ck0001872253-20231231
CROMWELL
CENTERSQUARE REAL ESTATE FUND
Investor
Class (MRESX)
Institutional
Class (MRASX)
CROMWELL
MARKETFIELD L/S FUND
Investor
Class (MFADX)
Institutional
Class (MFLDX)
CROMWELL
TRAN SUSTAINABLE FOCUS FUND
Investor
Class (LIMAX)
Institutional
Class (LIMIX)
CROMWELL
FORESIGHT GLOBAL SUSTAINABLE INFRASTRUCTURE FUND
Investor
Class (CFGVX)*
Institutional
Class (CFGIX)
CROMWELL
GREENSPRING MID CAP FUND
Investor
Class (GRNPX)*
Institutional
Class (GRSPX)
Statement
of Additional Information
Dated:
April 30,
2024
This
Statement of Additional Information (“SAI”) provides general information about
the Cromwell CenterSquare Real Estate Fund (“CenterSquare Fund”), the Cromwell
Marketfield L/S Fund (“Marketfield Fund”), the Cromwell Tran Sustainable Focus
Fund (“Tran Fund”), the Cromwell Foresight Global Sustainable Infrastructure
Fund (“Foresight Fund”), and the Cromwell Greenspring Mid Cap Fund (“Greenspring
Fund”), (together, the “Funds”), each a series of Total Fund Solution (the
“Trust”). This SAI is not a prospectus and should be read in conjunction with
the Funds’ current prospectus dated April 30, 2024 (the “Prospectus”), as
supplemented and amended from time to time, which is incorporated by reference.
To obtain a copy of the Prospectus and/or the Funds’ Annual
Report
to shareholders free of charge, please call the Fund at 1-855-625-7333 toll free
or by visiting the Fund’s website at www.thecromwellfunds.com.
*
Investor Class shares of the Cromwell Foresight Global Sustainable
Infrastructure Fund and Cromwell Greenspring Mid Cap Fund are not currently
available for sale.
TABLE
OF CONTENTS
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| TRUSTEES
AND OFFICERS |
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| MANAGER-OF-MANAGERS
ARRANGEMENTS |
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| INVESTMENT
SUB-ADVISERS |
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| DISTRIBUTION
(RULE 12b-1) AND SHAREHOLDER SERVICING PLAN |
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| RULE
12b-1 DISTRIBUTION FEE |
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| SUB-ACCOUNTING
SERVICE FEES |
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| REVENUE
SHARING |
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A-8 |
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The
Trust
The
Trust is a Delaware statutory trust organized on July 29, 2021 and is
registered with the Securities and Exchange Commission (“SEC”) as an open-end
management investment company. Each Fund is one series, or mutual fund, formed
by the Trust. Each Fund has its own investment objective and policies. Shares of
other series of the Trust are offered in separate prospectuses and SAIs. The
Trust may register additional series and offer shares of a new fund or share
class under the Trust at any time.
The
Trust is authorized to issue an unlimited number of interests (or shares).
Interests in each Fund are represented by shares of beneficial
interest
each with no par value. Each
share of the Trust has equal voting rights and liquidation rights, and is voted
in the aggregate and not by the series or class of shares except in matters
where a separate vote is required by the Investment Company Act of 1940, as
amended (the “1940 Act”), or when the matters affect only the interests of
a particular series or class of shares. When matters are submitted to
shareholders for a vote, each shareholder is entitled to one vote for each full
share owned and fractional votes for fractional shares owned. Shares of each
series or class generally vote together, except when required under federal
securities laws to vote separately on matters that only affect a particular
class. The Trust does not normally hold annual meetings of shareholders. The
Trust’s Board of Trustees (the “Board” or the “Board of Trustees”) shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon removal of any trustee when requested to do so in writing by
shareholders holding 10% or more of the Trust’s outstanding shares.
Each
share of each Fund represents an equal proportionate interest in the assets and
liabilities belonging to each Fund and is entitled to such distributions out of
the income belonging to each Fund as are declared by the Board of Trustees. The
Board of Trustees has the authority from time to time to divide or combine the
shares of any series into a greater or lesser number of shares of that series so
long as the proportionate beneficial interests in the assets belonging to that
series and the rights of shares of any other series are in no way affected.
Additionally, in case of any liquidation of a series, the shareholders of the
series being liquidated are entitled to receive a distribution out of the
assets, net of the liabilities, belonging to that series. Expenses attributable
to any series or class are borne by that series or class. Any general expenses
of the Trust not readily identifiable as belonging to a particular series or
class are allocated by, or under the direction of, the Board of Trustees on the
basis of relative net assets, the number of shareholders or another equitable
method. No shareholder shall be personally liable for the obligations and
expenses incurred by Trust or any Fund or class.
With
respect to each Fund, the Trust may offer more than one class of shares. The
Trust, on behalf of each Fund, has adopted a multiple class plan under
Rule 18f-3 under the 1940 Act, detailing the attributes of each Fund’s
share classes. Each share of a series or class represents an equal proportionate
interest in that series or class with each other share of that series or class.
While
each Fund offers both an Investor Class and Institutional Class shares, as of
the date of this SAI, the Investor Class are not available for purchase for the
Foresight Fund and Greenspring Fund.
The
assets of each Fund received for the issue or sale of its shares, and all
income, earnings, profits and proceeds thereof, subject only to the rights of
creditors, shall constitute the underlying assets of each Fund. In the event of
the dissolution or liquidation of each Fund, the shareholders of each Fund are
entitled to share pro rata in the net assets of each Fund available for
distribution to shareholders.
Cromwell
Investment Advisors, LLC (the “Adviser”) serves as the investment adviser to
each Fund. Effective on March 7, 2022, AMG Managers CenterSquare Real
Estate Fund, a series of AMG
Funds I
(the “Predecessor CenterSquare Fund”), reorganized into the CenterSquare Fund.
Pursuant to the reorganization, the CenterSquare Fund is the successor to the
accounting and performance information of the Predecessor CenterSquare Fund. The
Predecessor CenterSquare Fund Investor Class shares commenced operations on
December 31, 1997. The Predecessor CenterSquare Fund Institutional Class
shares commenced operations on February 24, 2017. Class Z shares of
the CenterSquare Fund converted into Institutional Class shares of the Fund on
February 28, 2023.
The
Marketfield Fund is the successor to the Marketfield Fund, a series of Trust for
Professional Managers (“TPM”) (the “Predecessor Marketfield Fund”) pursuant to a
reorganization effective after the close of business on March 11, 2022.
During the past 10 years, the Marketfield Fund was a series of different
registered investment companies. The Marketfield Fund, first named the
Marketfield Fund launched on July 31, 2007 as a series of TPM. The Fund
reorganized into the MainStay Marketfield Fund as a series of Mainstay Funds
Trust (“Mainstay”) on October 5, 2012. On April 8, 2016, the
Marketfield Fund reorganized back into the Marketfield Fund series of TPM where
it remained until March 11, 2022, when it reorganized into the Marketfield
Fund. The Marketfield Fund has adopted the performance and financial history of
the Predecessor Marketfield Fund. Performance information shown prior to the
close of business on March 11, 2022 is that of the Predecessor Marketfield
Fund. Class C shares of the Marketfield Fund converted into Investor Class
shares on November 17, 2023.
The
Cromwell Tran Sustainable Focus Fund is the successor to the Tran Capital
Sustainable Focused Fund, a series of FundVantage Trust (the “Predecessor Tran
Fund”) pursuant to a reorganization effective after the close of business on
August 5, 2022. From the Predecessor Tran Fund’s inception to
September 15, 2017, the Fund’s name was the “Lateef Fund.” From
September 16, 2017 to February 6, 2020, the Predecessor Tran Fund’s
name was the “Lateef Focused Growth Fund.” From February 7, 2020 to
April 14, 2021 the Predecessor Tran Fund’s name was “Lateef Focused
Sustainable Growth Fund.” Class A, Class C and Institutional Class shares
commenced operations (through the Predecessor Tran Fund) on September 6,
2007. Effective August 30, 2019, Class C shares were converted to
Class A shares. Effective August 5, 2022, Class A shares were
redesignated as Investor Class shares.
The
Foresight Fund commenced operations on January 31, 2023.
The
Greenspring Fund is the successor to the Greenspring Fund, Inc., which commenced
operations on July 1, 1983, pursuant to a reorganization effective after
the close of business on August 14, 2023.
Investment
Policies, Strategies and Associated Risks
The
investment objective of each Fund is provided in the prospectus. There is no
assurance that each Fund will achieve its investment objective. The following
discussion supplements the description of each of the Fund’s investment
objectives and principal investment strategies set forth in the Prospectus.
Except for the fundamental investment restrictions listed below (see “Investment
Restrictions - Fundamental Investment Restrictions” below), the Funds’
investment strategies and policies are not fundamental and may be changed by the
sole action of the Board of Trustees, without shareholder approval. The Funds’
investment objectives are non-fundamental and may be changed without the
approval of the Funds’ shareholders upon 60 days’ written notice to
shareholders. While each Fund is permitted to hold securities and to engage in
various strategies as described hereafter, it is not obligated to do
so.
Whenever
an investment policy or limitation states a maximum percentage of the Funds’
assets that may be invested in any security or other asset, or sets forth a
policy regarding quality standards, the standard or percentage limitation is
determined immediately after and as a result of the Funds’ acquisition or sale
of the security or other asset. Accordingly, except with respect to borrowing
and illiquid securities, any subsequent changes in values, net assets or other
circumstances are not considered when determining whether an investment complies
with the Funds’ investment policies and limitations. In addition, if a
bankruptcy or other extraordinary event occurs concerning a particular
investment by each Fund, each Fund may receive securities, real estate or other
investments that the Fund would not, or could not, buy. If this happens, each
Fund will sell these investments as soon as reasonably practicable while trying
to maximize the return to the Funds’ shareholders.
Diversification
The
Marketfield L/S Fund and the Greenspring Fund (each, a “Diversified Fund,” and
together, the “Diversified Funds”) are diversified. Under applicable federal
laws, to qualify as a diversified fund, the Diversified Funds, with respect to
75% of its total assets, may not invest more than 5% of its total assets in any
one issuer and may not hold more than 10% of the securities of any one issuer.
The remaining 25% of the Diversified Funds’ total assets does not need to be
“diversified” and may be invested in the securities of a single issuer, subject
to other applicable laws. The diversification of a Diversified Fund’s holdings
is measured at the time that the Fund purchases a security. However, if a
Diversified Fund purchases a security and holds it for a period of time, the
security may become a larger percentage of the Fund’s total assets due to
movements in the financial markets. If the market affects several securities
held by a Diversified Fund, the Fund may have a greater percentage of its assets
invested in the securities of a few issuers. Then the Fund is subject to the
risk that its performance may be hurt disproportionately by the poor performance
of relatively few securities despite the fact that the Fund qualifies as a
diversified fund under applicable federal laws.
Non-Diversification
The
CenterSquare Fund, the Tran Fund, and the Foresight Fund (each, a
“Non-Diversified Fund,” and together, the “Non-Diversified Funds”) are
non-diversified under the 1940 Act, which means that there is no
restriction as to how much each Non-Diversified Fund may invest in the
securities of any one issuer. However, to qualify for tax treatment as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the “Code”), each Non-Diversified Fund intends to comply, as of the end of each
taxable quarter, with certain diversification requirements imposed by the Code.
Pursuant to these requirements, at the end of each taxable quarter, each
Non-Diversified Fund, among other things, will not have investments in the
securities of any one issuer (other than U.S. Government securities) of
more than 25% of the value of the respective Non-Diversified Fund’s total
assets. In addition, each Non-Diversified Fund, with respect to 50% of its total
assets, will not have investments in the securities of any issuer equal to 5% of
the respective Non-Diversified Fund’s total assets, and will not purchase more
than 10% of the outstanding voting securities of any one issuer. As a
non-diversified investment company, each Non-Diversified Fund may be subject to
greater risks than diversified companies because of the larger impact of
fluctuation in the values of securities of fewer issues.
General
Market Risks
Global
economies and financial markets are increasingly interconnected, which increases
the probabilities that conditions in one country or region might adversely
impact issues in a different country or region. In some cases, the stock prices
of individual companies have been negatively impacted even though there may be
little or no apparent degradation in the financial condition or prospects of
that company. As a result of this volatility, many of the risks associated with
an
investment
in each Fund may be increased. Continuing market problems may have adverse
effects on each Fund.
Market
Disruption and Geopolitical Risk
Each
Fund is subject to the risk that geopolitical events will disrupt securities
markets and adversely affect global economies and markets. War, terrorism, and
related geopolitical events (and their aftermath) have led, and in the future
may lead, to increased short-term market volatility and may have adverse
long-term effects on U.S. and world economies and markets generally. Likewise,
natural and environmental disasters, such as, for example, earthquakes, fires,
floods, hurricanes, tsunamis and weather-related phenomena generally, as well as
the spread of infectious illness or other public health issues, including
widespread epidemics or pandemics such as the COVID-19 outbreak in 2020, and
systemic market dislocations can be highly disruptive to economies and markets.
Those events as well as other changes in non-U.S. and domestic economic and
political conditions also could adversely affect individual issuers or related
groups of issuers, securities markets, interest rates, credit ratings,
inflation, investor sentiment, and other factors affecting the value of each
Fund’s investments.
