internal performance benchmarks should also be disclosed and
transparent, unless a cogent case for confidentiality is made and fully
explained. Similarly, actual performance and vesting levels for previous grants
earned during the fiscal year should be disclosed.
We
also believe shareholders should evaluate the relative success of a company’s
compensation programs, particularly with regard to existing equity-based
incentive plans, in linking pay and performance when evaluating potential
changes to LTI plans and determining the impact of additional stock awards. We
will therefore review the company’s pay-for-performance grade (see below for
more information) and specifically the proportion of total compensation that is
stock-based.
Grants
of Front-Loaded Awards
Many
U.S. companies have chosen to provide large grants, usually in the form of
equity awards, that are intended to serve as compensation for multiple years.
This practice, often called front-loading, is taken up either in the regular
course of business or as a response to specific business conditions and with a
predetermined objective. We believe shareholders should generally be wary of
this approach, and we accordingly weigh these grants with particular
scrutiny.
While
the use of front-loaded awards is intended to lock-in executive service and
incentives, the same rigidity also raises the risk of effectively tying the
hands of the compensation committee. As compared with a more responsive annual
granting schedule program, front-loaded awards may preclude improvements or
changes to reflect evolving business strategies. The considerable emphasis on a
single grant can place intense pressures on every facet of its design,
amplifying any potential perverse incentives and creating greater room for
unintended consequences. In particular, provisions around changes of control or
separations of service must ensure that executives do not receive excessive
payouts that do not reflect shareholder experience or company
performance.
We
consider a company’s rationale for granting awards under this structure and also
expect any front-loaded awards to include a firm commitment not to grant
additional awards for a defined period, as is commonly associated with this
practice. Even when such a commitment is provided, unexpected circumstances may
lead the board to make additional payments or awards for retention purposes, or
to incentivize management towards more realistic goals or a revised strategy. If
a company breaks its commitment not to grant further awards, we may recommend
against the pay program unless a convincing rationale is provided.
The
multiyear nature of these awards generally lends itself to significantly higher
compensation figures in the year of grant than might otherwise be expected. In
our qualitative analysis of the grants of front-loaded awards to executives,
Glass Lewis considers the quantum of the award on an annualized basis and may
compare this result to the prior practice and peer data, among other benchmarks.
Additionally, for awards that are granted in the form of equity, Glass Lewis may
consider the total potential dilutive effect of such award on
shareholders.
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Linking
Executive Pay to Environmental and Social Criteria
Glass
Lewis believes that explicit environmental and/or social (E&S) criteria in
executive incentive plans, when used appropriately, can serve to provide both
executives and shareholders a clear line of sight into a company’s ESG strategy,
ambitions, and targets. Although we are strongly supportive of companies’
incorporation of material E&S risks and opportunities in their long-term
strategic planning, we believe that the inclusion of E&S metrics in
compensation programs should be predicated on each company’s unique
circumstances. In order to establish a meaningful link between pay and
performance, companies must consider factors including their industry, size,
risk profile, maturity, performance, financial condition, and any other relevant
internal or external factors.
When
a company is introducing E&S criteria into executive incentive plans, we
believe it is important that companies provide shareholders with sufficient
disclosure to allow them to understand how these criteria align with its
strategy. Additionally, Glass Lewis recognizes that there may be situations
where certain E&S performance criteria are reasonably viewed as
prerequisites for executive performance, as opposed to behaviors and conditions
that need to be incentivized. For example, we believe that shareholders should
interrogate the use of metrics that award executives for ethical behavior or
compliance with policies and regulations. It is our view that companies should
provide shareholders with disclosures that clearly lay out the rationale for
selecting specific E&S metrics, the target-setting process, and
corresponding payout opportunities. Further, particularly in the case of
qualitative metrics, we believe that shareholders should be provided with a
clear understanding of the basis on which the criteria will be assessed. Where
quantitative targets have been set, we believe that shareholders are best served
when these are disclosed on an ex-ante basis, or the board should outline why it
believes it is unable to do so.
While
we believe that companies should generally set long-term targets for their
environmental and social ambitions, we are mindful that not all compensation
schemes lend themselves to the inclusion of E&S metrics. We also are of the
view that companies should retain flexibility in not only choosing to
incorporate E&S metrics in their compensation plans, but also in the
placement of these metrics. For example, some companies may resolve that
including E&S criteria in the annual bonus may help to incentivize the
achievement of short-term milestones and allow for more maneuverability in
strategic adjustments to long-term goals. Other companies may determine that
their long-term sustainability targets are best achieved by incentivizing
executives through metrics included in their long-term incentive
plans.
One-Time
Awards
Glass
Lewis believes shareholders should generally be wary of awards granted outside
of the standard incentive schemes, as such awards have the potential to
undermine the integrity of a company’s regular incentive plans or the link
between pay and performance, or both. We generally believe that if the existing
incentive programs fail to provide adequate incentives to executives, companies
should redesign their compensation programs rather than make additional
grants.
However,
we recognize that in certain circumstances, additional incentives may be
appropriate. In these cases, companies should provide a thorough description of
the awards, including a cogent and convincing explanation of their necessity and
why existing awards do not provide sufficient motivation. Further, such awards
should be tied to future service and performance whenever possible.
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Additionally,
we believe companies making supplemental or one-time awards should also describe
if and how the regular compensation arrangements will be affected by these
additional grants. In reviewing a company’s use of supplemental awards, Glass
Lewis will evaluate the terms and size of the grants in the context of the
company’s overall incentive strategy and granting practices, as well as the
current operating environment.
Contractual
Payments and Arrangements
Beyond
the quantum of contractual payments, Glass Lewis will also consider the design
of any entitlements. Certain executive employment terms may help to drive a
negative recommendation, including, but not limited to:
•Excessively
broad change in control triggers;
•Inappropriate
severance entitlements;
•Inadequately
explained or excessive sign-on arrangements;
•Guaranteed
bonuses (especially as a multiyear occurrence); and
•Failure
to address any concerning practices in amended employment agreements.
In
general, we are wary of terms that are excessively restrictive in favor of the
executive, or that could potentially incentivize behaviors that are not in a
company’s best interest.
Sign-on
Awards and Severance Benefits
We
acknowledge that there may be certain costs associated with transitions at the
executive level. In evaluating the size of severance and sign-on arrangements,
we may consider the executive’s regular target compensation level, or the sums
paid to other executives (including the recipient’s predecessor, where
applicable) in evaluating the appropriateness of such an arrangement.
We
believe sign-on arrangements should be clearly disclosed and accompanied by a
meaningful explanation of the payments and the process by which the amounts were
reached. Further, the details of and basis for any “make-whole” payments (paid
as compensation for awards forfeited from a previous employer) should be
provided.
With
respect to severance, we believe companies should abide by predetermined payouts
in most circumstances. While in limited circumstances some deviations may not be
inappropriate, we believe shareholders should be provided with a meaningful
explanation of any additional or increased benefits agreed upon outside of
regular arrangements. However, where Glass Lewis determines that such
predetermined payouts are particularly problematic or unfavorable to
shareholders, we may consider the execution of such payments in a negative
recommendation for the advisory vote on executive compensation.
In
the U.S. market, most companies maintain severance entitlements based on a
multiple of salary and, in many cases, bonus. In almost all instances we see,
the relevant multiple is three or less, even in the case of a change in control.
We believe the basis and total value of severance should be reasonable and
should not exceed the upper limit of general market practice. We consider the
inclusion of long-term incentives in cash severance calculations to be
inappropriate, particularly given the commonality of accelerated vesting and the
proportional weight of long-term incentives as a component of total pay.
Additional considerations, however, will be accounted for when reviewing
atypically structured compensation approaches.
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Change
in Control
Glass
Lewis considers double-trigger change in control arrangements, which require
both a change in control and termination or constructive termination, to be best
practice. Any arrangement that is not explicitly double-trigger may be
considered a single-trigger or modified single-trigger arrangement.
Further,
we believe that excessively broad definitions of change in control are
potentially problematic as they may lead to situations where executives receive
additional compensation where no meaningful change in status or duties has
occurred.
Excise
Tax Gross-ups
Among
other entitlements, Glass Lewis is strongly opposed to excise tax gross-ups
related to IRC § 4999 and their expansion, especially where no consideration is
given to the safe harbor limit. We believe that under no normal circumstance is
the inclusion of excise tax gross-up provisions in new agreements or the
addition of such provisions to amended agreements acceptable. In consideration
of the fact that minor increases in change-in-control payments can lead to
disproportionately large excise taxes, the potential negative impact of tax
gross-ups far outweighs any retentive benefit.
Depending
on the circumstances, the addition of new gross-ups around this excise tax may
lead to negative recommendations for a company’s say-on-pay proposal, the chair
of the compensation committee, or the entire committee, particularly in cases
where a company had committed not to provide any such entitlements in the
future. For situations in which the addition of new excise tax gross ups will be
provided in connection with a specific change-in-control transaction, this
policy may be applied to the say-on-pay proposal, the golden parachute proposal
and recommendations related to the compensation committee for all involved
corporate parties, as appropriate.
Amended
Employment Agreements
Any
contractual arrangements providing for problematic pay practices which are not
addressed in materially amended employment agreements will potentially be viewed
by Glass Lewis as a missed opportunity on the part of the company to align its
policies with current best practices. Such problematic pay practices include,
but are not limited to, excessive change in control entitlements, modified
single-trigger change in control entitlements, excise tax gross-ups, and
multi-year guaranteed awards.
Recoupment
Provisions (Clawbacks)
Section
954 of the Dodd-Frank Act requires the SEC to create a rule requiring listed
companies to adopt policies for recouping certain compensation during a
three-year look-back period. The rule is more stringent than Section 304 of the
Sarbanes-Oxley Act and applies to incentive-based compensation paid to current
or former executives in the case of a financial restatement — specifically, the
recoupment provision applies in cases where the company is required to prepare
an accounting restatement due to erroneous data resulting from material
non-compliance with any financial reporting requirements under the securities
laws. Although the SEC has yet to finalize the relevant rules, we believe it is
prudent for boards to adopt detailed bonus recoupment policies that go beyond
Section 304 of the Sarbanes-Oxley Act to prevent executives from retaining
performance-based awards that were not truly earned.
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We
are increasingly focusing attention on the specific terms of recoupment policies
beyond whether a company maintains a clawback that simply satisfies the minimum
legal requirements. We believe that clawbacks should be triggered, at a minimum,
in the event of a restatement of financial results or similar revision of
performance indicators upon which bonuses were based. Such policies allow the
board to review all performance-related bonuses and awards made to senior
executives during a specified lookback period and, to the extent feasible, allow
the company to recoup such bonuses where appropriate. Notwithstanding the
foregoing, in cases where a company maintains only a bare-minimum clawback, the
absence of more expansive recoupment tools may inform our overall view of the
compensation program.
Hedging
of Stock
Glass
Lewis believes that the hedging of shares by executives in the shares of the
companies where they are employed severs the alignment of interests of the
executive with shareholders. We believe companies should adopt strict policies
to prohibit executives from hedging the economic risk associated with their
share ownership in the company.
Pledging
of Stock
Glass
Lewis believes that shareholders should examine the facts and circumstances of
each company rather than apply a one-size-fits-all policy regarding employee
stock pledging. Glass Lewis believes that shareholders benefit when employees,
particularly senior executives, have meaningful financial interest in the
success of the company under their management, and therefore we recognize the
benefits of measures designed to encourage employees to both buy shares out of
their own pocket and to retain shares they have been granted; blanket policies
prohibiting stock pledging may discourage executives and employees from doing
either.
However,
we also recognize that the pledging of shares can present a risk that, depending
on a host of factors, an executive with significant pledged shares and limited
other assets may have an incentive to take steps to avoid a forced sale of
shares in the face of a rapid stock price decline. Therefore, to avoid
substantial losses from a forced sale to meet the terms of the loan, the
executive may have an incentive to boost the stock price in the short term in a
manner that is unsustainable, thus hurting shareholders in the long-term. We
also recognize concerns regarding pledging may not apply to less senior
employees, given the latter group’s significantly more limited influence over a
company’s stock price. Therefore, we believe that the issue of pledging shares
should be reviewed in that context, as should policies that distinguish between
the two groups.
Glass
Lewis believes that the benefits of stock ownership by executives and employees
may outweigh the risks of stock pledging, depending on many factors. As such,
Glass Lewis reviews all relevant factors in evaluating proposed policies,
limitations and prohibitions on pledging stock, including:
•The
number of shares pledged;
•The
percentage executives’ pledged shares are of outstanding shares;
•The
percentage executives’ pledged shares are of each executive’s shares and total
assets;
•Whether
the pledged shares were purchased by the employee or granted by the company;
•Whether
there are different policies for purchased and granted shares;
•Whether
the granted shares were time-based or performance-based;
•The
overall governance profile of the company;
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•The
volatility of the company’s stock (in order to determine the likelihood of a
sudden stock price drop);
•The
nature and cyclicality, if applicable, of the company’s industry;
•The
participation and eligibility of executives and employees in pledging;
•The
company’s current policies regarding pledging and any waiver from these policies
for employees and executives; and
•Disclosure
of the extent of any pledging, particularly among senior executives.