Given
the increasing interdependence between global economies and markets, conditions
in one country, market, or region might adversely impact markets, issuers and/or
foreign exchange rates in other countries, including the U.S. Continuing
uncertainty as to the status of the Euro and the European Monetary Union (the
“EMU”) has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the EMU, or any continued
uncertainty as to its status, could have significant adverse effects on currency
and financial markets, and on the values of the Fund’s investments. At a
referendum in June 2016, the United Kingdom (the “UK”) voted to leave the EU
thereby initiating the British exit from the EU (commonly known as “Brexit”). In
March 2017, the UK formally notified the European Council of the UK’s intention
to withdraw from the EU pursuant to Article 50 of the Treaty on European Union.
This formal notification began a multi-year period of negotiations regarding the
terms of the UK’s exit from the EU, which formally occurred on January 31, 2020.
On January 31, 2020, the UK officially withdrew from the EU and on December 30,
2020, the EU and UK signed the EU-UK Trade and Cooperation Agreement (“TCA”), an
agreement on the terms governing certain aspects of the EU’s and the UK’s
relationship. Notwithstanding the TCA, there is likely to be considerable
uncertainty as to the UK’s post-transition framework. There is also still
uncertainty relating to whether the UK’s exit will increase the likelihood of
other countries also departing the EU. Brexit may have a significant impact on
the UK, Europe, and global economies, which may result in increased volatility
and illiquidity, and potentially lower economic growth in markets in the UK,
Europe and globally, which may adversely affect the value of a Fund’s
investments.
Unexpected
political, regulatory and diplomatic events within the United States and abroad
may affect investor and consumer confidence and may adversely impact financial
markets and the broader economy, perhaps suddenly and to a significant degree.
The ongoing armed conflict between Ukraine and Russia in Europe and Israel and
Hamas in the Middle East could have severe adverse effects on the regional or
global economies and the markets for certain securities. The U.S. and the
European Union have imposed sanctions on certain Russian individuals and
companies, including certain financial institutions, and have limited certain
exports and imports to and from Russia. The wars in the Ukraine and in the
Middle East have contributed to recent market volatility and may continue to do
so. For additional information, see “Market Disruption Risks Related to Armed
Conflict” below.
Market
Disruption Risks Related to Armed Conflict
As
a result of increasingly interconnected global economies and financial markets,
armed conflict between countries or in a geographic region, for example the
current conflicts between Russia and Ukraine in Europe and Hamas and Israel in
the Middle East, has the potential to adversely impact the Funds’ investments.
Such conflicts, and other corresponding events, have had, and could continue to
have, severe negative effects on regional and global economic and financial
markets, including increased volatility, reduced liquidity, and overall
uncertainty. The negative impacts may be particularly acute in certain sectors.
The timing and duration of such conflicts, resulting sanctions, related events
and other implications cannot be predicted. The foregoing may result in a
negative impact on Fund performance and the value of an investment in a Fund,
even beyond any direct investment exposure the Fund may have to issuers located
in or with significant exposure to an impacted country or geographic
regions.
Cyber
Security
With
the increasing use of the Internet and technology in connection with each Fund’s
operations, each Fund is susceptible to greater operational and information
security risks through breaches in cyber security. Cyber security breaches
include, without limitation, infection by computer viruses and unauthorized
access to the Funds’ systems through “hacking” or other means for the purpose of
misappropriating assets or sensitive information, corrupting data, or causing
operations to be disrupted. Cyber security breaches may also occur in a manner
that does not require gaining unauthorized access, such as denial-of-service
attacks or situations where authorized individuals intentionally or
unintentionally release confidential information stored on the Funds’ systems. A
cyber security breach may cause disruptions and impact the Fund’s business
operations, which could potentially result in financial losses, inability to
determine the Funds’ net asset value (“NAV”), violation of applicable law,
regulatory penalties and/or fines, compliance and other costs. Each Fund and its
shareholders could be negatively impacted as a result. In addition, because each
Fund works closely with third-party service providers (e.g., custodians),
indirect cyber security breaches at such third-party service providers may
subject the Funds’ shareholders to the same risks associated with direct cyber
security breaches. Further, indirect cyber security breaches at an issuer of
securities in which the Funds’ invest may similarly negatively impact each
Fund’s shareholders because of a decrease in the value of these securities.
While each Fund has established risk management systems designed to reduce the
risks associated with cyber security breaches, there can be no assurances that
such measures will be successful particularly since each Fund does not control
the cyber security systems of issuers or third-party service
providers.
Arbitrage
Each
Fund may sell a security that it owns in one market and simultaneously purchase
the same security in another market, or it may buy a security in one market and
simultaneously sell it in another market, in order to take advantage of
differences in the price of the security in the different markets. Each Fund
does not actively engage in arbitrage. Such transactions are generally entered
into with respect to debt securities and occur in a dealer’s market where the
buying and selling dealers involved confirm their prices to each Fund at the
time of the transaction, thus eliminating any risk to the assets of each Fund.
Such transactions, which involve costs to each Fund, may be limited by the
policy of each Fund to qualify as a regulated investment company (a “RIC”) under
the Internal Revenue Code of 1986, as amended (the “Code”).
Bank
Obligations
Each
Fund may invest in certificates of deposit (“CDs”), time deposits, bankers’
acceptances, and other short-term debt obligations issued by commercial banks or
savings and loan institutions (“S&Ls”).
CDs
are certificates evidencing the obligation of a bank or S&L to repay funds
deposited with it for a specified period of time at a specified rate of return.
If a CD is non-negotiable, it may be considered illiquid and will be subject to
each Fund’s restriction on investments in illiquid securities.
Time
deposits in banking institutions are generally similar to CDs, but are
uncertificated. Time deposits that may be held by each Fund will not benefit
from insurance administered by the Federal Deposit Insurance Corporation (the
“FDIC”). Bank time deposits are monies kept on deposit with U.S. or foreign
banks (and their subsidiaries and branches) or U.S. S&Ls for a stated period
of time at a fixed rate of interest. There may be penalties for the early
withdrawal of such time deposits, in which case the yields of these investments
will be reduced. Time deposits maturing in more than seven days and/or subject
to withdrawal penalties will be subject to each Fund’s restriction on
investments in illiquid securities.
Fixed
time deposits are bank obligations payable at a stated maturity date and bearing
interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the
investor, but may be subject to early withdrawal penalties that vary depending
upon market conditions and the remaining maturity of the obligation. These
instruments reflect the obligation both of the bank and of the drawer to pay the
full amount of the instrument upon maturity. There are no contractual
restrictions on the right to transfer a beneficial interest in a fixed time
deposit to a third party, although there generally is no market for such
deposits.
Bankers’
acceptances are credit instruments evidencing the obligation of a bank or
S&L to pay a draft drawn on it by a customer, usually in connection with
international commercial transactions. Bankers’ acceptances are short-term
credit instruments used to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then “accepted” by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an asset, or it may be sold in the secondary
market at the going rate of interest for a specific maturity.
As
a result of governmental regulations, U.S. branches of U.S. banks, among other
things, generally are required to maintain specified levels of reserves, and are
subject to other supervision and regulation designed to promote financial
soundness. U.S. S&Ls are supervised and subject to examination by the Office
of the Comptroller of the Currency. U.S. S&Ls are insured by the Deposit
Insurance Fund, which is administered by the FDIC and backed by the full faith
and credit of the U.S. government.
Obligations
of foreign banks involve somewhat different investment risks than those
affecting obligations of U.S. banks, including: (i) the possibilities that
their liquidity could be impaired because of future political and economic
developments; (ii) their obligations may be less marketable than comparable
obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations;
(iv) foreign deposits may be seized or nationalized; (v) foreign
governmental restrictions, such as exchange controls, may be adopted which might
adversely affect the payment of principal and interest on those obligations; and
(vi) the selection of
those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks or the accounting, auditing, and financial
reporting standards, practices and requirements applicable to foreign banks may
differ from those applicable to U.S. banks. Foreign banks are not generally
subject to examination by any U.S. government agency or
instrumentality.
See
“Cash Equivalents” for more information.
Borrowing
Each
Fund may borrow money to the extent permitted under the 1940 Act, or otherwise
limited herein, as such may be interpreted or modified by regulatory authorities
having jurisdiction, from time to time. This borrowing may be unsecured. The
1940 Act precludes the Funds from borrowing if, as a result of such borrowing,
the total amount of all money borrowed by each Fund exceeds 33 1/3% of the
value of its total assets (that is, total assets including borrowings, less
liabilities exclusive of borrowings) at the time of such borrowings. This means
that the 1940 Act requires each Fund to maintain continuous asset coverage of
300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, each Fund may be required to
sell some of its portfolio holdings within three days to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time, and could cause each Fund
to be unable to meet certain requirements for qualification as a RIC under the
Code.
Borrowing
tends to exaggerate the effect on each Fund’s NAV per share of any changes in
the market value of each Fund’s portfolio securities. Money borrowed will be
subject to interest costs, which may or may not be recovered by earnings on the
securities purchased. Each Fund also may be required to maintain minimum average
balances in connection with a borrowing or to pay a commitment or other fee to
maintain a line of credit. Either of these requirements would increase the cost
of borrowing over the stated interest
rate.
Brady
Bonds
Each
Fund may invest a portion of its assets in Brady Bonds. Brady Bonds are
sovereign bonds issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the International Monetary Fund (the
“IMF”). The Brady Plan framework, as it has developed, contemplates the exchange
of commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be
issued in respect of new money being advanced by existing lenders in connection
with the debt restructuring. The World Bank and the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements, which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Brady Bonds are not
considered U.S. government securities.
Brady
Bonds may be collateralized or uncollateralized and are issued in various
currencies (primarily the U.S. dollar). U.S. dollar-denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds,
are generally collateralized in full as to principal by U.S. Treasury zero
coupon bonds having the same maturity as the Brady Bonds. Interest payments on
these Brady Bonds generally are collateralized on a one-year or longer
rolling-forward basis by cash or securities in an amount that, in the case of
fixed rate bonds, is equal to at least one year of interest payments or, in the
case of floating rate bonds, initially is equal to at least one year’s interest
payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to “value recovery
payments” in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Brady Bonds are often
viewed as having three or four valuation components: (1) the collateralized
repayment of principal at final maturity; (2) the collateralized interest
payments; (3) the uncollateralized interest payments; and (4) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the “residual risk”).
Brady
Bonds involve various risk factors, including the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds. Investments in Brady Bonds are to be viewed as speculative.
There can be no assurance that Brady Bonds in which each Fund may invest will
not be subject to restructuring arrangements or to requests for new credit,
which may cause each Fund to suffer a loss of interest or principal on any of
its holdings.
Cash
Equivalents
To
the extent permitted by its investment objective and policies, the Funds may
invest in cash equivalents. Cash equivalents include U.S. government securities,
CDs, bank time deposits, bankers’ acceptances, repurchase agreements and
commercial paper, each of which is discussed in more detail herein. Cash
equivalents may include short-term fixed-income securities issued by private and
governmental institutions. Repurchase agreements may be considered cash
equivalents if the collateral pledged is an obligation of the U.S. government,
its agencies or instrumentalities.
Bankers
Acceptances.
Bankers acceptances are short-term credit instruments used to finance the
import, export, transfer or storage of goods. These instruments become
“accepted” when a bank guarantees their payment upon maturity. Eurodollar
bankers acceptances are bankers acceptances denominated in U.S. dollars and are
“accepted” by foreign branches of major U.S. commercial banks.
Certificates
of Deposit.
Certificates of deposit are issued against money deposited into a bank
(including eligible foreign branches of U.S. banks) or a savings and loan
association (“S&L”) for a definite period of time. They earn a specified
rate of return and are normally negotiable.
Eurodollar
Bonds and Yankeedollar Obligations. Eurodollar
obligations are U.S.-dollar obligations issued outside the United States by
domestic or foreign entities, while Yankeedollar obligations are U.S.-dollar
obligations issued inside the United States by foreign entities. Eurodollar
bonds are bonds issued outside the U.S. and are denominated in U.S.
dollars.
Repurchase
Agreements.
In a repurchase agreement, the Fund buys a security from a bank or a
broker-dealer that has agreed to repurchase the same security at a mutually
agreed-upon date and price. The resale price normally reflects the purchase
price plus a mutually agreed-upon interest rate. This interest rate is effective
for the period of time the Fund is invested in the agreement and is not related
to the coupon rate on the underlying security. Repurchase agreements are subject
to certain risks that may adversely affect the Fund. If a seller defaults, the
Fund may incur a loss if the value of the collateral securing the repurchase
agreement declines and may incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are commenced
with respect to a seller of the security, the Fund’s ability to dispose of the
collateral may be delayed or limited. Generally, the period of these repurchase
agreements will be short, and at no time will the Fund enter into a repurchase
agreement for a period of more than seven (7) days.
Short-Term
Corporate Debt Securities.
Short-term corporate debt securities include bills, notes, debentures, money
market instruments and similar instruments and securities, and are generally
used by corporations and other issuers to borrow money from investors for such
purposes as working capital or capital expenditures. The issuer pays the
investor a variable or fixed rate of interest and normally must repay the amount
borrowed on or before maturity. The investment return of corporate debt
securities reflects interest earnings and changes in the market value of the
security. The market value of a corporate debt obligation may be expected to
rise and fall inversely with interest rates generally. In addition to interest
rate risk, corporate debt securities also involve the risk that the issuers of
the securities may not be able to meet their obligations on interest or
principal payments at the time called for by an instrument. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Time
Deposits.
Time deposits in banks or S&Ls are generally similar to certificates of
deposit, but are uncertificated.
Closed-End
Funds
The
Funds may invest in shares of closed-end funds. Closed-end funds are investment
companies that generally do not continuously offer their shares for sale.
Rather, closed-end funds typically trade on a secondary market, such as the New
York Stock Exchange (“NYSE”) or the NASDAQ Stock Market, Inc. (“NASDAQ”).
Closed-end funds are subject to management risk because the adviser to the
closed-end fund may be unsuccessful in meeting each fund’s investment objective.
Moreover, an investment in a closed-end fund generally reflects the risks of the
closed-end fund’s underlying portfolio securities. Closed-end funds may also
trade at a discount or premium to their NAV and may trade at a larger discount
or smaller premium subsequent to purchase by each Fund. Closed-end funds may
trade infrequently and with small volume, which may make it difficult for each
Fund to buy and sell shares. Closed-end funds are subject to management fees and
other expenses that may increase their cost versus the costs of owning the
underlying securities. Since closed-end funds trade on exchanges, each Fund may
also incur brokerage expenses and commissions when it buys or sells closed-end
fund shares.
Collateralized
Debt Obligations
Each
Fund may invest in each of collateralized bond obligations (“CBOs”),
collateralized loan obligations (“CLOs”), other collateralized debt obligations
(“CDOs”) and other similarly structured securities. CBOs, CLOs and other CDOs
are types of asset-backed securities. A CBO is a trust which is often backed by
a diversified pool of high risk, below investment grade fixed-income securities.
The collateral can be from many different types of fixed-income securities, such
as high yield debt, residential privately issued mortgage-related securities,
commercial privately issued mortgage-related securities, trust preferred
securities and emerging market debt. A CLO is a trust typically collateralized
by a pool of loans, which may include, among others, domestic and foreign senior
secured loans, senior unsecured loans and subordinate corporate loans, including
loans that may be rated below investment grade or equivalent unrated loans.
Other CDOs are trusts backed by other types of assets representing obligations
of various parties. CBOs, CLOs and other CDOs may charge management fees and
administrative expenses.
For
CBOs, CLOs and other CDOs, the cash flows from the trust are split into two or
more portions, called tranches, varying in risk and yield. The riskiest portion
is the “equity” tranche, which bears the bulk of defaults from the bonds or
loans in the trust and serves to protect the other, more senior tranches from
default in all but the most severe circumstances. Since they are partially
protected from
defaults,
senior tranches from a CBO trust, CLO trust or trust of another CDO typically
have higher ratings and lower yields than their underlying securities, and can
be rated investment grade. Despite the protection from the equity tranche, CBO,
CLO or other CDO tranches can experience substantial losses due to actual
defaults, increased sensitivity to defaults due to collateral default and
disappearance of protecting tranches, market anticipation of defaults, as well
as aversion to CBO, CLO or other CDO securities as a class.
The
risks of an investment in a CBO, CLO or other CDO depend largely on the type of
the collateral securities and the class of the instrument in which each Fund
invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and
thus, are not registered under the securities laws. As a result, investments in
CBOs, CLOs and other CDOs may be characterized by each Fund as illiquid
securities, however an active dealer market may exist for CBOs, CLOs and other
CDOs allowing them to qualify for Rule 144A transactions. In addition to
the normal risks associated with debt or fixed-income securities discussed
elsewhere in this SAI and each Fund’s Prospectus (e.g., interest
rate risk and default risk), CBOs, CLOs and other CDOs carry additional risks
including, but not limited to: (i) the possibility that distributions from
collateral securities will not be adequate to make interest or other payments;
(ii) the quality of the collateral may decline in value or default;
(iii) the risk that Fund may invest in CBOs, CLOs or other CDOs that are
subordinate to other classes; and (iv) the complex structure of the
security may not be fully understood at the time of investment and may produce
disputes with the issuer or unexpected investment results.
Combined
Transactions (Marketfield Fund only)
Combined
transactions involve entering into multiple derivatives transactions (such as
multiple options transactions, including purchasing and writing options in
combination with each other; multiple futures transactions; and combinations of
options, futures, forward and swap transactions) instead of a single derivatives
transaction in order to customize the risk and return characteristics of the
overall position. Combined transactions typically contain elements of risk that
are present in each of the component transactions. The Marketfield Fund may
enter into a combined transaction instead of a single derivatives transaction
when, in the opinion of the Marketfield Sub-Adviser, it is in the best interest
of the Fund to do so. Because combined transactions involve multiple
transactions, they may result in higher transaction costs and may be more
difficult to close out.
Commercial
Paper
Each
Fund may invest in commercial paper if it is rated at the time of investment in
the highest ratings category by a nationally recognized statistical ratings
organization (“NRSRO”), such as Prime-1 by Moody’s Investor Services, Inc.
(“Moody’s”) or A-1 by Standard & Poor’s Rating Services (“S&P”), or, if
not rated by an NRSRO, if the Adviser or Sub-Adviser determines that the
commercial paper is of comparable quality.
In
addition, unless otherwise stated in the Prospectus or this SAI, each Fund may
invest up to 5% of its total assets in commercial paper if it is rated in the
second highest ratings category by an NRSRO, or, if unrated, the Adviser or
Sub-Adviser determines that the commercial paper is of comparable
quality.
Generally,
commercial paper represents short-term (nine months or less) unsecured
promissory notes issued (in bearer form) by banks or bank holding companies,
corporations and finance companies. A commercial paper rating is not a
recommendation to purchase, sell or hold a security inasmuch as it does not
comment as to market price or suitability for a particular investor. The ratings
are based on current information furnished to rating agencies by the issuer or
obtained from other sources the
rating
agencies consider reliable. The rating agencies do not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended, or withdrawn as a result of
changes in or unavailability of such information.
See
“Cash Equivalents” for more information.
Convertible
Securities
Each
Fund may invest in securities convertible into common stock or the cash value of
a single equity security or a basket or index of equity securities. Such
investments may be made, for example, if each Sub-Adviser believes that a
company’s convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in each Fund’s portfolios include convertible
bonds, convertible preferred stocks, warrants or notes or other instruments that
may be exchanged for cash payable in an amount that is linked to the value of a
particular security, basket of securities, index or indices of securities or
currencies.
Convertible
debt securities, until converted, have the same general characteristics as other
fixed-income securities insofar as they generally provide a stable stream of
income with generally higher yields than those of equity securities of the same
or similar issuers. By permitting the holder to exchange his investment for
common stock or the cash value of a security or a basket or index of securities,
convertible securities may also enable the investor to benefit from increases in
the market price of the underlying securities. Therefore, convertible securities
generally offer lower interest or dividend yields than non-convertible
securities of similar quality.
As
with all fixed-income securities, the market value of convertible debt
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The unique feature of the convertible
security is that as the market price of the underlying common stock declines, a
convertible security tends to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the price
of a convertible security increasingly reflects the value of the underlying
common stock and may rise accordingly. While no securities investment is without
some risk, investments in convertible securities generally entail less risk than
investments in the common stock of the same issuer. At any given time,
investment value is dependent upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer, and the seniority of the security in the issuer’s capital
structure.
Holders
of fixed-income securities (including convertible securities) have a claim on
the assets of the issuer prior to the holders of common stock in case of
liquidation. However, convertible securities are typically subordinated to
similar non-convertible securities of the same issuer. Accordingly, convertible
securities have unique investment characteristics because: (1) they have
relatively high yields as compared to common stocks; (2) they have
defensive characteristics since they provide a fixed return even if the market
price of the underlying common stock declines; and (3) they provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
A
convertible security may be subject to redemption at the option of the issuer at
a price established in the charter provision or indenture pursuant to which the
convertible security is issued. If a convertible security held by each Fund is
called for redemption, each Fund will be required to surrender the security for
redemption, convert it into the underlying common stock or cash or sell it to a
third party.
Each
Fund may invest in “synthetic” convertible securities. A synthetic convertible
security is a derivative position composed of two or more securities whose
investment characteristics, taken together, resemble those of traditional
convertible securities. Synthetic convertibles are typically offered by
financial institutions or investment banks in private placement transactions and
are typically sold back to the offering institution. Unlike traditional
convertible securities whose conversion values are based on the common stock of
the issuer of the convertible security, “synthetic” and “exchangeable”
convertible securities are preferred stocks or debt obligations of an issuer
which are structured with an embedded equity component whose conversion value is
based on the value of the common stocks of two or more different issuers or a
particular benchmark (which may include indices, baskets of domestic stocks,
commodities, a foreign issuer or basket of foreign stocks, or a company whose
stock is not yet publicly traded). The value of a synthetic convertible is the
sum of the values of its preferred stock or debt obligation component and its
convertible component. Therefore, the values of a synthetic convertible and a
true convertible security may respond differently to market fluctuations. In
addition, each Fund purchasing a synthetic convertible security may have
counterparty (including credit) risk with respect to the financial institution
or investment bank that offers the instrument. Purchasing a synthetic
convertible security may provide greater flexibility than purchasing a
traditional convertible security. Synthetic convertible securities are
considered convertible securities for compliance testing purposes.
Credit
and Liquidity Enhancements
Issuers
may employ various forms of credit and liquidity enhancements, including letters
of credit, guarantees, puts, and demand features, and insurance provided by
domestic or foreign entities such as banks and other financial institutions.
Each Sub-Adviser may rely on its evaluation of the credit of the liquidity or
credit enhancement provider in determining whether to purchase a security
supported by such enhancement. In evaluating the credit of a foreign bank or
other foreign entities, each Sub-Adviser will consider whether adequate public
information about the entity is available and whether the entity may be subject
to unfavorable political or economic developments, currency controls, or other
government restrictions that might affect its ability to honor its commitment.
Changes in the credit quality of the entity providing the enhancement could
affect the value of the security or each Fund’s share price.
Debt
Securities
Debt
securities may have fixed, variable or floating (including inverse floating)
rates of interest. To the extent that each Fund invests in debt securities, it
will be subject to certain risks. The value of the debt securities held by each
Fund, and thus the NAV of the shares of each Fund, generally will fluctuate
depending on a number of factors, including, among others, changes in the
perceived creditworthiness of the issuers of those securities, movements in
interest rates, the maturity of each Fund’s investments, changes in relative
values of the currencies in which each Fund’s investments are denominated
relative to the U.S. dollar, and the extent to which each Fund hedges its
interest rate, credit and currency exchange rate risks. Generally, a rise in
interest rates will reduce the value of fixed-income securities held by each
Fund, and a decline in interest rates will increase the value of fixed-income
securities held by each Fund. Longer term debt securities generally pay higher
interest rates than do shorter term debt securities but also may experience
greater price volatility as interest rates change.
Each
Fund’s investments in U.S. dollar- or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments) which meet the credit quality and maturity criteria set forth for
each Fund. The rate of return or return of principal on some debt obligations
may be linked to indices or stock prices or indexed to the level of exchange
rates between the U.S. dollar and foreign
currency
or currencies. Differing yields on corporate fixed-income securities of the same
maturity are a function of several factors, including the relative financial
strength of the issuers. Higher yields are generally available from securities
in the lower rating categories.
Since
shares of each Fund represent an investment in securities with fluctuating
market prices, the value of shares of each Fund will vary as the aggregate value
of each Fund’s portfolio securities increases or decreases. Moreover, the value
of lower-rated debt securities that each Fund purchases may fluctuate more than
the value of higher-rated debt securities. Lower-rated debt securities generally
carry greater risk that the issuer will default on the payment of interest and
principal. Lower-rated fixed-income securities generally tend to reflect short
term corporate and market developments to a greater extent than higher-rated
securities that react primarily to fluctuations in the general level of interest
rates. Changes in the value of securities subsequent to their acquisition will
not affect cash income or yields to maturity to each Fund but will be reflected
in the NAV of each Fund’s shares.
Corporate
debt securities may bear fixed, contingent, or variable rates of interest and
may involve equity features, such as conversion or exchange rights or warrants
for the acquisition of stock of the same or a different issuer, participations
based on revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
When
and if available, debt securities may be purchased at a discount from face
value. From time to time, each Fund may purchase securities not paying interest
or dividends at the time acquired if, in the opinion of each Sub-Adviser, such
securities have the potential for future income (or capital appreciation, if
any).
Investment
grade securities are generally securities rated at the time of purchase Baa3 or
better by Moody’s or BBB- or better by S&P or comparable non-rated
securities. Non-rated securities will be considered for investment by each Fund
when each Sub-Adviser believes that the financial condition of the issuers of
such obligations and the protection afforded by the terms of the obligations
themselves limit the risk to each Fund to a degree comparable to that of rated
securities which are consistent with each Fund’s objective and
policies.
Corporate
debt securities with a below investment grade rating have speculative
characteristics, and changes in economic conditions or individual corporate
developments are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of high grade bonds. If a credit rating
agency changes the rating of a portfolio security held by each Fund, each Fund
may retain the portfolio security if the Adviser or each Sub-Adviser, where
applicable, deems it in the best interest of each Fund’s
shareholders.