Compensation
Consultant Independence
As
mandated by Section 952 of the Dodd-Frank Act, as of January 11, 2013, the SEC
approved new listing requirements for both the NYSE and NASDAQ which require
compensation committees to consider six factors
(https://www.sec.gov/rules/final/2012/33-9330.pdf, p.31-32) in assessing
compensation advisor independence. According to the SEC, “no one factor should
be viewed as a determinative factor.” Glass Lewis believes this six-factor
assessment is an important process for every compensation committee to undertake
but believes companies employing a consultant for board compensation, consulting
and other corporate services should provide clear disclosure beyond just a
reference to examining the six points, in order to allow shareholders to review
the specific aspects of the various consultant relationships.
We
believe compensation consultants are engaged to provide objective,
disinterested, expert advice to the compensation committee. When the consultant
or its affiliates receive substantial income from providing other services to
the company, we believe the potential for a conflict of interest arises and the
independence of the consultant may be jeopardized. Therefore, Glass Lewis will,
when relevant, note the potential for a conflict of interest when the fees paid
to the advisor or its affiliates for other services exceeds those paid for
compensation consulting.
CEO
Pay Ratio
As
mandated by Section 953(b) of the Dodd-Frank Wall Street Consumer and Protection
Act, beginning in 2018, issuers will be required to disclose the median annual
total compensation of all employees except the CEO, the total annual
compensation of the CEO or equivalent position, and the ratio between the two
amounts. Glass Lewis will display the pay ratio as a data point in our Proxy
Papers, as available. While we recognize that the pay ratio has the potential to
provide additional insight when assessing a company’s pay practices, at this
time it will not be a determinative factor in our voting
recommendations.
Frequency
of Say-on-Pay
The
Dodd-Frank Act also requires companies to allow shareholders a non-binding vote
on the frequency of say-on-pay votes (i.e., every one, two or three years).
Additionally, Dodd-Frank requires companies to hold such votes on the frequency
of say-on-pay votes at least once every six years.
We
believe companies should submit say-on-pay votes to shareholders every year. We
believe that the time and financial burdens to a company with regard to an
annual vote are relatively small and incremental and are outweighed by the
benefits to shareholders through more frequent accountability. Implementing
biannual or triennial votes on executive compensation limits shareholders’
ability to hold
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the
board accountable for its compensation practices through means other than voting
against the compensation committee. Unless a company provides a compelling
rationale or unique circumstances for say-on-pay votes less frequent than
annually, we will generally recommend that shareholders support annual votes on
compensation.
Vote
on Golden Parachute Arrangements
The
Dodd-Frank Act also requires companies to provide shareholders with a separate
non-binding vote on approval of golden parachute compensation arrangements in
connection with certain change-in-control transactions. However, if the golden
parachute arrangements have previously been subject to a say-on-pay vote which
shareholders approved, then this required vote is waived.
Glass
Lewis believes the narrative and tabular disclosure of golden parachute
arrangements benefits all shareholders. Glass Lewis analyzes each golden
parachute arrangement on a case-by-case basis, taking into account, among other
items: the nature of the change-in-control transaction, the ultimate value of
the payments particularly compared to the value of the transaction, any excise
tax gross-up obligations, the tenure and position of the executives in question
before and after the transaction, any new or amended employment agreements
entered into in connection with the transaction, and the type of triggers
involved (i.e., single vs. double). In cases where new problematic features,
such as excise tax gross-up obligations, are introduced in a golden parachute
proposal, such features may contribute to a negative recommendation not only for
the golden parachute proposal under review, but for the next say-on-pay proposal
of any involved corporate parties, as well as recommendations against their
compensation committee as appropriate.
Equity-Based
Compensation Plan Proposals
We
believe that equity compensation awards, when not abused, are useful for
retaining employees and providing an incentive for them to act in a way that
will improve company performance. Glass Lewis recognizes that equity-based
compensation plans are critical components of a company’s overall compensation
program, and we analyze such plans accordingly based on both quantitative and
qualitative factors.
Our
quantitative analysis assesses the plan’s cost and the company’s pace of
granting utilizing a number of different analyses, comparing the program with
absolute limits we believe are key to equity value creation and with a carefully
chosen peer group. In general, our model seeks to determine whether the proposed
plan is either absolutely excessive or is more than one standard deviation away
from the average plan for the peer group on a range of criteria, including
dilution to shareholders and the projected annual cost relative to the company’s
financial performance. Each of the analyses (and their constituent parts) is
weighted and the plan is scored in accordance with that weight.
We
compare the program’s expected annual expense with the business’s operating
metrics to help determine whether the plan is excessive in light of company
performance. We also compare the plan’s expected annual cost to the enterprise
value of the firm rather than to market capitalization because the employees,
managers and directors of the firm contribute to the creation of enterprise
value but not necessarily market capitalization (the biggest difference is seen
where cash represents the vast majority of market capitalization). Finally, we
do not rely exclusively on relative comparisons with
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averages
because, in addition to creeping averages serving to inflate compensation, we
believe that some absolute limits are warranted.
We
then consider qualitative aspects of the plan such as plan administration, the
method and terms of exercise, repricing history, express or implied rights to
reprice, and the presence of evergreen provisions. We also closely review the
choice and use of, and difficulty in meeting, the awards’ performance metrics
and targets, if any. We believe significant changes to the terms of a plan
should be explained for shareholders and clearly indicated. Other factors such
as a company’s size and operating environment may also be relevant in assessing
the severity of concerns or the benefits of certain changes. Finally, we may
consider a company’s executive compensation practices in certain situations, as
applicable.
We
evaluate equity plans based on certain overarching principles:
•Companies
should seek more shares only when needed;
•Requested
share amounts should be small enough that companies seek shareholder approval
every three to four years (or more frequently);
•If
a plan is relatively expensive, it should not grant options solely to senior
executives and board members;
•Dilution
of annual net share count or voting power, along with the “overhang” of
incentive plans, should be limited;
•Annual
cost of the plan (especially if not shown on the income statement) should be
reasonable as a percentage of financial results and should be in line with the
peer group;
•The
expected annual cost of the plan should be proportional to the business’s
value;
•The
intrinsic value that option grantees received in the past should be reasonable
compared with the business’s financial results;
•Plans
should not permit re-pricing of stock options;
•Plans
should not contain excessively liberal administrative or payment
terms;
•Plans
should not count shares in ways that understate the potential dilution, or cost,
to common shareholders. This refers to “inverse” full-value award multipliers;
•Selected
performance metrics should be challenging and appropriate, and should be subject
to relative performance measurements; and
•Stock
grants should be subject to minimum vesting and/or holding periods sufficient to
ensure sustainable performance and promote retention.
Option
Exchanges and Repricing
Glass
Lewis is generally opposed to the repricing of employee and director options
regardless of how it is accomplished. Employees should have some downside risk
in their equity-based compensation program and repricing eliminates any such
risk. As shareholders have substantial risk in owning stock, we believe that the
equity compensation of employees and directors should be similarly situated to
align their interests with those of shareholders. We believe this will
facilitate appropriate risk- and opportunity-taking for the company by
employees.
We
are concerned that option grantees who believe they will be “rescued” from
underwater options will be more inclined to take unjustifiable risks. Moreover,
a predictable pattern of repricing or exchanges substantially alters a stock
option’s value because options that will practically never expire deeply out of
the money are worth far more than options that carry a risk of
expiration.
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In
short, repricings and option exchange programs change the bargain between
shareholders and employees after the bargain has been struck.
There
is one circumstance in which a repricing or option exchange program may be
acceptable: if macroeconomic or industry trends, rather than specific company
issues, cause a stock’s value to decline dramatically and the repricing is
necessary to motivate and retain employees. In viewing the company’s stock
decline as part of a larger trend, we would expect the impact to approximately
reflect the market or industry price decline in terms of timing and magnitude.
In this circumstance, we think it fair to conclude that option grantees may be
suffering from a risk that was not foreseeable when the original “bargain” was
struck. In such a scenario, we may opt to support a repricing or option exchange
program only if sufficient conditions are met. We are largely concerned with the
inclusion of the following features:
•Officers
and board members cannot participate in the program; and
•The
exchange is value-neutral or value-creative to shareholders using very
conservative assumptions.
•In
our evaluation of the appropriateness of the program design, we also consider
the inclusion of the following features:
•The
vesting requirements on exchanged or repriced options are extended beyond one
year;
•Shares
reserved for options that are reacquired in an option exchange will permanently
retire (i.e., will not be available for future grants) so as to prevent
additional shareholder dilution in the future; and
•Management
and the board make a cogent case for needing to motivate and retain existing
employees, such as being in a competitive employment market.
Option
Backdating, Spring-Loading and Bullet-Dodging
Glass
Lewis views option backdating, and the related practices of spring-loading and
bullet-dodging, as egregious actions that warrant holding the appropriate
management and board members responsible. These practices are similar to
repricing options and eliminate much of the downside risk inherent in an option
grant that is designed to induce recipients to maximize shareholder return.
Backdating
an option is the act of changing an option’s grant date from the actual grant
date to an earlier date when the market price of the underlying stock was lower,
resulting in a lower exercise price for the option. In past studies, Glass Lewis
identified over 270 companies that have disclosed internal or government
investigations into their past stock-option grants.
Spring-loading
is granting stock options while in possession of material, positive information
that has not been disclosed publicly. Bullet-dodging is delaying the grants of
stock options until after the release of material, negative information. This
can allow option grants to be made at a lower price either before the release of
positive news or following the release of negative news, assuming the stock’s
price will move up or down in response to the information. This raises a concern
similar to that of insider trading, or the trading on material non-public
information.
The
exercise price for an option is determined on the day of grant, providing the
recipient with the same market risk as an investor who bought shares on that
date. However, where options were backdated, the executive or the board (or the
compensation committee) changed the grant date retroactively. The new date may
be at or near the lowest price for the year or period. This would be like
allowing an investor to look back and select the lowest price of the year at
which to buy shares.
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A
2006 study of option grants made between 1996 and 2005 at 8,000 companies found
that option backdating can be an indication of poor internal controls. The study
found that option backdating was more likely to occur at companies without a
majority independent board and with a long-serving CEO; both factors, the study
concluded, were associated with greater CEO influence on the company’s
compensation and governance practices.42
Where
a company granted backdated options to an executive who is also a director,
Glass Lewis will recommend voting against that executive/director, regardless of
who decided to make the award. In addition, Glass Lewis will recommend voting
against those directors who either approved or allowed the backdating. Glass
Lewis feels that executives and directors who either benefited from backdated
options or authorized the practice have failed to act in the best interests of
shareholders.
Given
the severe tax and legal liabilities to the company from backdating, Glass Lewis
will consider recommending voting against members of the audit committee who
served when options were backdated, a restatement occurs, material weaknesses in
internal controls exist and disclosures indicate there was a lack of
documentation. These committee members failed in their responsibility to ensure
the integrity of the company’s financial reports.
When
a company has engaged in spring-loading or bullet-dodging, Glass Lewis will
consider recommending voting against the compensation committee members where
there has been a pattern of granting options at or near historic lows. Glass
Lewis will also recommend voting against executives serving on the board who
benefited from the spring-loading or bullet-dodging.
Director
Compensation Plans
Glass
Lewis believes that non-employee directors should receive reasonable and
appropriate compensation for the time and effort they spend serving on the board
and its committees. However, a balance is required. Fees should be competitive
in order to retain and attract qualified individuals, but excessive fees
represent a financial cost to the company and potentially compromise the
objectivity and independence of non-employee directors. We will consider
recommending support for compensation plans that include option grants or other
equity-based awards that help to align the interests of outside directors with
those of shareholders. However, to ensure directors are not incentivized in the
same manner as executives but rather serve as a check on imprudent risk-taking
in executive compensation plan design, equity grants to directors should not be
performance-based. Where an equity plan exclusively or primarily covers
non-employee directors as participants, we do not believe that the plan should
provide for performance-based awards in any capacity.
When
non-employee director equity grants are covered by the same equity plan that
applies to a company’s broader employee base, we will use our proprietary model
and analyst review of this model to guide our voting recommendations. If such a
plan broadly allows for performance-based awards to directors or explicitly
provides for such grants, we may recommend against the overall plan on this
basis, particularly if the company has granted performance-based awards to
directors in past.
42
Lucian Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY CEOs.” November,
2006.