The
ratings of fixed-income securities by an NRSRO are a generally accepted
barometer of credit risk. They are, however, subject to certain limitations from
an investor’s standpoint. The rating of an issuer is heavily weighted by past
developments and does not necessarily reflect future conditions. There is
frequently a lag between the time a rating is assigned and the time it is
updated. In addition, there may be varying degrees of difference in credit risk
of securities in each rating category. Each Sub-Adviser will attempt to reduce
the overall portfolio credit risk through diversification and selection of
portfolio securities based on considerations mentioned above.
Depositary
Receipts and Registered Depositary Certificates
Each
Fund may invest in securities of non-U.S. issuers directly or in the form of
American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”),
Global Depositary Receipts (“GDRs”) and International Depositary Receipts
(“IDRs”), Non-Voting Depositary Receipts (“NVDRs”) or other similar securities
representing ownership of securities of non-U.S. issuers held in trust by a
bank, exchange or similar financial institution. These securities may not
necessarily be denominated in the same currency as the securities they
represent. Designed for use in U.S., European and international securities
markets, as applicable, ADRs, EDRs, GDRs, IDRs and NVDRs are alternatives to the
purchase of the underlying securities in their national markets and currencies,
but are subject to the same risks as the non-U.S. securities to which they
relate.
ADRs
are receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. EDRs and
IDRs are receipts issued in Europe typically by non-U.S. banking and trust
companies that evidence ownership of either foreign or U.S. securities. GDRs are
receipts issued by either a U.S. or non-U.S. banking institution evidencing
ownership of the underlying non-U.S. securities. NVDRs are typically issued by
an exchange or its affiliate. Generally, ADRs, in registered form, are designed
for use in U.S. securities markets, and EDRs, GDRs, IDRs and NVDRs are designed
for use in European and international securities markets. An ADR, EDR, GDR, IDR
or NVDR may be denominated in a currency different from the currency in which
the underlying foreign security is denominated.
Derivative
Instruments (Marketfield Fund only)
The
Marketfield Fund may use derivative instruments consistent with its investment
objective for purposes including, but not limited to, hedging, managing risk or
equitizing cash while maintaining liquidity. Derivative instruments are commonly
defined to include securities or contracts whose value depends on (or “derives”
from) the value of one or more other assets, such as securities, currencies or
commodities. These “other assets” are commonly referred to as “underlying
assets.” Please see the disclosure regarding specific types of derivative
instruments, such as options, futures, swaps, forward contracts, indexed
securities and structured notes elsewhere in this SAI for more
information.
Hedging.
The Marketfield Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or anticipated to be
held in, their respective portfolios. Derivatives may also be used by the Fund
to “lock-in” realized but unrecognized gains in the value of portfolio
securities. Hedging strategies, if successful, can reduce the risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce the opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments.
Managing
Risk. The
Marketfield Fund may also use derivative instruments to manage the risks of
their respective assets. Risk management strategies include, but are not limited
to, facilitating the sale of portfolio securities, managing the effective
maturity or duration of debt obligations held, establishing a position in the
derivatives markets as a substitute for buying or selling certain securities or
creating or altering exposure to certain asset classes, such as equity, debt and
foreign securities. The use of derivative instruments may provide a less
expensive, more expedient or more specifically focused way for the Marketfield
Fund to invest than “traditional” securities (i.e., stocks
or bonds) would.
Equitization.
The
Marketfield Fund may also use derivative instruments to maintain exposure to the
market, while maintaining liquidity to meet expected redemptions or pending
investment in securities.
The
use of derivative instruments for this purpose may result in losses to the Fund
and may not achieve the intended results. The use of derivative instruments may
not provide the same type of exposure as is provided by the Fund’s other
portfolio investments.
Exchange
or OTC Derivatives.
Derivative instruments may be exchange-traded or traded in over-the-counter
(“OTC”) transactions between private parties. Exchange-traded derivatives are
standardized options and futures contracts traded in an auction on the floor of
a regulated exchange. Exchange contracts are generally liquid. The exchange
clearinghouse is the counterparty of every exchange-traded contract. Thus, each
holder of an exchange contract bears the credit risk of the clearinghouse (and
has the benefit of its financial strength) rather than that of a particular
counterparty. OTC derivatives are contracts between the holder and another party
to the transaction (usually a securities dealer or a bank), but not any exchange
clearinghouse. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument, and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction. Currently, some, but not all, swap transactions
are subject to central clearing. Swap transactions that are not centrally
cleared are less liquid investments than exchange-traded instruments. Eventually
many swaps will be centrally cleared and exchange-traded. Although these changes
are expected to decrease the counterparty risk involved in bilaterally
negotiated contracts because they interpose the central clearinghouse as the
counterparty to each participant’s swap, exchange-trading and clearing would not
make swap transactions risk-free.
Capped
Options.
Interest rate-capped options may be written or purchased to enhance returns or
for hedging opportunities. The purpose of purchasing interest rate-capped
options is to protect a portfolio from floating rate risk above a certain rate
on a given notional exposure. A floor can be used to give downside protection to
investments in interest rate linked products.
Risks
and Special Considerations. The
use of derivative instruments involves risks and special considerations as
described below. Risks pertaining to particular derivative instruments are
described in the sections relating to those instruments contained elsewhere in
this SAI.
Market
Risk.
The primary risk of derivatives is the same as the risk of the underlying
assets; namely, that the value of the underlying asset may go up or down.
Adverse movements in the value of an underlying asset can expose the Fund to
losses. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
Marketfield Sub-Adviser’s ability to anticipate movements of the securities and
currencies markets, which requires different skills than anticipating changes in
the prices of individual securities. There can be no assurance that any
particular strategy adopted will succeed. A decision to engage in a derivative
transaction will reflect the Marketfield Sub-Adviser’s judgment that the
derivative transaction will provide value to the Marketfield Fund and its
shareholders and is consistent with the Marketfield Fund’s objectives,
investment limitations and operating policies. In making such a judgment, the
Marketfield Sub-Adviser will analyze the benefits and risks of the derivative
transaction and weigh them in the context of the Marketfield Fund’s entire
portfolio and investment objective.
Credit
Risk. The
Marketfield Fund will be subject to the risk that a loss may be sustained as a
result of the failure of a counterparty to comply with the terms of a derivative
instrument. The counterparty risk for exchange-traded derivative instruments is
generally less than for
privately-negotiated
or OTC derivative instruments, since generally a clearing agency, which is the
issuer or counterparty to each exchange-traded instrument, provides a guarantee
of performance. For privately-negotiated instruments, including currency forward
contracts, there is no similar clearing agency guarantee. In all transactions,
the Marketfield Fund will bear the risk that the counterparty will default, and
this could result in a loss of the expected benefit of the derivative
transaction and possibly other losses to each Fund. The Marketfield Fund will
enter into transactions in derivative instruments only with counterparties that
the Marketfield Sub-Adviser reasonably believes are capable of performing under
the contract.
Correlation
Risk.
When a derivative transaction is used to completely hedge another position,
changes in the market value of the combined position (the derivative instrument
plus the position being hedged) can result from an imperfect correlation between
the price movements of the two instruments. With a perfect hedge, the value of
the combined position remains unchanged for any change in the price of the
underlying asset. With an imperfect hedge, the value of the derivative
instrument and its hedge are not perfectly correlated. Correlation risk is the
risk that there might be imperfect correlation, or even no correlation, between
price movements of a derivative instrument and price movements of investments
being hedged. For example, if the value of a derivative instrument used in a
short hedge (such as writing a call option, buying a put option or selling a
futures contract) increased by less than the decline in value of the hedged
investments, the hedge would not be perfectly correlated. Such a lack of
correlation might occur due to factors unrelated to the value of the investments
being hedged, such as speculative or other pressures on the markets in which
these instruments are traded. The effectiveness of hedges using instruments on
indices will depend, in part, on the degree of correlation between price
movements in the index and price movements in the investments being
hedged.
Liquidity
Risk.
Derivatives are also subject to liquidity risk. Liquidity risk is the risk that
a derivative instrument cannot be sold, closed out or replaced quickly at or
very close to its fundamental value. Generally, exchange contracts are very
liquid because the exchange clearinghouse is the counterparty of every contract.
OTC transactions are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction. The
Marketfield Fund might be required to make margin payments when it takes
positions in derivative instruments involving obligations to third parties
(i.e., instruments
other than purchased options). If the Marketfield Fund is unable to close out
its positions in such instruments, it might be required to continue to make such
payments until the position expires, matures or is closed out. The requirements
might impair the Fund’s ability to sell a portfolio security or make an
investment at a time when it would otherwise be favorable to do so, or require
that the Fund sell a portfolio security at a disadvantageous time. The
Marketfield Fund’s ability to sell or close out a position in an instrument
prior to expiration or maturity depends on the existence of a liquid secondary
market or, in the absence of such a market, the ability and willingness of the
counterparty to enter into a transaction closing out the position. Therefore,
there is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to the Marketfield Fund.
Legal
Risk.
Legal risk is the risk of loss caused by the legal unenforceability of a party’s
obligations under the derivative. While a party seeking price certainty agrees
to surrender the potential upside in exchange for downside protection, the party
taking the risk is looking for a positive payoff. Despite this voluntary
assumption of risk, a counterparty that has lost money
in
a derivative transaction may try to avoid payment by exploiting various legal
uncertainties about certain derivative products.
Systemic
or “Interconnection” Risk.
Interconnection risk is the risk that a disruption in the financial markets will
cause difficulties for all market participants. In other words, a disruption in
one market will spill over into other markets, perhaps creating a chain
reaction. Much of the OTC derivatives market takes place among the OTC dealers
themselves, thus creating a large interconnected web of financial obligations.
This interconnectedness raises the possibility that a default by one large
dealer could create losses for other dealers and destabilize the entire market
for OTC derivative instruments.
Commodity
Pool Operator Exclusion.
The Adviser currently intends to operate the Fund in compliance with the
requirements of Rule 4.5 of the Commodity Futures Trading Commission
(“CFTC”). As a result, the Fund is not deemed to be a “commodity pool” under the
Commodity Exchange Act (the “CEA”) and will be limited in its ability to use
futures and options on futures or commodities or engage in swap transactions for
other than bona fide hedging purposes. Provided the Fund operates within the
limits of Rule 4.5 of the CFTC, the Adviser will be excluded from
registration with and regulation under the CEA and the Adviser will not be
deemed to be a “commodity pool operator” with respect to the operations of each
Fund. If the Adviser were no longer able to claim the exclusion with respect to
the Fund, the Fund and the Adviser, to the extent trading in commodity
interests, would be subject to regulation under the CEA.
Direct
Investments
Direct
investments include (1) the private purchase from an enterprise of an
equity interest in the enterprise in the form of shares of common stock or
equity interests in trusts, partnerships, joint ventures or similar enterprises,
and (2) the purchase of such an equity interest in an enterprise from a
principal investor in the enterprise.
Certain
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. Direct investments may
also fund new operations for an enterprise which itself is engaged in similar
operations or is affiliated with an organization that is engaged in similar
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 direct investments may take longer to
liquidate 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. 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, each Fund may be required to bear
the expense of the registration. Direct investments may be considered illiquid
and, in that case, would be aggregated with other illiquid investments for
purposes of the limitation on illiquid investments. Direct investments can be
difficult to price and may be valued at “fair value” in accordance with
valuation policies established by the Board. The pricing of direct investments
may not be reflective of the price at which these assets could be
liquidated.
Effective
Maturity
Each
Fund may use an effective maturity for determining the maturity of its
portfolio. Effective maturity means the average expected repayment date of the
portfolio taking into account prospective calls, puts and mortgage prepayments,
in addition to the maturity dates of the securities in the
portfolio.
Emerging
Market Securities
Each
Fund may invest some of its assets in the securities of emerging market
countries. Investments in securities in emerging market countries may be
considered to be speculative and may have additional risks from those associated
with investing in the securities of U.S. issuers. There may be limited
information available to investors that is publicly available, and generally
emerging market issuers are not subject to uniform accounting, auditing and
financial standards and requirements like those required by U.S.
issuers.
Investors
should be aware that the value of each Fund’s investments in emerging markets
securities may be adversely affected by changes in the political, economic or
social conditions, embargoes, economic sanctions, expropriation,
nationalization, limitation on the removal of funds or assets, controls, tax
regulations and other restrictions in emerging market countries. These risks may
be more severe than those experienced in non-emerging market countries. Emerging
market securities trade with less frequency and volume than domestic securities
and, therefore, may have greater price volatility and lack liquidity.
Furthermore, there is often no legal structure governing private or foreign
investment or private property in some emerging market countries. This may
adversely affect each Fund’s operations and the ability to obtain a judgment
against an issuer in an emerging market country.
Equity
Securities
Common
Stock.
Common stock represents an equity or ownership interest in an issuer. Common
stock typically entitles the owner to vote on the election of directors and
other important matters as well as to receive dividends on such stock. In the
event an issuer is liquidated or declares bankruptcy, the claims of owners of
bonds, other debt holders, and owners of preferred stock take precedence over
the claims of those who own common stock.
Preferred
Stock. Preferred
stock represents an equity or ownership interest in an issuer. Preferred stock
normally pays dividends at a specified rate and has precedence over common stock
in the event the issuer is liquidated or declares bankruptcy. However, in the
event an issuer is liquidated or declares bankruptcy, the claims of owners of
bonds take precedence over the claims of those who own preferred and common
stock. Preferred stock, unlike common stock, often has a stated dividend rate
payable from the issuer’s earnings. Preferred stock dividends may be cumulative
or noncumulative, participating or auction rate. “Cumulative” dividend
provisions require all or a portion of prior unpaid dividends to be paid before
dividends can be paid to the issuer’s common stock. “Participating” preferred
stock may be entitled to a dividend exceeding the stated dividend in certain
cases. In some cases, preferred stock dividends are not paid at a stated rate
and may vary depending on an issuer’s financial performance. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the
price of such stocks to decline. Preferred stock may have mandatory sinking fund
provisions, as well as provisions allowing the stock to be called or redeemed,
which can limit the benefit of a decline in interest rates. Preferred stock is
subject to many of the risks to which common stock and debt securities are
subject.
Mid-Cap
and Small-Cap Stocks. The
general risks associated with equity securities and liquidity risk are
particularly pronounced for stocks of companies with market capitalizations that
are small compared to other publicly traded companies. These companies may have
limited product lines, markets or financial resources or they may depend on a
few key employees. Stocks of mid-capitalization and small-capitalization
companies may trade less frequently and in lesser volume than more widely held
securities, and their values may fluctuate more sharply than other securities.
They may also trade in the OTC market or on a regional exchange, or may
otherwise have limited liquidity. Generally, the smaller the company, the
greater these risks become.
Value
Stocks.
Each Fund may invest in companies that may not be expected to experience
significant earnings growth, but whose securities the portfolio managers believe
are selling at a price lower than their true value. Companies that issue such
“value stocks” may have experienced adverse business developments or may be
subject to special risks that have caused their securities to be out of favor.
The principal risk of investing in value stocks is that they may never reach
what each Fund’s portfolio managers believe is their full value or that they may
go down in value. If the portfolio managers’ assessment of a company’s prospects
is wrong, or if the market does not recognize the value of the company, the
price of that company’s stocks may decline or may not approach the value that
the portfolio managers anticipate.
Secondary
Offerings.
The Funds may invest in secondary offerings. A secondary offering is a
registered offering of a large block of a security that has been previously
issued to the public. A secondary offering can occur when an investor sells to
the public a large block of stock or other securities it has been holding in its
portfolio. In a sale of this kind, all of the profits go to the seller rather
than the issuer. Secondary offerings can also originate when the issuer issues
new shares of its stock over and above those sold in its initial public offering
(IPO), usually in order to raise additional capital. However, because an
increase in the number of shares devalues those that have already been issued,
many companies make a secondary offering only if their stock prices are high or
they are in need of capital. Secondary offerings may have a magnified impact on
the performance of a Fund with a small asset base. Secondary offering shares
frequently are volatile in price. Therefore, a Fund may hold secondary offering
shares for a very short period of time. This may increase the portfolio turnover
rate of the Fund and may lead to increased expenses for the Fund, such as
commissions and transaction costs. In addition, secondary offering shares can
experience an immediate drop in value if the demand for the securities does not
continue to support the offering price.
Eurocurrency
Instruments
The
Funds may make investments in Eurocurrency instruments. Eurocurrency instruments
are futures contracts or options thereon which are linked to the Secured
Overnight Financing Rate (“SOFR”) or to the interbank rates offered in other
financial centers. Eurocurrency futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. Each Fund may use Eurocurrency futures contracts and options thereon
to hedge against changes in SOFR and other interbank rates, to which many
interest rate swaps and fixed-income instruments are linked. To the extent SOFR
is no longer available, each Fund will seek alternative rates.
Exchange-Traded
Funds
The
Funds may invest in shares of exchange-traded funds (“ETFs”). ETFs are
investment companies that trade like stocks. (See also “Investment Companies.”)
Like stocks, shares of ETFs are not traded at NAV, but may trade at prices above
or below the value of their underlying portfolios. The price of an ETF is
derived from and based upon the securities held by the ETF. Accordingly, the
level of risk
involved
in the purchase or sale of an ETF is similar to the risk involved in the
purchase or sale of a traditional common stock, except that the pricing
mechanism for an ETF is based on a basket of stocks. Thus, the risks of owning
an ETF generally reflect the risks of owning the underlying securities it is
designed to track, although lack of liquidity in an ETF could result in its
being more volatile than the underlying portfolio of securities. Disruptions in
the markets for the securities underlying ETFs purchased or sold by each Fund
could result in losses on each Fund’s investment in ETFs. ETFs also have
management fees that increase their costs versus the costs of owning the
underlying securities directly. A portfolio manager may from time to time invest
in ETFs, primarily as a means of gaining exposure for each Fund to certain
markets without investing in individual securities, particularly in the context
of managing cash flows into each Fund or where access to a local market is
restricted or not cost-effective. The Funds may invest in certain ETFs that have
obtained exemptive orders from the SEC that permit registered investment
companies such as each Fund to invest in those ETFs beyond the limits of Section
12(d)(1) of the 1940 Act, subject to certain terms and conditions. Ordinarily,
Section 12(d)(1) of the 1940 Act limits a Fund’s investments in a single ETF to
5% of its total assets and in all ETFs to 10% of its total assets. In reliance
on such exemptive orders, each Fund may generally invest in excess of these 5%
and 10% limitations in a single ETF or in multiple ETFs, respectively. The Funds
may also rely on Rule 12d1-4 of the 1940 Act, which provides am exemption from
section 12(d)(1) that allows a Fund to invest all of its assets in other
registered investment companies, including ETFs, if each Fund satisfies certain
conditions specified in the Rule. For additional information, see “Investment
Companies” below.
The
Funds may invest its net assets in ETFs that invest in securities similar to
those in which each Fund may invest directly, and count such holdings towards
various guideline tests.
The
Funds may invest in ETFs to gain broad market, sector or asset class exposure,
including during periods when it has large amounts of uninvested cash or when
each Sub-Adviser believes share prices of ETFs offer attractive values, subject
to any applicable investment restrictions in the Prospectus and this
SAI.
ETFs
generally do not sell or redeem their shares for cash, and most investors do not
purchase or redeem shares directly from an ETF at all. Instead, an ETF issues
and redeems its shares in large blocks called “creation units.” Creation units
are issued to anyone who deposits a specified portfolio of the ETF’s underlying
securities, as well as a cash payment generally equal to accumulated dividends
on the securities (net of expenses) up to the time of deposit. Creation units
are redeemed in kind for a portfolio of the underlying securities (based on the
ETF’s NAV) together with a cash payment generally equal to accumulated dividends
on the date of redemption. Most ETF investors purchase and sell ETF shares in
the secondary trading market on a securities exchange in lots of any size, at
any time during the trading day. ETF investors generally pay a brokerage fee for
each purchase or sale of ETF shares, including purchases made to reinvest
dividends.
Because
ETF shares are created from the securities of an underlying portfolio and may be
redeemed for the securities of an underlying portfolio on any day, arbitrage
traders may move to profit from any price discrepancies between the shares and
the ETF’s portfolio, which in turn helps to close the price gap between the two.
Because of supply and demand and other market factors, there may be times during
which an ETF share trades at a premium or discount to its NAV.
Each
Fund intends to be a long-term investor in ETFs and does not intend to purchase
and redeem creation units to take advantage of short-term arbitrage
opportunities. However, each Fund may redeem creation units for the underlying
securities (and any applicable cash) and may assemble a
portfolio
of the underlying securities to be used (with any required cash) to purchase
creation units, if each Sub-Adviser believes that it is in each Fund’s best
interest to do so. Each Fund’s ability to redeem creation units may be limited
by the 1940 Act, which provides that ETFs are not obligated to redeem shares
held by each Fund in an amount exceeding 1% of their total outstanding
securities during any period of less than 30 days.
In
connection with its investment in ETF shares, each Fund incurs various costs.
The Funds may also realize capital gains or losses when ETF shares are sold, and
the purchase and sale of the ETF shares may generate a brokerage commission that
may result in costs. In addition, each Fund will be subject to other fees as an
investor in ETFs. Generally, those fees include, but are not limited to, trustee
fees, operating expenses, licensing fees, registration fees and marketing
expenses, each of which will be reflected in the NAV of the ETF and therefore
its shares.
There
is a risk that an ETF in which each Fund invests may terminate due to
extraordinary events that may cause service providers to the ETF, such as the
trustee or sponsor, to close or otherwise fail to perform their obligations to
the ETF. Also, because the ETFs in which each Fund may principally invest are
granted licenses to use the relevant indices as a basis for determining their
compositions and otherwise to use certain trade names, the ETFs may terminate if
the license agreements are terminated. In addition, an ETF may terminate if its
NAV falls below a certain amount.
Aggressive
ETF Investment Technique Risk. ETFs
may use investment techniques and financial instruments that could be considered
aggressive, including the use of futures contracts, options on futures
contracts, securities and indices, forward contracts, swap agreements and
similar instruments. An ETF’s investment in financial instruments may involve a
small investment relative to the amount of investment exposure assumed and may
result in losses exceeding the amounts invested in those instruments. Such
instruments, particularly when used to create leverage, may expose the ETF to
potentially dramatic changes (losses or gains) in the value of the instruments
and imperfect correlation between the value of the instruments and the relevant
security or index. The use of aggressive investment techniques also exposes an
ETF to risks different from, or possibly greater than, the risks associated with
investing directly in securities contained in an index underlying the ETF’s
benchmark, including: (1) the risk that an instrument is temporarily mispriced;
(2) credit, performance or documentation risk on the amount each ETF expects to
receive from a counterparty; (3) the risk that securities prices, interest rates
and currency markets will move adversely and an ETF will incur significant
losses; (4) imperfect correlation between the price of financial instruments and
movements in the prices of the underlying securities; (5) the risk that the cost
of holding a financial instrument may exceed its total return; and (6) the
possible absence of a liquid secondary market for any particular instrument and
possible exchange-imposed price fluctuation limits, both of which may make it
difficult or impossible to adjust an ETF’s position in a particular instrument
when desired.
Inverse
Correlation ETF Risk.
ETFs benchmarked to an inverse multiple of an index generally lose value as the
index or security underlying such ETF’s benchmark is increasing (gaining value),
a result that is the opposite from conventional mutual funds.
Leveraged
ETF Risk.
Leverage offers a means of magnifying market movements into larger changes in an
investment’s value and provides greater investment exposure than an unleveraged
investment. While only certain ETFs employ leverage, many may use leveraged
investment techniques for investment purposes. The ETFs that employ leverage
will normally lose more money in adverse market environments than ETFs that do
not employ leverage.
Firm
or Standby Commitments — Obligations with Puts Attached
The
Funds may from time to time purchase securities on a “firm commitment” or
“standby commitment” basis. Such transactions might be entered into, for
example, when each Sub-Adviser of each Fund anticipates a decline in the yield
of securities of a given issuer and is able to obtain a more advantageous yield
by committing currently to purchase securities to be issued or delivered
later.
Securities
purchased on a firm commitment basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. Delivery of and payment for
these securities can take place a month or more after the date of the purchase
commitment. No income accrues to the purchaser of a security on a firm
commitment basis prior to delivery. Such securities are recorded as an asset and
are subject to changes in value based upon changes in the general level of
interest rates. Purchasing a security on a firm commitment basis can involve a
risk that the market price at the time of delivery may be lower than the agreed
upon purchase price, in which case there could be an unrealized loss at the time
of delivery. Each Fund will generally make commitments to purchase securities on
a firm commitment basis with the intention of actually acquiring the securities,
but may sell them before the settlement date if it is deemed advisable. Liquid
assets are maintained to cover “senior securities” transactions which may
include, but are not limited to, each Fund’s commitments to purchase securities
on a firm commitment basis. The value of each Fund’s “senior securities”
holdings are marked-to-market daily to ensure proper coverage.
The
Funds may purchase securities together with the right to resell the securities
to the seller at an agreed-upon price or yield within a specified period prior
to the maturity date of the securities. Although it is not a put option in the
usual sense, such a right to resell is commonly known as a “put” and is also
referred to as a “standby commitment.” The Funds may pay for a standby
commitment either separately in cash, or in the form of a higher price for the
securities that are acquired subject to the standby commitment, thus increasing
the cost of securities and reducing the yield otherwise available from the same
security. Each Sub-Adviser understands that the Internal Revenue Service (the
“IRS”) has issued a revenue ruling to the effect that, under specified
circumstances, a RIC will be the owner of municipal obligations acquired subject
to a put option. The IRS has subsequently announced that it will not ordinarily
issue advance ruling letters as to the identity of the true owner of property in
cases involving the sale of securities or participation interests therein if the
purchaser has the right to cause the security, or the participation interest
therein, to be purchased by either the seller or a third party. Each Fund
intends to take the position that it is the owner of any debt securities
acquired subject to a standby commitment; however, no assurance can be given
that this position would prevail if challenged. In addition, there is no
assurance that firm or standby commitments will be available to each Fund, nor
will each Fund assume that such commitments would continue to be available under
all market conditions.