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Employee
Stock Purchase Plans
Glass
Lewis believes that employee stock purchase plans (ESPPs) can provide employees
with a sense of ownership in their company and help strengthen the alignment
between the interests of employees and shareholders. We evaluate ESPPs by
assessing the expected discount, purchase period, expected purchase activity (if
previous activity has been disclosed) and whether the plan has a “lookback”
feature. Except for the most extreme cases, Glass Lewis will generally support
these plans given the regulatory purchase limit of $25,000 per employee per
year, which we believe is reasonable. We also look at the number of shares
requested to see if a ESPP will significantly contribute to overall shareholder
dilution or if shareholders will not have a chance to approve the program for an
excessive period of time. As such, we will generally recommend against ESPPs
that contain “evergreen” provisions that automatically increase the number of
shares available under the ESPP each year.
Executive
Compensation Tax Deductibility — Amendment to IRC 162(M)
The
“Tax Cut and Jobs Act” had significant implications on Section 162(m) of the
Internal Revenue Code, a provision that allowed companies to deduct compensation
in excess of $1 million for the CEO and the next three most highly compensated
executive officers, excluding the CFO, if the compensation is performance-based
and is paid under shareholder-approved plans. Glass Lewis does not generally
view amendments to equity plans and changes to compensation programs in response
to the elimination of tax deductions under 162(m) as problematic. This
specifically holds true if such modifications contribute to the maintenance of a
sound performance-based compensation program.
As
grandfathered contracts may continue to be eligible for tax deductions under the
transition rule for Section 162(m), companies may therefore submit incentive
plans for shareholder approval to take of advantage of the tax deductibility
afforded under 162(m) for certain types of compensation.
We
believe the best practice for companies is to provide robust disclosure to
shareholders so that they can make fully informed judgments about the
reasonableness of the proposed compensation plan. To allow for meaningful
shareholder review, we prefer that disclosure should include specific
performance metrics, a maximum award pool, and a maximum award amount per
employee. We also believe it is important to analyze the estimated grants to see
if they are reasonable and in line with the company’s peers.
We
typically recommend voting against a 162(m) proposal where: (i) a company fails
to provide at least a list of performance targets; (ii) a company fails to
provide one of either a total maximum or an individual maximum; or (iii) the
proposed plan or individual maximum award limit is excessive when compared with
the plans of the company’s peers.
The
company’s record of aligning pay with performance (as evaluated using our
proprietary pay-for-performance model) also plays a role in our recommendation.
Where a company has a record of setting reasonable pay relative to business
performance, we generally recommend voting in favor of a plan even if the plan
caps seem large relative to peers because we recognize the value in special pay
arrangements for continued
exceptional performance.
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As
with all other issues we review, our goal is to provide consistent but
contextual advice given the specifics of the company and ongoing performance.
Overall, we recognize that it is generally not in shareholders’ best interests
to vote against such a plan and forgo the potential tax benefit since
shareholder rejection of such plans will not curtail the awards; it will only
prevent the tax deduction associated with them.
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Governance
Structure and the Shareholder Franchise
Anti-Takeover
Measures
Poison
Pills (Shareholder Rights Plans)
Glass
Lewis believes that poison pill plans are not generally in shareholders’ best
interests. They can reduce management accountability by substantially limiting
opportunities for corporate takeovers. Rights plans can thus prevent
shareholders from receiving a buy-out premium for their stock. Typically we
recommend that shareholders vote against these plans to protect their financial
interests and ensure that they have an opportunity to consider any offer for
their shares, especially those at a premium.
We
believe boards should be given wide latitude in directing company activities and
in charting the company’s course. However, on an issue such as this, where the
link between the shareholders’ financial interests and their right to consider
and accept buyout offers is substantial, we believe that shareholders should be
allowed to vote on whether they support such a plan’s implementation. This issue
is different from other matters that are typically left to board discretion. Its
potential impact on and relation to shareholders is direct and substantial. It
is also an issue in which management interests may be different from those of
shareholders; thus, ensuring that shareholders have a voice is the only way to
safeguard their interests.
In
certain circumstances, we will support a poison pill that is limited in scope to
accomplish a particular objective, such as the closing of an important merger,
or a pill that contains what we believe to be a reasonable qualifying offer
clause. We will consider supporting a poison pill plan if the qualifying offer
clause includes each of the following attributes:
•The
form of offer is not required to be an all-cash transaction;
•The
offer is not required to remain open for more than 90 business days;
•The
offeror is permitted to amend the offer, reduce the offer, or otherwise change
the terms;
•There
is no fairness opinion requirement; and
•There
is a low to no premium requirement.
Where
these requirements are met, we typically feel comfortable that shareholders will
have the opportunity to voice their opinion on any legitimate offer.
NOL
Poison Pills
Similarly,
Glass Lewis may consider supporting a limited poison pill in the event that a
company seeks shareholder approval of a rights plan for the express purpose of
preserving Net Operating Losses (NOLs). While companies with NOLs can generally
carry these losses forward to offset future taxable income, Section 382 of the
Internal Revenue Code limits companies’ ability to use NOLs in the event of a
“change of ownership.”43
In this case, a company may adopt or amend a poison pill (NOL pill) in order
43
Section 382 of the Internal Revenue Code refers to a “change of ownership” of
more than 50 percentage points by one or more 5% shareholders within a
three-year period. The statute is intended to deter the “trafficking” of net
operating losses.
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to
prevent an inadvertent change of ownership by multiple investors purchasing
small chunks of stock at the same time, and thereby preserve the ability to
carry the NOLs forward. Often such NOL pills have trigger thresholds much lower
than the common 15% or 20% thresholds, with some NOL pill triggers as low as 5%.
Glass
Lewis evaluates NOL pills on a strictly case-by-case basis taking into
consideration, among other factors, the value of the NOLs to the company, the
likelihood of a change of ownership based on the size of the holding and the
nature of the larger shareholders, the trigger threshold and whether the term of
the plan is limited in duration (i.e., whether it contains a reasonable “sunset”
provision) or is subject to periodic board review and/or shareholder
ratification. In many cases, companies will propose the adoption of bylaw
amendments specifically restricting certain share transfers, in addition to
proposing the adoption of a NOL pill. In general, if we support the terms of a
particular NOL pill, we will generally support the additional protective
amendment in the absence of significant concerns with the specific terms of that
proposal.
Furthermore,
we believe that shareholders should be offered the opportunity to vote on any
adoption or renewal of a NOL pill regardless of any potential tax benefit that
it offers a company. As such, we will consider recommending voting against those
members of the board who served at the time when an NOL pill was adopted without
shareholder approval within the prior twelve months and where the NOL pill is
not subject to shareholder ratification.
Fair
Price Provisions
Fair
price provisions, which are rare, require that certain minimum price and
procedural requirements be observed by any party that acquires more than a
specified percentage of a corporation’s common stock. The provision is intended
to protect minority shareholder value when an acquirer seeks to accomplish a
merger or other transaction which would eliminate or change the interests of the
minority shareholders. The provision is generally applied against the acquirer
unless the takeover is approved by a majority of ”continuing directors” and
holders of a majority, in some cases a supermajority as high as 80%, of the
combined voting power of all stock entitled to vote to alter, amend, or repeal
the above provisions.
The
effect of a fair price provision is to require approval of any merger or
business combination with an “interested shareholder” by 51% of the voting stock
of the company, excluding the shares held by the interested shareholder. An
interested shareholder is generally considered to be a holder of 10% or more of
the company’s outstanding stock, but the trigger can vary.
Generally,
provisions are put in place for the ostensible purpose of preventing a back-end
merger where the interested shareholder would be able to pay a lower price for
the remaining shares of the company than he or she paid to gain control. The
effect of a fair price provision on shareholders, however, is to limit their
ability to gain a premium for their shares through a partial tender offer or
open market acquisition which typically raise the share price, often
significantly. A fair price provision discourages such transactions because of
the potential costs of seeking shareholder approval and because of the
restrictions on purchase price for completing a merger or other transaction at a
later time.
Glass
Lewis believes that fair price provisions, while sometimes protecting
shareholders from abuse in a takeover situation, more often act as an impediment
to takeovers, potentially limiting gains to shareholders from a variety of
transactions that could significantly increase share price. In some cases,
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even
the independent directors of the board cannot make exceptions when such
exceptions may be in the best interests of shareholders. Given the existence of
state law protections for minority shareholders such as Section 203 of the
Delaware Corporations Code, we believe it is in the best interests of
shareholders to remove fair price provisions.
Quorum
Requirements
Glass
Lewis believes that a company’s quorum requirement should be set at a level high
enough to ensure that a broad range of shareholders are represented in person or
by proxy, but low enough that the company can transact necessary business.
Companies in the U.S. are generally subject to quorum requirements under the
laws of their specific state of incorporation. Additionally, those companies
listed on the NASDAQ Stock Market are required to specify a quorum in their
bylaws, provided however that such quorum may not be less than one-third of
outstanding shares. Prior to 2013, the New York Stock Exchange required a quorum
of 50% for listed companies, although this requirement was dropped in
recognition of individual state requirements and potential confusion for
issuers. Delaware, for example, required companies to provide for a quorum of no
less than one-third of outstanding shares; otherwise such quorum shall default
to a majority.
We
generally believe a majority of outstanding shares entitled to vote is an
appropriate quorum for the transaction of business at shareholder meetings.
However, should a company seek shareholder approval of a lower quorum
requirement we will generally support a reduced quorum of at least one-third of
shares entitled to vote, either in person or by proxy. When evaluating such
proposals, we also consider the specific facts and circumstances of the company,
such as size and shareholder base.
Director
and Officer Indemnification
While
Glass Lewis strongly believes that directors and officers should be held to the
highest standard when carrying out their duties to shareholders, some protection
from liability is reasonable to protect them against certain suits so that these
officers feel comfortable taking measured risks that may benefit shareholders.
As such, we find it appropriate for a company to provide indemnification and/or
enroll in liability insurance to cover its directors and officers so long as the
terms of such agreements are reasonable.
Reincorporation
In
general, Glass Lewis believes that the board is in the best position to
determine the appropriate jurisdiction of incorporation for the company. When
examining a management proposal to reincorporate to a different state or
country, we review the relevant financial benefits, generally related to
improved corporate tax treatment, as well as changes in corporate governance
provisions, especially those relating to shareholder rights, resulting from the
change in domicile. Where the financial benefits are de minimis and there is a
decrease in shareholder rights, we will recommend voting against the
transaction.
However,
costly, shareholder-initiated reincorporations are typically not the best route
to achieve the furtherance of shareholder rights. We believe shareholders are
generally better served by proposing specific shareholder resolutions addressing
pertinent issues which may be implemented at a lower cost,
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and
perhaps even with board approval. However, when shareholders propose a shift
into a jurisdiction with enhanced shareholder rights, Glass Lewis examines the
significant ways would the company benefit from shifting jurisdictions including
the following:
•Is
the board sufficiently independent?
•Does
the company have anti-takeover protections such as a poison pill or classified
board in place?
•Has
the board been previously unresponsive to shareholders (such as failing to
implement a shareholder proposal that received majority shareholder
support)?
•Do
shareholders have the right to call special meetings of
shareholders?
•Are
there other material governance issues of concern at the company?
•Has
the company’s performance matched or exceeded its peers in the past one and
three years?
•How
has the company ranked in Glass Lewis’ pay-for-performance analysis during the
last three years?
•Does
the company have an independent chair?
We
note, however, that we will only support shareholder proposals to change a
company’s place of incorporation in exceptional circumstances.
Exclusive
Forum and Fee-Shifting Bylaw Provisions
Glass
Lewis recognizes that companies may be subject to frivolous and opportunistic
lawsuits, particularly in conjunction with a merger or acquisition, that are
expensive and distracting. In response, companies have sought ways to prevent or
limit the risk of such suits by adopting bylaws regarding where the suits must
be brought or shifting the burden of the legal expenses to the plaintiff, if
unsuccessful at trial.
Glass
Lewis believes that charter or bylaw provisions limiting a shareholder’s choice
of legal venue are not in the best interests of shareholders. Such clauses may
effectively discourage the use of shareholder claims by increasing their
associated costs and making them more difficult to pursue. As such, shareholders
should be wary about approving any limitation on their legal recourse including
limiting themselves to a single jurisdiction (e.g., Delaware or federal courts
for matters arising under the Securities Act of 1933) without compelling
evidence that it will benefit shareholders.
For
this reason, we recommend that shareholders vote against any bylaw or charter
amendment seeking to adopt an exclusive forum provision unless the company: (i)
provides a compelling argument on why the provision would directly benefit
shareholders; (ii) provides evidence of abuse of legal process in other,
non-favored jurisdictions; (iii) narrowly tailors such provision to the risks
involved; and (iv) maintains a strong record of good corporate governance
practices.