A
standby commitment may not be used to affect each Fund’s valuation of the
security underlying the commitment. Any consideration paid by each Fund for the
standby commitment, whether paid in cash or by paying a premium for the
underlying security, which increases the cost of the security and reduces the
yield otherwise available from the same security, will be accounted for by each
Fund as unrealized depreciation until the standby commitment is exercised or has
expired.
Firm
and standby transactions are entered into in order to secure what is considered
to be an advantageous price and yield to each Fund and not for purposes of
leveraging each Fund’s assets. However, each Fund will not accrue any income on
these securities prior to delivery. The value of firm and standby commitment
agreements may vary prior to and after delivery depending on market conditions
and changes in interest rate levels. If the other party to a delayed delivery
transaction fails
to
deliver or pay for the securities, each Fund could miss a favorable price or
yield opportunity or could suffer a loss. Each Fund may dispose of or
renegotiate a delayed delivery transaction after it is entered
into.
Each
Fund does not believe that its NAV per share or income will be exposed to
additional risk by the purchase of securities on a firm or standby commitment
basis. At the time each Fund makes the commitment to purchase a security on a
firm or standby commitment basis, it will record the transaction and reflect the
amount due and the value of the security in determining the its NAV per share.
The market value of the firm or standby commitment securities may be more or
less than the purchase price payable at the settlement date. The Board does not
believe that each Fund’s NAV or income will be exposed to additional risk by the
purchase of securities on a firm or standby commitment basis.
Floating
and Variable Rate Securities
The
Funds may invest in floating and variable rate debt instruments. Floating and
variable rate securities provide for a periodic adjustment in the interest rate
paid on the obligations. The terms of such obligations must provide that
interest rates are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. The adjustment intervals may be
regular and range from daily up to annually, or may be based on an event, such
as a change in the prime rate.
Some
variable or floating rate securities are structured with liquidity features such
as (1) put options or tender options that permit holders (sometimes subject to
conditions) to demand payment of the unpaid principal balance plus accrued
interest from the issuers or certain financial intermediaries or (2) auction
rate features, remarketing provisions, or other maturity-shortening devices
designed to enable the issuer to refinance or redeem outstanding debt securities
(market-dependent liquidity features). Variable or floating rate securities that
include market-dependent liquidity features may have greater liquidity risk than
other securities, due to (for example) the failure of a market-dependent
liquidity feature to operate as intended (as a result of the issuer’s declining
creditworthiness, adverse market conditions, or other factors) or the inability
or unwillingness of a participating broker-dealer to make a secondary market for
such securities. As a result, variable or floating rate securities that include
market-dependent liquidity features may lose value, and the holders of such
securities may be required to retain them until the later of the repurchase
date, the resale date, or maturity.
The
interest rate on a floating rate debt instrument (“floater”) is a variable rate
that is tied to another interest rate, such as a money-market index or a
Treasury bill rate. The interest rate on a floater may reset periodically,
typically every three to six months, or whenever a specified interest rate
changes. While, because of the interest rate reset feature, floaters may provide
each Fund with a certain degree of protection against rises in interest rates,
each Fund will participate in any declines in interest rates as
well.
The
Funds may invest in leveraged inverse floating rate debt instruments (“inverse
floaters”). The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher degree of leverage inherent in inverse
floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be determined to be illiquid securities
for purposes of each Fund’s limitation on investments in such
securities.
Foreign
Currency Transactions (Forward Contracts)
A
foreign currency forward exchange contract (a “forward contract”) involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (usually less than one year) from the contract date,
at a price set at the time of the contract. These contracts may be used to gain
exposure to a particular currency or to hedge against the risk of loss due to
changing currency exchange rates. Forward contracts to purchase or sell a
foreign currency may also be used by each Fund in anticipation of future
purchases (or in settlement of such purchases) or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected. Forward currency contracts may also be used to exchange one
currency for another, including to repatriate foreign currency. A forward
contract generally has no deposit requirement and no commissions are charged at
any stage for trades. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the price at which they are buying and selling various currencies.
Although these contracts are intended, when used for hedging purposes, to
minimize the risk of loss due to a decline in the value of the hedged
currencies, they also tend to limit any potential gain which might result should
the value of such currencies increase.
Foreign
currency transactions in which each Fund may engage include foreign currency
forward contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts. The Funds also may use foreign currency transactions to increase
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
To
the extent that each Fund invests in foreign securities, it may enter into
foreign currency forward contracts in order to increase its return by trading in
foreign currencies and/or protect against uncertainty in the level of future
foreign currency exchange rates. Each Fund may also enter into contracts to
purchase foreign currencies to protect against an anticipated rise in the U.S.
dollar price of securities it intends to purchase and may enter into contracts
to sell foreign currencies to protect against the decline in value of its
foreign currency-denominated portfolio securities due to a decline in the value
of the foreign currencies against the U.S. dollar. In addition, each Fund may
use one currency (or a basket of currencies) to hedge against adverse changes in
the value of another currency (or a basket of currencies) when exchange rates
between the two currencies are correlated.
Normally,
consideration of fair value exchange rates will be incorporated in a longer-term
investment decision made with regard to overall diversification strategies.
However, each Sub-Adviser believes that it is important to have the flexibility
to enter into such forward contracts when they determine that the best interest
of each Fund will be served by entering into such a contract. Set forth below
are examples of some circumstances in which each Fund might employ a foreign
currency transaction. When each Fund enters into, or anticipates entering into,
a contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to “lock in” the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a fixed amount of
U.S. dollars, of the amount of foreign currency involved in the underlying
security transaction, each Fund will be able to insulate itself from a possible
loss resulting from a change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received,
although each Fund would also forego any gain it might have realized had rates
moved in the opposite direction. This technique is sometimes referred to as a
“settlement” hedge or “transaction” hedge.
When
each Sub-Adviser believes that the currency of a particular foreign country may
suffer a substantial decline against the U.S. dollar, it may enter into a
forward contract to sell, for a fixed amount of dollars, an amount of foreign
currency approximating the value of some or all of each Fund’s portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a “position” hedge) will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. Each Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency, which may be less costly than a
direct hedge. This type of hedge, sometimes referred to as a “proxy hedge,”
could offer advantages in terms of cost, yield, or efficiency, but generally
would not hedge currency exposure as effectively as a direct hedge into U.S.
dollars. Proxy hedges may result in losses if the currency used to hedge does
not perform similarly to the currency in which the hedged securities are
denominated. A proxy hedge entails greater risk than a direct hedge because it
is dependent on a stable relationship between the two currencies paired, as
proxies, and the relationship can be very unstable at times. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute “transaction” or “position” hedges (including “proxy” hedges), each
Fund will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
each Fund to deliver an amount of foreign currency in excess of the value of
each Fund’s portfolio securities or other assets denominated in that currency
(or the related currency, in the case of a “proxy” hedge).
The
Funds also may enter into forward contracts to shift its investment exposure
from one currency into another currency that is expected to perform inversely
with respect to the hedged currency relative to the U.S. dollar. This type of
strategy, sometimes known as a “cross-currency” hedge, will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to the
currency that is purchased, much as if each Fund had sold a security denominated
in one currency and purchased an equivalent security denominated in another.
“Cross-currency” hedges protect against losses resulting from a decline in the
hedged currency but will cause each Fund to assume the risk of fluctuations in
the value of the currency it purchases.
The
Funds may also enter into currency transactions to profit from changing exchange
rates based upon each Sub-Adviser’s assessment of likely exchange rate
movements. These transactions will not necessarily hedge existing or anticipated
holdings of foreign securities and may result in a loss if each Sub-Adviser’s
currency assessment is incorrect.
At
the consummation of the forward contract, each Fund may either make delivery of
the foreign currency or terminate its contractual obligation to deliver the
foreign currency by purchasing an offsetting contract obligating it to purchase
at the same maturity date the same amount of such foreign currency. If each Fund
chooses to make delivery of the foreign currency, it may be required to obtain
such currency for delivery through the sale of portfolio securities denominated
in such currency or through conversion of other assets of each Fund into such
currency. If each Fund engages in an offsetting transaction, each Fund will
realize a gain or a loss to the extent that there has been a change in forward
contract prices. Closing purchase transactions with respect to forward contracts
are usually effected with the currency trader who is a party to the original
forward contract. Each Fund will only enter into such a forward contract if it
is expected that there will be a liquid market in which
to
close out the contract. However, there can be no assurance that a liquid market
will exist in which to close a forward contract, in which case each Fund may
suffer a loss.
When
each Fund has sold a foreign currency, a similar process would be followed at
the consummation of the forward contract. Of course, each Fund is not required
to enter into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by each
Sub-Adviser.
In
cases of transactions which constitute “transaction” or “settlement” hedges or
“position” hedges (including “proxy” hedges) or “cross-currency” hedges that
involve the purchase and sale of two different foreign currencies directly
through the same foreign currency contract, each Fund may deem its forward
currency hedge position to be covered by underlying portfolio securities or may
maintain liquid assets in an amount at least equal in value to each Fund’s sum
of the unrealized gain and loss for each contract.
Each
Sub-Adviser believes that active currency management strategies can be employed
as an overall portfolio risk management tool. For example, in their view,
foreign currency management can provide overall portfolio risk diversification
when combined with a portfolio of foreign securities, and the market risks of
investing in specific foreign markets can at times be reduced by currency
strategies that may not involve the currency in which the foreign security is
denominated. However, the use of currency management strategies to protect the
value of each Fund’s portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities.
While
each Fund may enter into forward contracts to reduce currency exchange risks,
changes in currency exchange rates may result in poorer overall performance for
each Fund than if it had not engaged in such transactions. Exchange rate
movements can be large, depending on the currency, and can last for extended
periods of time, affecting the value of each Fund’s assets. Moreover, there may
be an imperfect correlation between each Fund’s portfolio holdings of securities
denominated in a particular currency and forward contracts entered into by each
Fund. Such imperfect correlation may prevent each Fund from achieving the
intended hedge or expose each Fund to the risk of currency exchange
loss.
Each
Fund cannot assure that its use of currency management will always be
successful. Successful use of currency management strategies will depend on each
Sub-Adviser’s skill in analyzing currency values. Currency management strategies
may substantially change each Fund’s investment exposure to changes in currency
exchange rates and could result in losses to each Fund if currencies do not
perform as each Sub-Adviser anticipates. For example, if a currency’s value rose
at a time when each Sub-Adviser had hedged each Fund by selling that currency in
exchange for dollars, each Fund would not participate in the currency’s
appreciation. If each Sub-Adviser hedges currency exposure through proxy hedges,
each Fund could realize currency losses from both the hedge and the security
position if the two currencies do not move in tandem. Similarly, if each
Sub-Adviser increases each Fund’s exposure to a foreign currency and that
currency’s value declines, each Fund will realize a loss. There is no assurance
that each Sub-Adviser’s use of currency management strategies will be
advantageous to each Fund or that they will hedge at appropriate times. 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, each Fund
may be required to buy or sell additional currency on the spot market (and bear
the expense of such transaction) if each Sub-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 each Fund in a less advantageous position than if such a hedge had
not been established. Because foreign currency forward contracts are privately
negotiated transactions, there can be no assurance that each Fund will have
flexibility to roll- over a foreign currency forward contract upon its
expiration if it desires to do so. Additionally, these contracts are subject to
counterparty risks as there can be no assurance that the other party to the
contract will perform its services thereunder. Certain foreign currency forwards
may eventually be exchange-traded and cleared. Although these changes are
expected to decrease the credit risk involved in bilaterally negotiated
contracts, exchange-trading and clearing would not make the contracts risk-free.
Each Fund may hold a portion of its assets in bank deposits denominated in
foreign currencies, so as to facilitate investment in foreign securities as well
as protect against currency fluctuations and the need to convert such assets
into U.S. dollars (thereby also reducing transaction costs). To the extent these
monies are converted back into U.S. dollars, the value of the assets so
maintained will be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations.
Foreign
Government and Supranational Entity Securities
Each
Fund may invest in debt securities or obligations of foreign governments,
agencies, and supranational organizations (“Sovereign Debt”). Each Fund’s
portfolio may include government securities of a number of foreign countries or,
depending upon market conditions, those of a single country. Investments in
Sovereign Debt can involve greater risks than investing in U.S. government
securities. The issuer of the debt or the governmental authorities that control
the repayment of the debt may be unable or unwilling to repay principal or
interest when due in accordance with the terms of such debt, and each Fund may
have limited legal recourse in the event of default.
Each
Sub-Adviser’s determination that a particular country should be considered
stable depends on its evaluation of political and economic developments
affecting the country as well as recent experience in the markets for government
securities of the country. Examples of foreign governments which each
Sub-Adviser currently considers to be stable, among others, are the governments
of Canada, Germany, Japan, Sweden and the United Kingdom. Each Sub-Adviser does
not believe that the credit risk inherent in the Sovereign Debt of such stable
foreign governments is significantly greater than that of U.S. government
securities. The percentage of each Fund’s assets invested in foreign government
securities will vary depending on the relative yields of such securities, the
economies of the countries in which the investments are made and such countries’
financial markets, the interest rate climate of such countries and the
relationship of such countries’ currencies to the U.S. dollar. Currency is
judged on the basis of fundamental economic criteria (e.g.,
relative inflation levels and trends, growth rate forecasts, balance of payments
status and economic policies) as well as technical and political
data.