Moreover,
in the event a board seeks shareholder approval of a forum selection clause
pursuant to a bundled bylaw amendment rather than as a separate proposal, we
will weigh the importance of the other bundled provisions when determining the
vote recommendation on the proposal. We will nonetheless recommend voting
against the chair of the governance committee for bundling disparate proposals
into a single proposal (refer to our discussion of nominating and governance
committee performance in Section I of the guidelines).
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Similarly,
some companies have adopted bylaws requiring plaintiffs who sue the company and
fail to receive a judgment in their favor pay the legal expenses of the company.
These bylaws, also known as “fee-shifting” or “loser pays” bylaws, will likely
have a chilling effect on even meritorious shareholder lawsuits as shareholders
would face an strong financial disincentive not to sue a company. Glass Lewis
therefore strongly opposes the adoption of such fee-shifting bylaws and, if
adopted without shareholder approval, will recommend voting against the
governance committee. While we note that in June of 2015 the State of Delaware
banned the adoption of fee-shifting bylaws, such provisions could still be
adopted by companies incorporated in other states.
Authorized
Shares
Glass
Lewis believes that adequate capital stock is important to a company’s
operation. When analyzing a
request for additional shares, we typically
review four common reasons why a company might need additional capital
stock:
1.Stock
Split
— We typically consider three metrics when evaluating whether we think a stock
split is likely or necessary: The historical stock pre-split price, if any; the
current price relative to the company’s most common trading price over the past
52 weeks; and some absolute limits on stock price that, in our view, either
always make a stock split appropriate if desired by management or would almost
never be a reasonable price at which to split a stock.
2.Shareholder
Defenses
— Additional authorized shares could be used to bolster takeover defenses such
as a poison pill. Proxy filings often discuss the usefulness of additional
shares in defending against or discouraging a hostile takeover as a reason for a
requested increase. Glass Lewis is typically against such defenses and will
oppose actions intended to bolster such defenses.
3.Financing
for Acquisitions
— We look at whether the company has a history of using stock for acquisitions
and attempt to determine what levels of stock have typically been required to
accomplish such transactions. Likewise, we look to see whether this is discussed
as a reason for additional shares in the proxy.
4.Financing
for Operations
— We review the company’s cash position and its ability to secure financing
through borrowing or other means. We look at the company’s history of
capitalization and whether the company has had to use stock in the recent past
as a means of raising capital.
Issuing
additional shares generally dilutes existing holders in most circumstances.
Further, the availability of additional shares, where the board has discretion
to implement a poison pill, can often serve as a deterrent to interested
suitors. Accordingly, where we find that the company has not detailed a plan for
use of the proposed shares, or where the number of shares far exceeds those
needed to accomplish a detailed plan, we typically recommend against the
authorization of additional shares. Similar concerns may also lead us to
recommend against a proposal to conduct a reverse stock split if the board does
not state that it will reduce the number of authorized common shares in a ratio
proportionate to the split.
With
regard to authorizations and/or increases in preferred shares, Glass Lewis is
generally against such authorizations, which allow the board to determine the
preferences, limitations and rights of the preferred shares (known as
“blank-check preferred stock”). We believe that granting such broad discretion
should be of concern to common shareholders, since blank-check preferred stock
could be used as an anti-takeover device or in some other fashion that adversely
affects the voting power or
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financial
interests of common shareholders. Therefore, we will generally recommend voting
against such requests, unless the company discloses a commitment to not use such
shares as an anti-takeover defense or in a shareholder rights plan, or discloses
a commitment to submit any shareholder rights plan to a shareholder vote prior
to its adoption.
While
we think that having adequate shares to allow management to make quick decisions
and effectively operate the business is critical, we prefer that, for
significant transactions, management come to shareholders to justify their use
of additional shares rather than providing a blank check in the form of a large
pool of unallocated shares available for any purpose.
Advance
Notice Requirements
We
typically recommend that shareholders vote against proposals that would require
advance notice of shareholder proposals or of director nominees.
These
proposals typically attempt to require a certain amount of notice before
shareholders are allowed to place proposals on the ballot. Notice requirements
typically range between three to six months prior to the annual meeting. Advance
notice requirements typically make it impossible for a shareholder who misses
the deadline to present a shareholder proposal or a director nominee that might
be in the best interests of the company and its shareholders.
We
believe shareholders should be able to review and vote on all proposals and
director nominees. Shareholders can always vote against proposals that appear
with little prior notice. Shareholders, as owners of a business, are capable of
identifying issues on which they have sufficient information and ignoring issues
on which they have insufficient information. Setting arbitrary notice
restrictions limits the opportunity for shareholders to raise issues that may
come up after the window closes.
Virtual
Shareholder Meetings
A
growing contingent of companies have elected to hold shareholder meetings by
virtual means only. Glass Lewis believes that virtual meeting technology can be
a useful complement to a traditional, in-person shareholder meeting by expanding
participation of shareholders who are unable to attend a shareholder meeting in
person (i.e. a “hybrid meeting”). However, we also believe that virtual-only
meetings have the potential to curb the ability of a company’s shareholders to
meaningfully communicate with the company’s management.
Prominent
shareholder rights advocates, including the Council of Institutional Investors,
have expressed concerns that such virtual-only meetings do not approximate an
in-person experience and may serve to reduce the board’s accountability to
shareholders. When analyzing the governance profile of companies that choose to
hold virtual-only meetings, we look for robust disclosure in a company’s proxy
statement which assures shareholders that they will be afforded the same rights
and opportunities to participate as they would at an in-person
meeting.
Examples
of effective disclosure include: (i) addressing the ability of shareholders to
ask questions during the meeting, including time guidelines for shareholder
questions, rules around what types of questions are allowed, and rules for how
questions and comments will be recognized and disclosed to meeting participants;
(ii) procedures, if any, for posting appropriate questions received during the
meeting and the company’s answers, on the investor page of their website as soon
as is practical after
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the
meeting; (iii) addressing technical and logistical issues related to accessing
the virtual meeting platform; and (iv) procedures for accessing technical
support to assist in the event of any difficulties accessing the virtual
meeting.
We
will generally recommend voting against members of the governance committee
where the board is planning to hold a virtual-only shareholder meeting and the
company does not provide such disclosure.
Voting
Structure
Multi-Class
Share Structures
Glass
Lewis believes multi-class voting structures are typically not in the best
interests of common shareholders. Allowing one vote per share generally operates
as a safeguard for common shareholders by ensuring that those who hold a
significant minority of shares are able to weigh in on issues set forth by the
board.
Furthermore,
we believe that the economic stake of each shareholder should match their voting
power and that no small group of shareholders, family or otherwise, should have
voting rights different from those of other shareholders. On matters of
governance and shareholder rights, we believe shareholders should have the power
to speak and the opportunity to effect change. That power should not be
concentrated in the hands of a few for reasons other than economic
stake.
We
generally consider a multi-class share structure to reflect negatively on a
company’s overall corporate governance. Because we believe that companies should
have share capital structures that protect the interests of non-controlling
shareholders as well as any controlling entity, we typically recommend that
shareholders vote in favor of recapitalization proposals to eliminate dual-class
share structures. Similarly, we will generally recommend against proposals to
adopt a new class of common stock. Beginning in 2022, we will recommend voting
against the chair of the governance committee at companies with a multi-class
share structure and unequal voting rights when the company does not provide for
a reasonable sunset of the multi-class share structure (generally seven years or
less).
In
the case of a board that adopts a multi-class share structure in connection with
an IPO, spin-off, or direct listing within the past year, we will generally
recommend voting against all members of the board who served at the time of the
IPO if the board: (i) did not also commit to submitting the multi-class
structure to a shareholder vote at the company’s first shareholder meeting
following the IPO; or (ii) did not provide for a reasonable sunset of the
multi-class structure (generally seven years or less). If the multi-class share
structure is put to a shareholder vote, we will examine the level of approval or
disapproval attributed to unaffiliated shareholders when determining the vote
outcome.
When
analyzing voting results from meetings of shareholders at companies controlled
through multi-class structures, we will carefully examine the level of approval
or disapproval attributed to unaffiliated shareholders when determining whether
board responsiveness is warranted. Where vote results indicate that a majority
of unaffiliated shareholders supported a shareholder proposal or opposed a
management proposal, we believe the board should demonstrate an appropriate
level of responsiveness.
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Cumulative
Voting
Cumulative
voting increases the ability of minority shareholders to elect a director by
allowing shareholders to cast as many shares of the stock they own multiplied by
the number of directors to be elected. As companies generally have multiple
nominees up for election, cumulative voting allows shareholders to cast all of
their votes for a single nominee, or a smaller number of nominees than up for
election, thereby raising the likelihood of electing one or more of their
preferred nominees to the board. It can be important when a board is controlled
by insiders or affiliates and where the company’s ownership structure includes
one or more shareholders who control a majority-voting block of company
stock.
Glass
Lewis believes that cumulative voting generally acts as a safeguard for
shareholders by ensuring that those who hold a significant minority of shares
can elect a candidate of their choosing to the board. This allows the creation
of boards that are responsive to the interests of all shareholders rather than
just a small group of
large holders.
We
review cumulative voting proposals on a case-by-case basis, factoring in the
independence of the board and the status of the company’s governance structure.
But we typically find these proposals on ballots at companies where independence
is lacking and where the appropriate checks and balances favoring shareholders
are not in place. In those instances we typically recommend in favor of
cumulative voting.
Where
a company has adopted a true majority vote standard (i.e., where a director must
receive a majority of votes cast to be elected, as opposed to a modified policy
indicated by a resignation policy only), Glass Lewis will recommend voting
against cumulative voting proposals due to the incompatibility of the two
election methods. For companies that have not adopted a true majority voting
standard but have adopted some form of majority voting, Glass Lewis will also
generally recommend voting against cumulative voting proposals if the company
has not adopted anti-takeover protections and has been responsive to
shareholders.
Where
a company has not adopted a majority voting standard and is facing both a
shareholder proposal to adopt majority voting and a shareholder proposal to
adopt cumulative voting, Glass Lewis will support only the majority voting
proposal. When a company has both majority voting and cumulative voting in
place, there is a higher likelihood of one or more directors not being elected
as a result of not receiving a majority vote. This is because shareholders
exercising the right to cumulate their votes could unintentionally cause the
failed election of one or more directors for whom shareholders do not cumulate
votes.
Supermajority
Vote Requirements
Glass
Lewis believes that supermajority vote requirements impede shareholder action on
ballot items critical to shareholder interests. An example is in the takeover
context, where supermajority vote requirements can strongly limit the voice of
shareholders in making decisions on such crucial matters as selling the
business. This in turn degrades share value and can limit the possibility of
buyout premiums to shareholders. Moreover, we believe that a supermajority vote
requirement can enable a small group of shareholders to overrule the will of the
majority shareholders. We believe that a simple majority is appropriate to
approve all matters presented to shareholders.
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Transaction
of Other Business
We
typically recommend that shareholders not give their proxy to management to vote
on any other business items that may properly come before an annual or special
meeting. In our opinion, granting unfettered discretion is unwise.
Anti-Greenmail
Proposals
Glass
Lewis will support proposals to adopt a provision preventing the payment of
greenmail, which would serve to prevent companies from buying back company stock
at significant premiums from a certain shareholder. Since a large or majority
shareholder could attempt to compel a board into purchasing its shares at a
large premium, the anti-greenmail provision would generally require that a
majority of shareholders other than the majority shareholder approve the
buyback.
Mutual
Funds: Investment Policies and Advisory Agreements
Glass
Lewis believes that decisions about a fund’s structure and/or a fund’s
relationship with its investment advisor or sub-advisors are generally best left
to management and the members of the board, absent a showing of egregious or
illegal conduct that might threaten shareholder value. As such, we focus our
analyses of such proposals on the following main areas:
•The
terms of any amended advisory or sub-advisory agreement;
•Any
changes in the fee structure paid to the investment advisor; and
•Any
material changes to the fund’s investment objective or strategy.
We
generally support amendments to a fund’s investment advisory agreement absent a
material change that is not in the best interests of shareholders. A significant
increase in the fees paid to an investment advisor would be reason for us to
consider recommending voting against a proposed amendment to an investment
advisory agreement or fund reorganization. However, in certain cases, we are
more inclined to support an increase in advisory fees if such increases result
from being performance-based rather than asset-based. Furthermore, we generally
support sub-advisory agreements between a fund’s advisor and sub-advisor,
primarily because the fees received by the sub-advisor are paid by the advisor,
and not by the fund.
In
matters pertaining to a fund’s investment objective or strategy, we believe
shareholders are best served when a fund’s objective or strategy closely
resembles the investment discipline shareholders understood and selected when
they initially bought into the fund. As such, we generally recommend voting
against amendments to a fund’s investment objective or strategy when the
proposed changes would leave shareholders with stakes in a fund that is
noticeably different than when originally purchased, and which could therefore
potentially negatively impact some investors’ diversification strategies.
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Real
Estate Investment Trusts
The
complex organizational, operational, tax and compliance requirements of Real
Estate Investment Trusts (REITs) provide for a unique shareholder evaluation. In
simple terms, a REIT must have a minimum of 100 shareholders (the 100
Shareholder Test) and no more than 50% of the value of its shares can be held by
five or fewer individuals (the “5/50 Test”). At least 75% of a REITs’ assets
must be in real estate, it must derive 75% of its gross income from rents or
mortgage interest, and it must pay out 90% of its taxable earnings as dividends.
In addition, as a publicly traded security listed on a stock exchange, a REIT
must comply with the same general listing requirements as a publicly traded
equity.
In
order to comply with such requirements, REITs typically include percentage
ownership limitations in their organizational documents, usually in the range of
5% to 10% of the REITs outstanding shares. Given the complexities of REITs as an
asset class, Glass Lewis applies a highly nuanced approach in our evaluation of
REIT proposals, especially regarding changes in authorized share capital,
including preferred stock.
Preferred
Stock Issuances at REITs
Glass
Lewis is generally against the authorization of "blank-check preferred stock."
However, given the requirement that a REIT must distribute 90% of its net income
annually, it is inhibited from retaining capital to make investments in its
business. As such, we recognize that equity financing likely plays a key role in
a REIT’s growth and creation of shareholder value. Moreover, shareholder concern
regarding the use of preferred stock as an anti-takeover mechanism may be
allayed by the fact that most REITs maintain ownership limitations in their
certificates of incorporation. For these reasons, along with the fact that REITs
typically do not engage in private placements of preferred stock (which result
in the rights of common shareholders being adversely impacted), we may support
requests to authorize shares of blank-check preferred stock at
REITs.
Business
Development Companies
Business
Development Companies (BDCs) were created by the U.S. Congress in 1980; they are
regulated under the Investment Company Act of 1940 and are taxed as regulated
investment companies (RICs) under the Internal Revenue Code. BDCs typically
operate as publicly traded private equity firms that invest in early stage to
mature private companies as well as small public companies. BDCs realize
operating income when their investments are sold off, and therefore maintain
complex organizational, operational, tax and compliance requirements that are
similar to those of REITs—the most evident of which is that BDCs must distribute
at least 90% of their taxable earnings as dividends.
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Authorization
to Sell Shares at a Price Below Net Asset Value
Considering
that BDCs are required to distribute nearly all their earnings to shareholders,
they sometimes need to offer additional shares of common stock in the public
markets to finance operations and acquisitions. However, shareholder approval is
required in order for a BDC to sell shares of common stock at a price below Net
Asset Value (NAV). Glass Lewis evaluates these proposals using a case-by-case
approach, but will recommend supporting such requests if the following
conditions are met:
•The
authorization to allow share issuances below NAV has an expiration date of one
year or less from the date that shareholders approve the underlying proposal
(i.e. the meeting date);
•The
proposed discount below NAV is minimal (ideally no greater than
20%);
•The
board specifies that the issuance will have a minimal or modest dilutive effect
(ideally no greater than 25% of the company’s then-outstanding common stock
prior to the issuance); and
•A
majority of the company’s independent directors who do not have a financial
interest in the issuance approve the sale.
In
short, we believe BDCs should demonstrate a responsible approach to issuing
shares below NAV, by proactively addressing shareholder concerns regarding the
potential dilution of the requested share issuance, and explaining if and how
the company’s past below-NAV share issuances have benefitted the company.
Auditor
Ratification and Below-NAV Issuances
When
a BDC submits a below-NAV issuance for shareholder approval, we will refrain
from recommending against the audit committee chair for not including auditor
ratification on the same ballot. Because of the unique way these proposals
interact, votes may be tabulated in a manner that is not in shareholders’
interests. In cases where these proposals appear on the same ballot, auditor
ratification is generally the only “routine proposal,” the presence of which
triggers a scenario where broker non-votes may be counted toward shareholder
quorum, with unintended consequences.
Under
the 1940 Act, below-NAV issuance proposals require relatively high shareholder
approval. Specifically, these proposals must be approved by the lesser of: (i)
67% of votes cast if a majority of shares are represented at the meeting; or
(ii) a majority of outstanding shares. Meanwhile, any broker non-votes counted
toward quorum will automatically be registered as “against” votes for purposes
of this proposal. The unintended result can be a case where the issuance
proposal is not approved, despite sufficient voting shares being cast in favor.
Because broker non-votes result from a lack of voting instruction by the
shareholder, we do not believe shareholders’ ability to weigh in on the
selection of auditor outweighs the consequences of failing to approve an
issuance proposal due to such technicality.
Special
Purpose Acquisition Companies
Special
Purpose Acquisition Companies (SPACs), also known as “blank check companies,”
are publicly traded entities with no commercial operations and are formed
specifically to pool funds in order to complete a merger or acquisition within a
set time frame. In general, the acquisition target of a SPAC is either not yet
identified or otherwise not explicitly disclosed to the public even when the
founders of the
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SPAC
may have at least one target in mind. Consequently, IPO investors often do not
know what company they will ultimately be investing in.
SPACs
are therefore very different from typical operating companies. Shareholders do
not have the same expectations associated with an ordinary publicly traded
company and executive officers of a SPAC typically do not continue in employment
roles with an acquired company.
Extension
of Business Combination Deadline
Governing
documents of SPACs typically provide for the return of IPO proceeds to common
shareholders if no qualifying business combination is consummated before a
certain date. Because the time frames for the consummation of such transactions
are relatively short, SPACs will sometimes hold special shareholder meetings at
which shareholders are asked to extend the business combination deadline. In
such cases, an acquisition target will typically have been identified, but
additional time is required to allow management of the SPAC to finalize the
terms of the deal.
Glass
Lewis believes management and the board are generally in the best position to
determine when the extension of a business combination deadline is needed. We
therefore generally defer to the recommendation of management and support
reasonable extension requests.
SPAC
Board Independence
The
board of directors of a SPAC’s acquisition target is in many cases already
established prior to the business combination. In some cases, however, the
board’s composition may change in connection with the business combination,
including the potential addition of individuals who served in management roles
with the SPAC. The role of a SPAC executive is unlike that of a typical
operating company executive. Because the SPAC’s only business is identifying and
executing an acquisition deal, the interests of a former SPAC executive are also
different. Glass Lewis does not automatically consider a former SPAC executive
to be affiliated with the acquired operating entity when their only position on
the board of the combined entity is that of an otherwise independent director.
Absent any evidence of an employment relationship or continuing material
financial interest in the combined entity, we will therefore consider such
directors to be independent.
Director
Commitments of SPAC Executives
We
believe the primary role of executive officers at SPACs is identifying
acquisition targets for the SPAC and consummating a business combination. Given
the nature of these executive roles and the limited business operations of
SPACs, when a directors’ only executive role is at a SPAC, we will generally
apply our higher limit for company directorships. As a result, we generally
recommend that shareholders vote against a director who serves in an executive
role only at a SPAC while serving on more than five public company
boards.
Shareholder
Proposals
Glass
Lewis believes that shareholders should seek to promote governance structures
that protect shareholders, support effective ESG oversight and reporting, and
encourage director accountability. Accordingly, Glass Lewis places a significant
emphasis on promoting transparency, robust governance
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structures
and companies’ responsiveness to and engagement with shareholders. We also
believe that companies should be transparent on how they are mitigating material
ESG risks, including those related to climate change, human capital management,
and stakeholder relations.
To
that end, we evaluate all shareholder proposals on a case-by-case basis with a
view to promoting long-term shareholder value. While we are generally supportive
of those that promote board accountability, shareholder rights, and
transparency, we consider all proposals in the context of a company’s unique
operations and risk profile.
For
a detailed review of our policies concerning compensation, environmental,
social, and governance shareholder proposals, please refer to our comprehensive
Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives,
available at www.glasslewis.com/voting-policies-current/.
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Overall
Approach to
Environmental, Social & Governance
Glass
Lewis evaluates all environmental and social issues through the lens of
long-term shareholder value. We believe that companies should be considering
material environmental and social factors in all aspects of their operations and
that companies should provide shareholders with disclosures that allow them to
understand how these factors are being considered and how attendant risks are
being mitigated. We also are of the view that governance is a critical factor in
how companies manage environmental and social risks and opportunities and that a
well-governed company will be generally managing these issues better than one
without a governance structure that promotes board independence and
accountability.
We
believe part of the board’s role is to ensure that management conducts a
complete risk analysis of company operations, including those that have material
environmental and social implications. We believe that directors should monitor
management’s performance in both capitalizing on environmental and social
opportunities and mitigating environmental and social risks related to
operations in order to best serve the interests of shareholders. Companies face
significant financial, legal and reputational risks resulting from poor
environmental and social practices, or negligent oversight thereof. Therefore,
in cases where the board or management has neglected to take action on a
pressing issue that could negatively impact shareholder value, we believe that
shareholders should take necessary action in order to effect changes that will
safeguard their financial interests.
Given
the importance of the role of the board in executing a sustainable business
strategy that allows for the realization of environmental and social
opportunities and the mitigation of related risks, relating to environmental
risks and opportunities, we believe shareholders should seek to promote
governance structures that protect shareholders and promote director
accountability. When management and the board have displayed disregard for
environmental or social risks, have engaged in egregious or illegal conduct, or
have failed to adequately respond to current or imminent environmental and
social risks that threaten shareholder value, we believe shareholders should
consider holding directors accountable. In such instances, we will generally
recommend against responsible members of the board that are specifically charged
with oversight of the issue in question.
When
evaluating environmental and social factors that may be relevant to a given
company, Glass Lewis does so in the context of the financial materiality of the
issue to the company’s operations. We believe that all companies face risks
associated with environmental and social issues. However, we recognize that
these risks manifest themselves differently at each company as a result of a
company’s operations, workforce, structure, and geography, among other factors.
Accordingly, we place a significant emphasis on the financial implications of a
company’s actions with regard to impacts on its stakeholders and the
environment.
When
evaluating environmental and social issues, Glass Lewis examines
companies’:
Direct
environmental and social risk
— Companies should evaluate financial exposure to direct environmental risks
associated with their operations. Examples of direct environmental risks include
those associated with oil or gas spills, contamination, hazardous leakages,
explosions, or reduced water or air quality, among others. Social risks may
include non-inclusive employment policies, inadequate human rights policies, or
issues that adversely affect the company’s stakeholders. Further,
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we
believe that firms should consider their exposure to risks emanating from a
broad range of issues, over which they may have no or only limited control, such
as insurance companies being affected by increased storm severity and frequency
resulting from climate change or membership in trade associations with
controversial political ties.
Risk
due to legislation and regulation —
Companies should evaluate their exposure to changes or potential changes in
regulation that affect current and planned operations. Regulation should be
carefully monitored in all jurisdictions in which the company operates. We look
closely at relevant and proposed legislation and evaluate whether the company
has responded proactively.
Legal
and reputational risk
— Failure to take action on important environmental or social issues may carry
the risk of inciting negative publicity and potentially costly litigation. While
the effect of high-profile campaigns on shareholder value may not be directly
measurable, we believe it is prudent for companies to carefully evaluate the
potential impacts of the public perception of their impacts on stakeholders and
the environment. When considering investigations and lawsuits, Glass Lewis is
mindful that such matters may involve unadjudicated allegations or other charges
that have not been resolved. Glass Lewis does not assume the truth of such
allegations or charges or that the law has been violated. Instead, Glass Lewis
focuses more broadly on whether, under the particular facts and circumstances
presented, the nature and number of such concerns, lawsuits or investigations
reflects on the risk profile of the company or suggests that appropriate risk
mitigation measures may be warranted.
Governance
risk
— Inadequate oversight of environmental and social issues carries significant
risks to companies. When leadership is ineffective or fails to thoroughly
consider potential risks, such risks are likely unmitigated and could thus
present substantial risks to the company, ultimately leading to loss of
shareholder value.
Glass
Lewis believes that one of the most crucial factors in analyzing the risks
presented to companies in the form of environmental and social issues is the
level and quality of oversight over such issues. When management and the board
have displayed disregard for environmental risks, have engaged in egregious or
illegal conduct, or have failed to adequately respond to current or imminent
environmental risks that threaten shareholder value, we believe shareholders
should consider holding directors accountable. When companies have not provided
for explicit, board-level oversight of environmental and social matters and/or
when a substantial environmental or social risk has been ignored or inadequately
addressed, we may recommend voting against members of the board. In addition, or
alternatively, depending on the proposals presented, we may also consider
recommending voting in favor of relevant shareholder proposals or against other
relevant management-proposed items, such as the ratification of auditor, a
company’s accounts and reports, or ratification of management and board
acts.
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DISCLAIMER
©
2021 Glass, Lewis & Co., and/or its affiliates. All Rights
Reserved.