Debt
securities of “quasi-governmental entities” are issued by entities owned by
either a national, state or equivalent government or are obligations of a
political unit that is not backed by the national government’s full faith and
credit and general taxing powers. Examples of quasi-governmental issuers
include, among others, the Province of Ontario and the City of Stockholm. Each
Fund’s portfolio may also include debt securities denominated in European
Currency Units of an issuer in a country in which each Fund may invest. A
European Currency Unit represents specified amounts of the currencies of certain
member states of the European Union.
A
“supranational entity” is an entity established or financially supported by the
governments of several countries to promote reconstruction, economic development
or trade. Examples of supranational entities include the World Bank
(International Bank for Reconstruction and
Development),
the European Investment Bank, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank and the European Coal and Steel
Community. Typically, the governmental members, or “stockholders,” make initial
capital contributions to the supranational entity and may be committed to make
additional contributions if the supranational entity is unable to repay its
borrowings. There is no guarantee that one or more stockholders of a
supranational entity will continue to make any necessary additional capital
contributions or otherwise provide continued financial backing to the
supranational entity. If such contributions or financial backing are not made,
the entity may be unable to pay interest or repay principal on its debt
securities. As a result, each Fund might lose money on such investments. In
addition, if the securities of a supranational entity are denominated in a
foreign currency, the obligations also will bear the risks of foreign currency
investments. Securities issued by supranational entities may (or may not)
constitute foreign securities for purposes of each Fund, depending on a number
of factors, including the countries that are members of the entity, the location
of the primary office of the entity, the obligations of the members, the markets
in which the securities trade, and whether, and to what extent, the performance
of the securities is tied closely to the political or economic developments of a
particular country or geographic region.
The
occurrence of political, social or diplomatic changes in one or more of the
countries issuing Sovereign Debt could adversely affect each Fund’s investments.
Political changes or a deterioration of a country’s domestic economy or balance
of trade may affect the willingness of countries to service their Sovereign
Debt. While each Sub-Adviser intends to manage each Fund’s portfolios in a
manner that will minimize the exposure to such risks, there can be no assurance
that adverse political changes will not cause each Fund to suffer a loss of
interest or principal on any of its holdings.
Foreign
Index-Linked Instruments
The
Funds may invest, subject to compliance with its limitations applicable to its
investment in debt securities, in instruments which have the investment
characteristics of particular securities, securities indices, futures contracts
or currencies. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to the
value of a currency or commodity at a future point in time. For example, each
Fund may invest in instruments issued by the U.S. or a foreign government or by
private issuers that return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index (“foreign
index-linked instruments”). Foreign index-linked instruments have the investment
characteristics of particular securities, securities indices, futures contracts
or currencies. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to the
value of a currency or commodity at a future point in time.
A
foreign index-linked instrument may be based upon the exchange rate of a
particular currency or currencies or the differential between two currencies, or
the level of interest rates in a particular country or countries, or the
differential in interest rates between particular countries. In the case of
foreign index-linked instruments linking the interest component to a foreign
index, the amount of interest payable will adjust periodically in response to
changes in the level of the foreign index during the term of the foreign
index-linked instrument. The risks of such investments would reflect the risks
of investing in the index or other instrument, the performance of which
determines the return for the instrument. Currency-indexed securities may be
positively or negatively indexed, meaning their maturity value may increase when
the specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose price
characteristics are similar to a put on
the
underlying currency. Currency-indexed securities may also have prices that
depend on the values of a number of different foreign currencies relative to
each other.
Foreign
Securities
The
Funds may invest in U.S. dollar-denominated and non-U.S. dollar-denominated
foreign debt and equity securities and in CDs issued by foreign banks and
foreign branches of U.S. banks. Securities of issuers within a given country may
be denominated in the currency of another country. The foreign securities are
generally those securities issued by companies organized outside the U.S. and,
in the case of equity securities, that trade primarily in markets outside the
U.S., have their primary markets outside of the U.S., or are otherwise deemed to
be non-U.S. securities by each Sub-Adviser. These foreign securities are subject
to most, if not all, of the risks of foreign investing.
Investors
should carefully consider the appropriateness of foreign investing in light of
their financial objectives and goals. While foreign markets may present unique
investment opportunities, foreign investing involves risks not associated with
domestic investing. In many foreign countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers and listed companies than in the United States. Foreign investments
involve risks relating to local political, economic, regulatory, or social
instability, military action or unrest, or adverse diplomatic developments, and
may be affected by actions of foreign governments adverse to the interests of
U.S. investors. Securities denominated in foreign currencies may gain or lose
value as a result of fluctuating currency exchange rates. Securities markets in
other countries are not always as efficient as those in the U.S. and are
sometimes less liquid and more volatile. If foreign securities are determined to
be illiquid, then each Fund will limit its investment in these securities
subject to its limitation on investments in illiquid securities. Foreign
securities transactions may be subject to higher brokerage and custodial costs
than domestic securities transactions.
The
Funds may invest in securities of issuers in emerging markets, including issuers
in Asia (including Russia), Eastern Europe, Central and South America, the
Middle East and Africa. Securities markets of emerging countries may also have
less efficient clearance and settlement procedures than U.S. markets, making it
difficult to conduct and complete transactions. Delays in the settlement could
result in temporary periods when a portion of each Fund’s assets is uninvested
and no return is earned thereon. Inability to make intended security purchases
could cause each Fund to miss attractive investment opportunities. Inability to
dispose of portfolio securities could result either in losses to each Fund due
to subsequent declines in value of the portfolio security or, if each Fund has
entered into a contract to sell the security, could result in possible liability
of each Fund to the purchaser. Other risks involved in investing in the
securities of foreign issuers include differences in accounting, auditing and
financial reporting standards; limited publicly available information; the
difficulty of assessing economic trends in foreign countries; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); government interference, including
government ownership of companies in certain sectors, wage and price controls,
or imposition of trade barriers and other protectionist measures; difficulties
in invoking legal process abroad and enforcing contractual obligations;
political, social or economic instability which could affect U.S. investments in
foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities and dividends and interest payable on
those securities may be subject to foreign taxes, including foreign withholding
taxes, and other foreign taxes may apply with respect to securities
transactions. Additional costs associated with an investment in foreign
securities may include higher transaction, custody and foreign currency
conversion costs. In the event of litigation
relating
to a portfolio investment, each Fund may encounter substantial difficulties in
obtaining and enforcing judgments against non-U.S. resident individuals and
companies.
Some
securities are issued by companies organized outside the United States but are
traded in U.S. securities markets and are denominated in U.S. dollars. Other
securities are not traded in the United States but are denominated in U.S.
dollars. These securities may be exposed to many, if not all, of the risks of
foreign investing. For example, foreign trading market or currency risks will
not apply to U.S. dollar-denominated securities traded in U.S. securities
markets.
Investment
in countries with emerging markets presents risks in greater degree than, and in
addition to, those presented by investment in foreign issuers in general.
Countries with developing markets have economic structures that are less mature.
Furthermore, countries with developing markets have less stable political
systems and may have high inflation, rapidly changing interest and currency
exchange rates, and their securities markets are substantially less developed.
The economies of countries with developing markets generally are heavily
dependent upon international trade, and, accordingly, have been and may continue
to be adversely affected by barriers, exchange controls, managed adjustments in
relative currency values and other protectionist measures in the countries with
which they trade. These economies also have been and may continue to be
adversely affected by economic conditions in the countries with which they
trade.
Futures
Transactions (Marketfield Fund only)
A
futures contract is an agreement to buy or sell a security or currency (or to
deliver a final cash settlement price in the case of a contract relating to an
index or otherwise not calling for physical delivery at the end of trading in
the contract), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of each Fund’s current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or purchase prices for each Fund
than might later be available in the market when each Fund makes anticipated
purchases. See “Derivative Instruments -- General Discussion” for more
information. For a discussion on currency futures, please see “Foreign Currency
Transactions (Forward Contracts)” in this section.
In
the United States, futures contracts are traded on boards of trade that have
been designated as “contract markets” or registered as derivatives transaction
execution facilities by the CFTC. Futures contracts generally trade on these
markets through an “open outcry” auction on the exchange floor or through
competitive trading on an electronic trading system. Currently, there are
futures contracts based on a variety of instruments, indices and currencies,
including long-term U.S. Treasury bonds, Treasury notes, GNMA certificates,
three-month U.S. Treasury bills, three-month domestic bank CDs, municipal bond
indices, individual equity securities and various stock indices. Subject to
compliance with applicable CFTC rules, the Marketfield Fund also may enter into
futures contracts traded on foreign futures exchanges such as those located in
Frankfurt, Tokyo, London or Paris, as long as trading on foreign futures
exchanges does not subject the Fund to risks that are materially greater than
the risks associated with trading on U.S. exchanges.
Positions
taken in the futures markets are not normally held until delivery or final cash
settlement is required, but are instead liquidated through offsetting
transactions, which may result in a gain or a loss. While futures positions
taken by the Marketfield Fund will usually be liquidated in this manner, each
Fund may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing- out transactions and
guarantees
that as between the clearing members of an exchange, the sale and purchase
obligations will be performed with regard to all positions that remain open at
the termination of the contract.
When
a purchase or sale of a futures contract is made by the Marketfield Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of liquid assets (“initial margin”) as a partial guarantee of
its performance under the contract. The margin required for a futures contract
is set by the exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract that is returned
to the Fund upon termination of the contract assuming all contractual
obligations have been satisfied. The Marketfield Fund expects to earn interest
income on its initial margin deposits. The Fund is also required to deposit and
maintain margin with respect to put and call options on futures contracts
written by it. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin requirements), the
current market value of the option, and other futures positions held by the
Fund.
A
futures contract held by the Marketfield Fund is valued daily at the official
settlement price of the exchange on which it is traded. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized appreciation or depreciation by marking to market such contract on a
daily basis to reflect the market value of the contract at the end of each day’s
trading. The Fund and broker do not exchange cash flows daily as a result of the
daily change in unrealized appreciation or depreciation. When the futures
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund’s basis in the contract and will settle cash on such date. In computing
daily NAV per share, the Fund will mark-to-market its open futures positions.
Futures
on Debt Securities.
Bond prices are established in both the cash market and the futures market. In
the cash market, bonds are purchased and sold with payment for the full purchase
price of the bond being made in cash, generally within five business days after
the trade. In the futures market, only a contract is made to purchase or sell a
bond in the future for a set price on a certain date. Historically, the prices
for bonds established in the futures markets have tended to move generally in
the aggregate in concert with the cash market prices and have maintained fairly
predictable relationships.
Accordingly,
the Marketfield Fund may purchase and sell futures contracts on debt securities
and on indices of debt securities in order to hedge against anticipated changes
in interest rates that might otherwise have an adverse effect upon the value of
the Fund’s securities. The Fund may also enter into such futures contracts as a
substitute for the purchase of longer-term securities to lengthen or shorten the
average maturity or duration of the Fund’s portfolio, and for other appropriate
risk management, income enhancement and investment purposes.
For
example, the Marketfield Fund may take a “short” position in the futures market
by selling contracts for the future delivery of debt securities held by the Fund
(or securities having characteristics similar to those held by the Fund) in
order to hedge against an anticipated rise in interest rates that would
adversely affect the value of the Fund’s investment portfolio. When hedging of
this character is successful, any depreciation in the value of portfolio
securities will be substantially offset by appreciation in the value of the
futures position. On other occasions, the Fund may take a “long” position by
purchasing futures on debt securities. This would be done, for example, when the
Fund intends to purchase particular securities and it has the necessary cash,
but expects the rate of return available in the securities markets at that time
to be less favorable than rates currently
available
in the futures markets. If the anticipated rise in the price of the securities
should occur (with its concomitant reduction in yield), the increased cost to
the Fund of purchasing the securities will be offset, at least to some extent,
by the rise in the value of the futures position taken in anticipation of the
subsequent securities purchase. The Fund could accomplish similar results by
selling securities with long maturities and investing in securities with short
maturities when interest rates are expected to increase, or by buying securities
with long maturities and selling securities with short maturities when interest
rates are expected to decline. However, by using futures contracts as a risk
management technique, given the greater liquidity in the futures market than in
the cash market, it may be possible to accomplish the same result more easily
and more quickly.
Depending
upon the types of futures contracts that are available to hedge the Fund’s
portfolio of securities or portion of a portfolio, perfect correlation between
the Fund’s futures positions and portfolio positions may be difficult to
achieve. Futures contracts do not exist for all types of securities and markets
for futures contracts that do exist may, for a variety of reasons, be illiquid
at particular times when each Fund might wish to buy or sell a futures
contract.
Open
futures positions on debt securities will be valued at the most recent
settlement price, unless such price does not appear to the Marketfield
Sub-Adviser to reflect the fair value of the contract, in which case the
positions will be valued by or under the direction of the Board.
Securities
Index Futures.
A
securities index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific securities index at the close of
the last trading day of the contract and the price at which the agreement is
made. A securities index futures contract does not require the physical delivery
of securities, but merely provides for profits and losses resulting from changes
in the market value of the contract to be credited or debited at the close of
each trading day to the respective accounts of the parties to the contract. On
the contract’s expiration date a final cash settlement occurs and the futures
positions are simply closed out. Changes in the market value of a particular
securities index futures contract reflect changes in the specified index of
equity securities on which the contract is based. A securities index is designed
to reflect overall price trends in the market for equity
securities.