This
document is intended to provide an overview of Glass Lewis’ proxy voting
guidelines. It is not intended to be exhaustive and does not address all
potential voting issues. Glass Lewis’ proxy voting guidelines, as they apply to
certain issues or types of proposals, are further explained in supplemental
guidelines and reports that are made available on Glass Lewis’ website –
http://www.glasslewis.com.
These guidelines have not been set or approved by the U.S. Securities and
Exchange Commission or any other regulatory body. Additionally, none of the
information contained herein is or should be relied upon as investment advice.
The content of this document has been developed based on Glass Lewis’ experience
with proxy voting and corporate governance issues, engagement with clients and
issuers, and review of relevant studies and surveys, and has not been tailored
to any specific person or entity.
Glass
Lewis’ proxy voting guidelines are grounded in corporate governance best
practices, which often exceed minimum legal requirements. Accordingly, unless
specifically noted otherwise, a failure to meet these guidelines should not be
understood to mean that the company or individual involved has failed to meet
applicable legal requirements.
No
representations or warranties express or implied, are made as to the accuracy or
completeness of any information included herein. In addition, Glass Lewis shall
not be liable for any losses or damages arising from or in connection with the
information contained herein or the use, reliance on, or inability to use any
such information. Glass Lewis expects its subscribers possess sufficient
experience and knowledge to make their own decisions entirely independent of any
information contained in this document.
All
information contained in this report is protected by law, including, but not
limited to, copyright law, and none of such information may be copied or
otherwise reproduced, repackaged, further transmitted, transferred,
disseminated, redistributed or resold, or stored for subsequent use for any such
purpose, in whole or in part, in any form or manner, or by any means whatsoever,
by any person without Glass Lewis’ prior written consent.
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2022
International Proxy Paper Policy
Guidelines 2
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International Proxy Paper Policy
Guidelines 3
About
Glass Lewis
Glass
Lewis is the world’s choice for governance solutions. We enable
institutional investors and publicly listed companies to make sustainable
decisions based on research and data. We cover 30,000+ meetings each year,
across approximately 100 global markets. Our team has been providing
in-depth analysis of companies since 2003, relying solely on publicly available
information to inform its policies, research, and voting
recommendations.
Our
customers include the majority of the world’s largest pension plans, mutual
funds, and asset
managers, collectively managing over $40 trillion in
assets. We have teams located across the United States, Europe, and
Asia-Pacific giving us global reach with a local perspective on the important
governance issues.
Investors
around the world depend on Glass Lewis’ Viewpoint
platform to manage their proxy voting, policy implementation, recordkeeping, and
reporting. Our industry leading Proxy
Paper
product provides comprehensive environmental, social, and governance research
and voting recommendations weeks ahead of voting deadlines. Public companies can
also use our innovative Report
Feedback Statement
to deliver their opinion on our proxy research directly to the voting decision
makers at every investor client in time for voting decisions to be made or
changed.
The
research team engages extensively with public companies, investors, regulators,
and other industry stakeholders to gain relevant context into the realities
surrounding companies, sectors, and the market in general. This enables us to
provide the most comprehensive and pragmatic insights to our customers.
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Glass
Lewis is committed to ongoing engagement with all market
participants.
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2022
International Proxy Paper Policy
Guidelines 4
Introduction
These
guidelines provide a general overview of the Glass Lewis approach to proxy
advice globally. Glass Lewis publishes separate, detailed policy guidelines for
all major global markets, which are publicly available on the Glass Lewis
website. Glass Lewis policies are largely based on the regulations, listing
rules, codes of best practice and other relevant standards set in each country.
While these guidelines provide a high-level overview of our general policy
approach, implementation varies in accordance with relevant requirements or best
practices in each market. For detailed information on the implementation of the
policy approach described below, refer to the Glass Lewis policy guidelines for
the relevant country.
Summary
of Changes for 2022
Board
Composition
In
this section we have clarified that, in our assessment of the independence of
directors, we apply a three-year look back for material financial transactions,
and a five-year look back for former employment relationships. We have also
highlighted that we will generally recommend that shareholders oppose board
elections when there are substantial concerns regarding the performance and/or
skills and experience of a director.
Furthermore,
we have clarified that we generally believe that a board will be more effective
in protecting shareholders’ interests when a majority of shareholder
representatives on the board are independent, although we set higher and lower
thresholds in some markets on the basis of local best practice recommendations
and prevailing market practice. We typically accept the presence of
representatives of a company's major shareholder(s) on the board in line with
their stake in a company's issued share capital or voting rights, so long as
there is a sufficient number of independent directors to represent free-float
shareholders and allow for the formation of sufficiently independent board
committees.
Board
Committee Composition
We
have clarified that we generally recommend that shareholders oppose the presence
of executive directors on the audit and compensation committee given the risks
for conflicts of interest. Further, we have clarified that we generally believe
that the majority of shareholder representatives on key board committees should
be independent, although we set higher and lower thresholds in some markets on
the basis of local best practice recommendations and prevailing market
practice.
Slate
Elections
We
have clarified that we do not generally recommend that shareholders vote against
an election of directors that is proposed as a slate solely on the basis of this
election method in countries where this is common market practice. We will
generally recommend that shareholders support a director slate, unless we have
identified independence or performance concerns. When the proposed slate raises
concerns regarding board or committee independence, we will generally recommend
that shareholders vote against the slate. In egregious cases where we have
identified concerns regarding the
2022
International Proxy Paper Policy
Guidelines 5
performance
and/or experience of the board, its committees, and/or individual directors, we
will similarly recommend that shareholders vote against the director
slate.
Board
Diversity
We
have amended the language in these guidelines to clarify that the Glass Lewis
assessment of board-level gender diversity is based on the self-identification
of directors and that we consider directors that self-identify as non-binary to
contribute to the gender diversity of a board. Further, we have clarified that
we expect large companies to provide clear disclosure on the board’s performance
against local legal requirements and best practice recommendations on
board-level ethnic diversity.
Compensation
We
have updated these guidelines to highlight that we will generally recommend that
shareholders oppose backward-looking remuneration report proposals where there
is a gross disconnect between remuneration outcomes and the experience of
shareholders and other key stakeholders (in particular company employees) in the
year under review.
Further,
we have clarified that, in particularly egregious cases where we conclude that
the compensation committee has substantially failed to fulfill its duty to
shareholders, we may also recommend that shareholders vote against the chair,
senior members, or all members of the committee, depending on the seriousness
and persistence of the issues identified.
Repurchase
of Shares
We
have clarified that we may recommend that shareholders support share repurchase
programs that are larger than the typical 10%-15% limits when the terms of the
program stipulate that repurchased shares must be cancelled.
Overall
Approach to Environmental, Social, & Governance (ESG)
We
have expanded our discussion of environmental, social & governance
initiatives in a new section titled Glass Lewis’ Overall Approach to ESG. Here
we provide additional details of our considerations when evaluating these
topics. To summarize, Glass Lewis evaluates all environmental and social issues
through the lens of long-term shareholder value. We believe that companies
should be considering material environmental and social factors in all aspects
of their operations and that companies should provide shareholders with
disclosures that allow them to understand how these factors are being considered
and how attendant risks are being mitigated.
Shareholder
Proposals
In
the section titled Governance Structure and the Shareholder Franchise, we have
added a sub-section titled Shareholder Proposals, summarizing our existing
approach to analyzing these proposals. Specifically, we evaluate all shareholder
proposals on a case-by-case basis with a view to promoting long-term shareholder
value. While we are generally supportive of those that promote board
accountability, shareholder rights, and transparency, we consider all proposals
in the context of a company’s unique operations and risk profile.
2022
International Proxy Paper Policy
Guidelines 6
Please
refer to our comprehensive Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives
for additional detail.
2022
International Proxy Paper Policy
Guidelines 7
Election
of Directors
Board
of Directors
Boards
are put in place to represent shareholders and protect their interests. Glass
Lewis seeks boards with a proven record of protecting shareholders and
delivering value over the medium- and long-term. In our view, boards working to
protect and enhance the best interests of shareholders typically include some
independent directors (the percentage will vary by local market practice and
regulations), boast a record of positive performance, have directors with
diverse backgrounds, and appoint directors with a breadth and depth of
experience.
Board
Composition
We
look at each individual on the board and examine his or her relationships with
the company, the company’s executives and with other board members. The purpose
of this inquiry is to determine whether pre-existing personal, familial or
financial relationships are likely to impact the decisions of that board member.
Where
the company does not disclose the names or backgrounds of director nominees with
sufficient time in advance of the shareholder meeting to evaluate their
independence, performance or skills we will consider recommending voting against
or abstaining from voting on the directors’ election.
We
recommend voting in favor of governance structures that will drive positive
performance and enhance shareholder value. The most crucial test of a board’s
commitment to the company and to its shareholders is the performance of the
board and its members. The performance of directors in their capacity as board
members and as executives of the company, when applicable, and in their roles at
other companies where they serve is critical to this evaluation. We generally
believe that a board will be most effective in protecting shareholders'
interests when a majority of shareholder representatives on the board are
independent, although we set higher and lower thresholds in some markets on the
basis of local best practice recommendations and prevailing market practice. We
typically accept the presence of representatives of a company's major
shareholder(s) on the board in line with their stake in a company's issued share
capital or voting rights, so long as there is a sufficient number of independent
directors to represent free-float shareholders and allow for the formation of
sufficiently independent board committees.
We
believe a director is independent if they have no material financial, familial
or other current relationships with the company, its executives or other board
members except for service on the board and standard fees paid for that service.
Relationships that have existed within the three to five years, dependent on the
nature of the relationship, prior to the inquiry are usually considered to be
“current” for purposes of this test.
In
our view, a director is affiliated if they have a material financial, familial
or other relationship with the company or its executives, but are not an
employee of the company. This includes directors whose employers have a material
financial relationship with the Company. This also includes a director who owns
or controls, directly or indirectly, 10% or more of the company’s voting stock
(except where local regulations or best practice set a different threshold).
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International Proxy Paper Policy
Guidelines 8
We
define an inside director as one who simultaneously serves as a director and as
an employee of the company. This category may include a board chair who acts as
an employee of the company or is paid as an employee of the company.
Although
we typically recommend that shareholders support the election of independent
directors, we will recommend voting against directors for the following reasons:
•A
director who attends less than 75% of the board and applicable committee
meetings.
•A
director who is also the CEO of a company where a serious restatement has
occurred after the CEO certified the pre-restatement financial statements.
•An
affiliated director where the board is not sufficiently independent in
accordance with market best practice standards.
•There
are substantial concerns regarding the performance and/or skills and experience
of a director.
We
also feel that the following conflicts of interest may hinder a director’s
performance and will therefore recommend voting against a:
•Director
who presently sits on an excessive number of boards.
•Director
who, or a director whose immediate family member, provides material professional
services to the company at any time during the past three years.
•Director
who, or a director whose immediate family member, engages in airplane, real
estate or other similar deals, including perquisite type grants from the
company.
•Director
with an interlocking directorship.
Slate
Elections
In
some countries, companies elect their board members as a slate, whereby
shareholders are unable to vote on the election of each individual director, but
rather are limited to voting for or against the board as a whole. In countries
where slate elections are common market practice, we will not recommend that
shareholders oppose an election on the basis of this election method alone.
We
will generally recommend that shareholders support a director slate, unless we
have identified independence or performance concerns. When the proposed slate
raises concerns regarding board or committee independence, we will generally
recommend that shareholders vote against the slate. In egregious cases where we
have identified concerns regarding the performance and/or experience of the
board, its committees, and/or individual directors, we will similarly recommend
that shareholders vote against the director slate.
Board
Committee Composition
We
believe that independent directors should serve on a company’s audit,
compensation, nominating and governance committees. We will support boards with
such a structure and encourage change where this is not the case. We generally
recommend that shareholders oppose the presence of executive directors on the
audit and compensation committee given the risks for conflicts of interest. We
generally believe that the majority of shareholder representatives on key board
committees should be independent, although we set higher and lower thresholds in
some markets on the basis of local best practice recommendations and prevailing
market practice.
2022
International Proxy Paper Policy
Guidelines 9
Review
of Risk Management Controls
We
believe companies, particularly financial firms, should have a dedicated risk
committee, or a committee of the board charged with risk oversight, as well as a
chief risk officer who reports directly to that committee, not to the CEO or
another executive. In cases where a company has disclosed a sizable loss or
writedown, and where a reasonable analysis indicates that the company’s
board-level risk committee should be held accountable for poor oversight, we
would recommend that shareholders vote against such committee members on that
basis. In addition, in cases where a company maintains a significant level of
financial risk exposure but fails to disclose any explicit form of board-level
risk oversight (committee or otherwise), we will consider recommending to vote
against the chairman of the board on that basis.
Classified
Boards
Glass
Lewis favors the repeal of staggered boards in favor of the annual election of
directors. We believe that staggered boards are less accountable to shareholders
than annually elected boards. Furthermore, we feel that the annual election of
directors encourages board members to focus on protecting the interests of
shareholders.
Board
Tenure and Refreshment
Glass
Lewis strongly supports routine director evaluation, including independent
external reviews, and periodic board refreshment to foster the sharing of
diverse perspectives in the boardroom and the generation of new ideas and
business strategies. In our view, a director’s experience can be a valuable
asset to shareholders because of the complex, critical issues that boards face.
This said, we recognize a lack of refreshment can contribute to a lack of board
responsiveness to poor company performance. We may consider recommending voting
against directors with a lengthy tenure (e.g. over 12 years) when we identify
significant performance or governance concerns indicating that a fresh
perspective would be beneficial and we find no evidence of board refreshment.
Where
a board has established an age or term limit, we believe these should generally
be applied equally for all members of the board. If a board waives its age/term
limits, Glass Lewis will consider recommending shareholders vote against the
chair of the nominating committee or equivalent, unless compelling rationale is
provided for why the board is proposing to waive this rule through an
election/re-election.
Board
Diversity
Glass
Lewis values the importance of board diversity, believing there are a number of
benefits from having individuals with a variety of backgrounds serving on
boards. We consider the diversity of gender, backgrounds, skills and experience
of directors when evaluating board diversity. If a board has failed to address
material concerns regarding the mix of skills and experience of the
non-executive directors or when it fails to meet legal requirements or the best
practice standard prevalent in the market for gender quotas and has not
disclosed any cogent explanation or plan regarding its approach to board
diversity, we will consider recommending voting against the chair of the
nominating committee. We expect boards of companies listed on blue chip indices
in major global markets (Australia, Canada, Europe, Japan, United Kingdom and
United States), to comprise at least one gender diverse director (women, or
directors that identify with a gender other than male or female). We apply a
higher standard where
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Guidelines 10
best
practice recommendations or listing regulations set a higher target. We also
monitor company disclosure on ethnic diversity at board level. We expect large
companies in markets with legal requirements or best practice recommendations in
this area (e.g. United States; United Kingdom) to provide clear disclosure on
the board's performance or transition plans.
Environmental
and Social Risk Oversight
Glass
Lewis recognises the importance of ensuring the sustainability of companies’
operations. We believe that insufficient oversight of material environmental and
social issues can present direct legal, financial, regulatory and reputational
risks that could serve to harm shareholder interests. Therefore, we believe that
these issues should be carefully monitored and managed by companies, and that
companies should have an appropriate oversight structure in place to ensure that
they are mitigating attendant risks and capitalizing on related opportunities to
the best extent possible. From 2022, Glass Lewis will generally recommend that
shareholders vote against the chair of the governance committee (or equivalent)
of companies listed on a major blue-chip index in key global markets that do not
provide clear disclosure concerning the board-level oversight afforded to
material environmental and/or social issues.
Board
Responsiveness
Glass
Lewis believes that any time 20% or more of shareholders vote contrary to the
recommendation of management, the board should, depending on the issue,
demonstrate some level of responsiveness to address the concerns of
shareholders, particularly in the case of a compensation or director election
proposal. While the 20% threshold alone will not automatically generate a
negative vote recommendation from Glass Lewis on a future proposal (e.g., to
recommend against a director nominee, against a remuneration proposal, etc.), it
will be a contributing factor to recommend a vote against management's
recommendation in the event we determine that the board did not respond
appropriately.
As
a general framework, our evaluation of board responsiveness involves a review of
the publicly available disclosures released following the date of the company's
last annual meeting up through the publication date of our most current Proxy
Paper.
Separation
of the Roles of Chair and CEO
Glass
Lewis believes that separating the roles of corporate officers and the chair of
the board is a better governance structure than a combined executive/chair
position. The role of executives is to manage the business on the basis of the
course charted by the board. Executives should be in the position of reporting
and answering to the board for their performance in achieving the goals set out
by such board. This becomes much more complicated when management actually sits
on, or chairs, the board.
We
view an independent chair as better able to oversee the executives of the
company and set a pro-shareholder agenda without the management conflicts that a
CEO and other executive insiders often face. This, in turn, leads to a more
proactive and effective board of directors that is looking out for the interests
of shareholders above all else.
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In
the absence of an independent chair, we support the appointment of a presiding
or lead director with authority to set the agenda for the meetings and to lead
sessions outside the presence of the insider chair.
We
may recommend voting against the chair of the nominating committee when the
chair and CEO roles are combined and the board has not appointed an independent
presiding or lead director.
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Financial
Reporting
Accounts
and Reports
Many
countries require companies to submit the annual financial statements, director
reports and independent auditors’ reports to shareholders at a general meeting.
We will usually recommend voting in favor of these proposals except when there
are concerns about the integrity of the statements/reports. However, should the
audited financial statements, auditor’s report and/or annual report not be
published at the writing of our report, we will recommend that shareholders
abstain from voting on this proposal.
Income
Allocation (Distribution of Dividends)
In
many countries, companies must submit the allocation of income for shareholder
approval. We will generally recommend voting for such a proposal. However, we
will give particular scrutiny to cases where the company’s dividend payout ratio
is exceptionally low or excessively high relative to its peers, or the proposed
distribution represents a substantial departure from a company's disclosed
dividend policy, and the company has not provided a satisfactory explanation.
Appointment
of Auditors and Authority to Set Fees
We
believe that role of the auditor is crucial in protecting shareholder value.
Like directors, auditors should be free from conflicts of interest and should
assiduously avoid situations that require them to make choices between their own
interests and the interests of the shareholders. We generally support
management’s recommendation regarding the selection of an auditor and support
granting the board the authority to fix auditor fees except in cases where we
believe the independence of an incumbent auditor or the integrity of the audit
has been compromised. However, we generally recommend voting against
ratification of the auditor and/or authorizing the board to set auditor fees for
the following reasons:
•When
audit fees added to audit-related fees total less than one-half of total fees.
•When
there have been any recent restatements or late filings by the company where the
auditor bears some responsibility for the restatement or late filing (e.g., a
restatement due to a reporting error).
•When
the company has aggressive accounting policies.
•When
the company has poor disclosure or lack of transparency in financial statements.
•When
there are other relationships or issues of concern with the auditor that might
suggest a conflict between the interest of the auditor and the interests of
shareholders.
•When
the company is changing auditors as a result of a disagreement between the
company and the auditor on a matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedures.
•Where
the auditor’s tenure is lengthy (e.g. over 10 years) and when we identify any
ongoing litigation or significant controversies which call into question an
auditor's effectiveness
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Compensation
Compensation
Report/Compensation Policy
We
closely review companies’ remuneration practices and disclosure as outlined in
company filings to evaluate management-submitted advisory compensation report
and policy vote proposals. In evaluating these proposals, which can be binding
or non-binding depending on the country, we examine how well the company has
disclosed information pertinent to its compensation programs, the extent to
which overall compensation is tied to performance, the performance metrics
selected by the company and the levels of remuneration in comparison to company
performance and that of its peers.
We
will usually recommend voting against approval of the compensation report or
policy when the following occur:
•Gross
disconnect between pay and performance;
•Gross
disconnect between remuneration outcomes and the experience of shareholders and
other key stakeholders (in particular company employees) in the year under
review;
•Performance
goals and metrics are inappropriate or insufficiently challenging;
•Lack
of disclosure regarding performance metrics and goals as well as the extent to
which the performance metrics, targets and goals are implemented to enhance
company performance and encourage prudent risk-taking;
•Excessive
weighting of short-term (e.g., generally less than three year) performance
measurement in incentive plans;
•Excessive
discretion afforded to or exercised by management or the compensation committee
to deviate from defined performance metrics and goals in making awards;
•Ex
gratia or other non-contractual payments have been made and the reasons for
making the payments have not been fully explained or the explanation is
unconvincing;
•Guaranteed
bonuses are established;
•Egregious
or excessive bonuses, equity awards or severance payments;
•Excessive
increases (e.g. over 10%) in fixed payments such as salary or pension
entitlements that are not adequately justified
In
addition, we look for the presence of other structural safeguards, such as
clawback and malus policies for incentive plans. The absence of such safeguards
may contribute to a negative recommendation. In particularly egregious cases
where we conclude that the compensation committee has substantially failed to
fulfill its duty to shareholders, we may also recommend that shareholders vote
against the chair, senior members, or all members of the committee, depending on
the seriousness and persistence of the issues identified.
Long-Term
Incentive Plans
Glass
Lewis recognizes the value of equity-based incentive programs. When used
appropriately, they can provide a vehicle for linking an employee’s pay to a
company’s performance, thereby aligning their interests with those of
shareholders. Tying a portion of an employee’s compensation to the performance
of the Company provides an incentive to maximize share value. In addition,
equity-based compensation is an effective way to attract, retain and motivate
key employees. In order to allow for meaningful
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Guidelines 14
shareholder
review, we believe that incentive programs should generally include: (i)
specific and appropriate performance goals; (ii) a maximum award pool; and (iii)
a maximum award amount per employee. In addition, the payments made should be
reasonable relative to the performance of the business and total compensation to
those covered by the plan should be in line with compensation paid by the
Company’s peers.
Performance-Based
Equity Compensation
Glass
Lewis believes in performance-based equity compensation plans for senior
executives. We feel that executives should be compensated with equity when their
performance and that of the company warrants such rewards. While we do not
believe that equity-based compensation plans for all employees need to be based
on overall company performance, we do support such limitations for grants to
senior executives (although even some equity-based compensation of senior
executives without performance criteria is acceptable, such as in the case of
moderate incentive grants made in an initial offer of employment). Boards often
argue that such a proposal would hinder them in attracting talent. We believe
that boards can develop a consistent, reliable approach, as boards of many
companies have, that would still attract executives who believe in their ability
to guide the company to achieve its targets.
We
generally recommend that shareholders vote in favor of performance-based option
requirements. There should be no retesting of performance conditions for all
share- and option- based incentive schemes. We will generally recommend that
shareholders vote against performance-based equity compensation plans that allow
for re-testing. We pay particular attention to awards to major shareholders that
serve as senior executives, mindful of the natural alignment between
shareholders' and the executive's interests and the potential for such grants to
further consolidate the executive's ownership level.
Director
Compensation
Glass
Lewis believes that non-employee directors should receive appropriate types and
levels of compensation for the time and effort they spend serving on the board
and its committees. Director fees should be reasonable in order to retain and
attract qualified individuals. We support compensation plans that include non
performance-based equity awards. Glass Lewis compares the costs of these plans
to the plans of peer companies with similar market capitalizations in the same
country to help inform its judgment on this issue.
Retirement
Benefits for Directors
We
will typically recommend voting against proposals to grant retirement benefits
to non-executive directors. Such extended payments can impair the objectivity
and independence of these board members. Directors should receive adequate
compensation for their board service through initial and annual fees.
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Limits
on Executive Compensation
As
a general rule, Glass Lewis believes that shareholders should not seek to
micromanage executive compensation programs. Such matters should be left to the
board’s compensation committee. We view the election of directors, and
specifically those who sit on the compensation committee, as an appropriate
mechanism for shareholders to express their disapproval or support of board
policy on this issue. Further, we believe that companies whose
pay-for-performance is in line with their peers should be granted the
flexibility to compensate their executives in a manner that drives sustainable
growth. However, Glass Lewis favors performance-based compensation as an
effective means of motivating executives to act in the best interests of
shareholders. Performance-based compensation may be limited if a chief
executive’s pay is capped at a low level rather than flexibly tied to the
performance of the company.
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Governance
Structure
Amendments
to the Articles of Association
We
will evaluate proposed amendments to a company’s articles of association on a
case-by-case basis. We are opposed to the practice of bundling several
amendments under a single proposal because it prevents shareholders from
evaluating each amendment on its own merits. In such cases, we will analyze each
change individually and will recommend voting for the proposal only when we
believe that the amendments on balance are in the best interests of
shareholders.
Virtual
Meetings
Glass
Lewis unequivocally supports companies facilitating the virtual participation of
shareholders in general meetings. We believe that virtual meeting technology can
be a useful complement to a traditional, in-person shareholder meeting by
expanding participation of shareholders who are unable to attend a shareholder
meeting in person (i.e. a "hybrid meeting"). However, we also believe that
virtual-only shareholder meetings can curb the ability of a company's
shareholders to participate in the meeting and meaningfully communicate with
company management and directors.
Where
companies are convening a meeting at which in-person attendance of shareholders
is limited, we expect companies to set and disclose clear procedures at the time
of convocation regarding:
i)When,
where, and how shareholders will have an opportunity to ask questions related to
the subjects normally discussed at the annual meeting, including a timeline for
submitting questions, types of appropriate questions, and rules for how
questions and comments will be recognized and disclosed to shareholders;
ii)In
particular where there are restrictions on the ability of shareholders to
question the board during the meeting - the manner in which appropriate
questions received during the meeting will be addressed by the board; this
should include a commitment that questions which meet the board’s guidelines are
answered in a format that is accessible by all shareholders, such as on the
company’s AGM or investor relations website;
iii)The
procedure and requirements to participate in the meeting and access the meeting
platform; and
iv)Technical
support that is available to shareholders prior to and during the meeting. In
egregious cases where inadequate disclosure of the aforementioned has been
provided to shareholders at the time of convocation, we will generally recommend
that shareholders hold the board or relevant directors accountable.
Depending
on a company’s governance structure, country of incorporation, and the agenda of
the meeting, this may lead to recommendations that shareholders vote against
members of the governance committee (or equivalent; if up for re-election); the
chair of the board (if up for re-election); and/or other agenda items concerning
board composition and performance as applicable (e.g. ratification of board
acts). We will always take into account emerging local laws, best practices, and
disclosure standards when assessing a company’s performance on this issue.
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Anti-Takeover
Measures
Multi-Class
Share Structures
Glass
Lewis believes multi-class voting structures are typically not in the best
interests of common shareholders. We believe the economic stake of each
shareholder should match their voting power and that no small group of
shareholders, family or otherwise, should have voting rights different from
those of other shareholders.
We
generally consider a multi-class share structure to reflect negatively on a
company's overall corporate governance. Because we believe that allowing one
vote per share best protects the interests of shareholders, we typically
recommend that shareholders vote in favor of recapitalization proposals to
eliminate multi-class share structures. Similarly, we will generally recommend
voting against proposals to adopt a new class of common stock.
Poison
Pills (Shareholder Rights Plans)
Glass
Lewis believes that poison pill plans generally are not in the best interests of
shareholders. Specifically, they can reduce management accountability by
substantially limiting opportunities for corporate takeovers. Rights plans can
thus prevent shareholders from receiving a buy-out premium for their stock. We
believe that boards should be given wide latitude in directing the activities of
the company and charting the company’s course. However, on an issue such as this
where the link between the financial interests of shareholders and their right
to consider and accept buyout offers is so substantial, we believe that
shareholders should be allowed to vote on whether or not they support such a
plan’s implementation. In certain limited circumstances, we will support a
limited poison pill to accomplish a particular objective, such as the closing of
an important merger, or a pill that contains what we believe to be a reasonable
‘qualifying offer’ clause.
Supermajority
Vote Requirements
Glass
Lewis favors a simple majority voting structure except where a supermajority
voting requirement is explicitly intended to protect the rights of minority
shareholders in a controlled company. In the case of noncontrolled companies,
supermajority vote requirements act as impediments to shareholder action on
ballot items that are critical to their interests. One key example is in the
takeover context where supermajority vote requirements can strongly limit
shareholders’ input in making decisions on such crucial matters as selling the
business.
Increase
in Authorized Shares
Glass
Lewis believes that having adequate capital stock available for issuance is
important to the operation of a company. We will generally support proposals
when a company could reasonably use the requested shares for financing, stock
splits and stock dividends. While we believe that having adequate shares to
allow management to make quick decisions and effectively operate the business is
critical, we prefer that, for significant transactions, management come to
shareholders to justify their use of additional shares rather than providing a
blank check in the form of large pools of unallocated shares available for any
purpose.
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Guidelines 18
In
general, we will support proposals to increase authorized shares up to 100% of
the number of shares currently authorized unless, after the increase the company
would be left with less than 30% of its authorized shares outstanding. In
markets where such authorities typically also authorize the board to issue new
shares without separate shareholder approval, we apply the policy described
below on the issuance of shares.
Issuance
of Shares
Issuing
additional shares can dilute existing holders in some circumstances. Further,
the availability of additional shares, where the board has discretion to
implement a poison pill, can often serve as a deterrent to interested suitors.
Accordingly, where we find that the company has not disclosed a detailed plan
for use of the proposed shares, or where the number of shares requested are
excessive, we typically recommend against the issuance. In the case of a private
placement, we will also consider whether the company is offering a discount to
its share price.
In
general, we will support proposals to authorize the board to issue shares (with
pre-emption rights) when the requested increase is equal to or less than the
current issued share capital. This authority should generally not exceed five
years. In accordance with differing market best practice, in some countries, if
a proposal seeks to issue shares exceeding 33% of issued share capital, the
company should explain the specific rationale, which we analyze on a
case-by-case basis.
We
will also generally support proposals to suspend pre-emption rights for a
maximum of 5-20% of the issued ordinary share capital of the company, depending
on best practice in the country in which the company is located. This authority
should not exceed five years, or less for some countries.
Repurchase
of Shares
We
will recommend voting in favor of a proposal to repurchase shares when the plan
includes the following provisions: (i) a maximum number of shares which may be
purchased (typically not more than 10-20% of the issued share capital); and (ii)
a maximum price which may be paid for each share (as a percentage of the market
price). We may support a larger proposed repurchase program where the terms of
the program stipulate that repurchased shares must be cancelled.
Shareholder
Proposals
Glass
Lewis believes that shareholders should seek to promote governance structures
that protect shareholders, support effective ESG oversight and reporting, and
encourage director accountability. Accordingly, Glass Lewis places a significant
emphasis on promoting transparency, robust governance structures and companies’
responsiveness to and engagement with shareholders. We also believe that
companies should be transparent on how they are mitigating material ESG risks,
including those related to climate change, human capital management, and
stakeholder relations.
To
that end, we evaluate all shareholder proposals on a case-by-case basis with a
view to promoting long-term shareholder value. While we are generally supportive
of those that promote board accountability, shareholder rights, and
transparency, we consider all proposals in the context of a company’s unique
operations and risk profile.
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Guidelines 19
For
a detailed review of our policies concerning compensation, environmental,
social, and governance shareholder proposals, please refer to our comprehensive
Proxy
Paper Guidelines for Environmental, Social & Governance
Initiatives,
available at www.glasslewis.com/voting-policies-current/.
2022
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Guidelines 20
Overall
Approach to
Environmental, Social & Governance
Glass
Lewis evaluates all environmental and social issues through the lens of
long-term shareholder value. We believe that companies should be considering
material environmental and social factors in all aspects of their operations and
that companies should provide shareholders with disclosures that allow them to
understand how these factors are being considered and how attendant risks are
being mitigated. We also are of the view that governance is a critical factor in
how companies manage environmental and social risks and opportunities and that a
well-governed company will be generally managing these issues better than one
without a governance structure that promotes board independence and
accountability.
We
believe part of the board’s role is to ensure that management conducts a
complete risk analysis of company operations, including those that have material
environmental and social implications. We believe that directors should monitor
management’s performance in both capitalizing on environmental and social
opportunities and mitigating environmental and social risks related to
operations in order to best serve the interests of shareholders. Companies face
significant financial, legal and reputational risks resulting from poor
environmental and social practices, or negligent oversight thereof. Therefore,
in cases where the board or management has neglected to take action on a
pressing issue that could negatively impact shareholder value, we believe that
shareholders should take necessary action in order to effect changes that will
safeguard their financial interests.
Given
the importance of the role of the board in executing a sustainable business
strategy that allows for the realization of environmental and social
opportunities and the mitigation of related risks, relating to environmental
risks and opportunities, we believe shareholders should seek to promote
governance structures that protect shareholders and promote director
accountability. When management and the board have displayed disregard for
environmental or social risks, have engaged in egregious or illegal conduct, or
have failed to adequately respond to current or imminent environmental and
social risks that threaten shareholder value, we believe shareholders should
consider holding directors accountable. In such instances, we will generally
recommend against responsible members of the board that are specifically charged
with oversight of the issue in question.
When
evaluating environmental and social factors that may be relevant to a given
company, Glass Lewis does so in the context of the financial materiality of the
issue to the company’s operations. We believe that all companies face risks
associated with environmental and social issues. However, we recognize that
these risks manifest themselves differently at each company as a result of a
company’s operations, workforce, structure, and geography, among other factors.
Accordingly, we place a significant emphasis on the financial implications of a
company’s actions with regard to impacts on its stakeholders and the
environment.
When
evaluating environmental and social issues, Glass Lewis examines
companies’:
Direct
environmental and social risk
— Companies should evaluate financial exposure to direct environmental risks
associated with their operations. Examples of direct environmental risks include
those associated with oil or gas spills, contamination, hazardous leakages,
explosions, or reduced water or air quality, among others. Social risks may
include non-inclusive employment policies, inadequate human rights policies, or
issues that adversely affect the company’s stakeholders. Further,
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Guidelines 21
we
believe that firms should consider their exposure to risks emanating from a
broad range of issues, over which they may have no or only limited control, such
as insurance companies being affected by increased storm severity and frequency
resulting from climate change or membership in trade associations with
controversial political ties.
Risk
due to legislation and regulation —
Companies should evaluate their exposure to changes or potential changes in
regulation that affect current and planned operations. Regulation should be
carefully monitored in all jurisdictions in which the company operates. We look
closely at relevant and proposed legislation and evaluate whether the company
has responded proactively.
Legal
and reputational risk
— Failure to take action on important environmental or social issues may carry
the risk of inciting negative publicity and potentially costly litigation. While
the effect of high-profile campaigns on shareholder value may not be directly
measurable, we believe it is prudent for companies to carefully evaluate the
potential impacts of the public perception of their impacts on stakeholders and
the environment. When considering investigations and lawsuits, Glass Lewis is
mindful that such matters may involve unadjudicated allegations or other charges
that have not been resolved. Glass Lewis does not assume the truth of such
allegations or charges or that the law has been violated. Instead, Glass Lewis
focuses more broadly on whether, under the particular facts and circumstances
presented, the nature and number of such concerns, lawsuits or investigations
reflects on the risk profile of the company or suggests that appropriate risk
mitigation measures may be warranted.
Governance
risk
— Inadequate oversight of environmental and social issues carries significant
risks to companies. When leadership is ineffective or fails to thoroughly
consider potential risks, such risks are likely unmitigated and could thus
present substantial risks to the company, ultimately leading to loss of
shareholder value.
Glass
Lewis believes that one of the most crucial factors in analyzing the risks
presented to companies in the form of environmental and social issues is the
level and quality of oversight over such issues. When management and the board
have displayed disregard for environmental risks, have engaged in egregious or
illegal conduct, or have failed to adequately respond to current or imminent
environmental risks that threaten shareholder value, we believe shareholders
should consider holding directors accountable. When companies have not provided
for explicit, board-level oversight of environmental and social matters and/or
when a substantial environmental or social risk has been ignored or inadequately
addressed, we may recommend voting against members of the board. In addition, or
alternatively, depending on the proposals presented, we may also consider
recommending voting in favor of relevant shareholder proposals or against other
relevant management-proposed items, such as the ratification of auditor, a
company’s accounts and reports, or ratification of management and board
acts.
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Guidelines 22
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with Glass Lewis
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2022
International Proxy Paper Policy
Guidelines 23
DISCLAIMER
©
2021 Glass, Lewis & Co., and/or its affiliates. All Rights
Reserved.
This
document is intended to provide an overview of Glass Lewis’ proxy voting
guidelines. It is not intended to be exhaustive and does not address all
potential voting issues. Glass Lewis’ proxy voting guidelines, as they apply to
certain issues or types of proposals, are further explained in supplemental
guidelines and reports that are made available on Glass Lewis’ website –
http://www.glasslewis.com.
These guidelines have not been set or approved by the U.S. Securities and
Exchange Commission or any other regulatory body. Additionally, none of the
information contained herein is or should be relied upon as investment advice.
The content of this document has been developed based on Glass Lewis’ experience
with proxy voting and corporate governance issues, engagement with clients and
issuers, and review of relevant studies and surveys, and has not been tailored
to any specific person or entity.
Glass
Lewis’ proxy voting guidelines are grounded in corporate governance best
practices, which often exceed minimum legal requirements. Accordingly, unless
specifically noted otherwise, a failure to meet these guidelines should not be
understood to mean that the company or individual involved has failed to meet
applicable legal requirements.
No
representations or warranties express or implied, are made as to the accuracy or
completeness of any information included herein. In addition, Glass Lewis shall
not be liable for any losses or damages arising from or in connection with the
information contained herein or the use, reliance on, or inability to use any
such information. Glass Lewis expects its subscribers possess sufficient
experience and knowledge to make their own decisions entirely independent of any
information contained in this document.
All
information contained in this report is protected by law, including, but not
limited to, copyright law, and none of such information may be copied or
otherwise reproduced, repackaged, further transmitted, transferred,
disseminated, redistributed or resold, or stored for subsequent use for any such
purpose, in whole or in part, in any form or manner, or by any means whatsoever,
by any person without Glass Lewis’ prior written consent.
2022
International Proxy Paper Policy
Guidelines 24