The
Fund may purchase and sell securities index futures to hedge the equity portion
of its investment portfolio with regard to market (systematic) risk (involving
the market’s assessment of overall economic prospects), as distinguished from
stock-specific risk (involving the market’s evaluation of the merits of the
issuer of a particular security) or to gain market exposure to that portion of
the market represented by the futures contracts. The Fund may enter into
securities index futures to the extent that it has equity securities in its
portfolio. Similarly, the Fund may enter into futures on debt securities indices
(including the municipal bond index) to the extent it has debt securities in
their portfolios. In addition, to the extent that it invests in foreign
securities, and subject to any applicable restriction on the Fund’s ability to
invest in foreign currencies, the Fund may enter into contracts for the future
delivery of foreign currencies to hedge against changes in currency exchange
rates. The Fund may also use securities index futures to maintain exposure to
the market, while maintaining liquidity to meet expected redemptions or pending
investment in securities.
By
establishing an appropriate “short” position in securities index futures, the
Marketfield Fund may seek to protect the value of its portfolio against an
overall decline in the market for securities. Alternatively, in anticipation of
a generally rising market, the Fund can seek to avoid losing the benefit of
apparently low current prices by establishing a “long” position in securities
index futures
and
later liquidating that position as particular securities are in fact acquired.
To the extent that these hedging strategies are successful, each Fund will be
affected to a lesser degree by adverse overall market price movements, unrelated
to the merits of specific portfolio securities, than would otherwise be the
case. The Fund may also purchase futures on debt securities or indices as a
substitute for the purchase of longer-term debt securities to lengthen the
dollar-weighted average maturity of the Fund’s debt portfolio or to gain
exposure to particular markets represented by the index.
Options
on Futures.
For
bona fide hedging, risk management and other appropriate purposes, the Fund also
may purchase and write call and put options on futures contracts that are traded
on exchanges that are licensed and regulated by the CFTC for the purpose of
options trading, or, subject to applicable CFTC rules, on foreign
exchanges.
A
“call” option on a futures contract gives the purchaser the right, in return for
the premium paid, to purchase a futures contract (assume a “long” position) at a
specified exercise price at any time before the option expires. Upon the
exercise of a “call,” the writer of the option is obligated to sell the futures
contract (to deliver a “long” position to the option holder) at the option
exercise price, which will presumably be lower than the current market price of
the contract in the futures market. The writing of a call option on a futures
contract constitutes a partial hedge against declining prices of the underlying
securities or the currencies in which such securities are denominated. If the
futures price at expiration is below the exercise price, each Fund will retain
the full amount of the option premium, which provides a partial hedge against
any decline that may have occurred in the Fund’s holdings of securities or the
currencies in which such securities are denominated. The purchase of a call
option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when each Fund is
not fully invested or of lengthening the average maturity or duration of the
Fund’s portfolio.
A
“put” option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a “short” position), for a specified exercise
price at any time before the option expires. Upon exercise of a “put,” the
writer of the option is obligated to purchase the futures contract (deliver a
“short” position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. The writing of a put option on a futures contract is analogous
to the purchase of a futures contract. For example, if the Fund writes a put
option on a futures contract on debt securities related to securities that the
Fund expects to acquire and the market price of such securities increases, the
net cost to the Fund of the debt securities acquired by it will be reduced by
the amount of the option premium received. Of course, if market prices have
declined, the Fund’s purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market. The
purchase of put options on futures contracts is a means of hedging the Fund’s
portfolio against the risk of rising interest rates, declining securities prices
or declining exchange rates for a particular currency.
When
an entity exercises an option and assumes a “long” futures position, in the case
of a “call,” or a “short” futures position, in the case of a “put,” its gain
will be credited to its futures margin account, while the loss suffered by the
writer of the option will be debited to its account. However, as with the
trading of futures, most participants in the options markets do not seek to
realize their gains or losses by exercise of their option rights. Instead, the
writer or holder of an option will usually realize a gain or loss by buying or
selling an offsetting option at a market price that will reflect an increase or
a decrease from the premium originally paid.
Depending
on the pricing of the option compared to either the futures contract upon which
it is based or upon the price of the underlying securities or currencies, owning
an option may or may not be less risky than ownership of the futures contract or
underlying securities or currencies. In contrast to a futures transaction, in
which only transaction costs are involved, benefits received in an option
transaction will be reduced by the amount of the premium paid as well as by
transaction costs. In the event of an adverse market movement, however, the Fund
will not be subject to a risk of loss on the option transaction beyond the price
of the premium it paid plus its transaction costs, and may consequently benefit
from a favorable movement in the value of its portfolio securities or the
currencies in which such securities are denominated that would have been more
completely offset if the hedge had been effected through the use of futures. If
the Fund writes options on futures contracts, the Fund will receive a premium
but will assume a risk of adverse movement in the price of the underlying
futures contract comparable to that involved in holding a futures position. If
the option is not exercised, the Fund will realize a gain in the amount of the
premium, which may partially offset unfavorable changes in the value of
securities held by or to be acquired for the Fund. If the option is exercised,
the Fund will incur a loss on the option transaction, which will be reduced by
the amount of the premium it has received, but which may partially offset
favorable changes in the value of its portfolio securities or the currencies in
which such securities are denominated.
While
the holder or writer of an option on a futures contract may normally terminate
its position by selling or purchasing an offsetting option of the same series,
the Marketfield Fund’s ability to establish and close out options positions at
fairly established prices will be subject to the maintenance of a liquid market.
The Marketfield Fund will not purchase or write options on futures contracts
unless the market for such options has sufficient liquidity such that the risks
associated with such options transactions are not at unacceptable
levels.
Coverage
of Futures Contracts and Options on Futures Contracts.
The Marketfield Fund may only enter into futures contracts or related options
that are standardized and traded on a U.S. or foreign exchange or board of
trade, or similar entity, or quoted on an automatic quotation system. The Fund
will not enter into futures contracts to the extent that the market value of the
contracts exceed 100% of the Fund’s net assets.
The
requirements for qualification as a RIC also may limit the extent to which the
Fund may enter into futures, options on futures or forward contracts. See
“Federal Income Tax Matters.”
Risks
Associated with Futures and Options on Futures Contracts.
There
are several risks associated with the use of futures contracts and options on
futures contracts as hedging techniques. There can be no assurance that hedging
strategies using futures will be successful. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in the futures
contract, which in some cases may be unlimited. There can be no guarantee that
there will be a correlation between price movements in the hedging vehicle and
in the Fund’s securities being hedged, even if the hedging vehicle closely
correlates with the Fund’s investments, such as with single stock futures
contracts. If the price of a futures contract changes more than the price of the
securities or currencies, the Fund will experience either a loss or a gain on
the futures contracts that will not be completely offset by changes in the price
of the securities or currencies that are the subject of the hedge. An incorrect
correlation could result in a loss on both the hedged securities or currencies
and the hedging vehicle so that the portfolio return might have been better had
hedging not been attempted. It is not possible to hedge fully or perfectly
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations. 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. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and options on securities,
including technical influences in futures trading and options, and differences
between the financial instruments being hedged and the instruments underlying
the standard contracts available for trading in such respects as interest rate
levels, maturities, and creditworthiness of issuers. A decision as to whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends. It is also possible that, when the
Fund has sold single stock futures or stock index futures to hedge its portfolio
against a decline in the market, the market may advance while the value of the
particular securities held in the Fund’s portfolio might decline. If this were
to occur, the Fund would incur a loss on the futures contracts and also
experience a decline in the value of its portfolio securities. This risk may be
magnified for single stock futures transactions, as the Marketfield Sub-Adviser
would be required to predict the direction of the price of an individual stock,
as opposed to securities prices generally.
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 a liquid market will exist at a time when the
Marketfield Fund seeks to close out a futures contract or a futures option
position. If no liquid market exists, the Fund would remain obligated to meet
margin requirements until the position is closed.
Also,
in the event of the bankruptcy or insolvency of a futures commission merchant
that holds margin on behalf of the Fund, the Fund may not be entitled to the
return of all the margin owed to the Fund, potentially resulting in a
loss.
In
addition, many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
In
addition to the risks that apply to all options transactions, there are several
special risks relating to options on futures contracts. The ability to establish
and close out positions in such options will be subject to the development and
maintenance of a liquid market in the options. It is not certain that such a
market will develop. Although the Fund generally will purchase only those
options and futures contracts for which there appears to be an active market,
there is no assurance that a liquid market on an exchange will exist for any
particular option or futures contract at any particular time. In the event no
such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that the Fund would have to
exercise options it has
purchased
in order to realize any profit and would be less able to limit its exposure to
losses on options it has written.
High
Yield Securities
Typically,
high yield debt securities (sometimes called “junk bonds”) are rated below
investment grade by one or more of the rating agencies or, if not rated, are
determined to be of comparable quality by each Sub-Adviser and are generally
considered to be speculative. Investment in lower rated corporate debt
securities provides 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.
Investors
should be willing to accept the risk associated with investment in high
yield/high risk securities. Investment in high yield/high risk bonds involves
special risks in addition to the risks associated with investments in higher
rated debt securities. High yield/high risk bonds may be more susceptible to
real or perceived adverse economic and competitive industry conditions than
higher grade bonds. The prices of high yield/high risk bonds have been found to
be less sensitive to interest-rate changes than more highly rated investments,
but more sensitive to adverse economic downturns or individual corporate
developments.
The
secondary market on which high yield/high risk bonds are traded may be less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which each Fund could sell a
high yield/high risk bond, and could adversely affect and cause large
fluctuations in each Fund’s daily NAV. A projection of an economic downturn or
of a period of rising interest rates, for example, could cause a decline in high
yield/high risk bond 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 such securities are determined to be illiquid, then each
Fund will limit its investment in these securities subject to its limitation on
investments in illiquid securities.
Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield/high risk bonds,
especially in a thinly traded market.
Some
high yield securities are issued by smaller, less-seasoned companies, while
others are issued as part of a corporate restructuring, such as an acquisition,
merger, or leveraged buyout. Companies that issue high yield securities are
often highly leveraged and may not have available to them more traditional
methods of financing. Therefore, the risk associated with acquiring the
securities of such issuers generally is greater than is the case with
investment-grade securities. Some high yield securities were once rated as
investment-grade but have been downgraded to junk bond status because of
financial difficulties experienced by their issuers.
If
the issuer of high yield/high risk bonds defaults, each Fund may incur
additional expenses to seek recovery. In the case of high yield/high risk bonds
structured as zero coupon or payment-in-kind securities, the market prices of
such securities are affected to a greater extent by interest rate changes, and
therefore tend to be more volatile than securities that pay interest
periodically and in cash.
Analysis
of the creditworthiness of issuers of high yield/high risk bonds may be more
complex than for issuers of higher quality debt securities, and the ability of
each Fund to achieve its investment objective may, to the extent of its
investment in high yield/high risk bonds, be more dependent upon
such
creditworthiness analysis than would be the case if each Fund were investing in
higher quality bonds. 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.
The
use of credit ratings as the sole method for evaluating high yield/high risk
bonds also involves certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield/high risk bonds. Also, credit rating agencies may fail to change credit
ratings on a timely basis to reflect subsequent events. If a credit rating
agency changes the rating of a portfolio security held by each Fund, each Fund
may retain the portfolio security if each Sub-Adviser, where applicable, deems
it in the best interest of each Fund’s shareholders. Legislation designed to
limit the use of high yield/high risk bonds in corporate transactions may have a
material adverse effect on each Fund’s NAV per share and investment
practices.
In
addition, there may be special tax considerations associated with investing in
high yield/high risk bonds structured as zero coupon or payment-in-kind
securities. Each Fund records the interest on these securities annually as
income even though it receives no cash interest until the security’s maturity or
payment date. As a result, the amounts that have accrued each year are required
to be distributed to shareholders and such amounts will be taxable to
shareholders. Therefore, each Fund may have to sell some of its assets to
distribute cash to shareholders. These actions are likely to reduce each Fund’s
assets and may thereby increase its expense ratios and decrease its rate of
return.
Hybrid
Instruments and Other Capital Securities (Marketfield Fund only)
Hybrid
Instruments.
A hybrid instrument, or hybrid, is a derivative interest in an issuer that
combines the characteristics of an equity security and a debt security. A hybrid
may have characteristics that, on the whole, more strongly suggest the existence
of a bond, stock or other traditional investment, but may also have prominent
features that are normally associated with a different type of investment. For
example, a hybrid instrument may have an interest rate or principal amount that
is determined by an unrelated indicator, such as the performance of a commodity
or a securities index. Moreover, hybrid instruments may be treated as a
particular type of investment for one regulatory purpose (such as taxation) and
may be simultaneously treated as a different type of investment for a different
regulatory purpose (such as securities or commodity regulation). Hybrids can be
used as an efficient means of pursuing a variety of investment goals, including
increased total return and duration management. Because hybrids combine features
of two or more traditional investments, and may involve the use of innovative
structures, hybrids present risks that may be similar to, different from, or
greater than those associated with traditional investments with similar
characteristics. Some of these structural features may include, but are not
limited to, structural subordination to the claims of senior debt holders,
interest payment deferrals under certain conditions, perpetual securities with
no final maturity date, and/or maturity extension risk for callable securities
should the issuer elect not to redeem the security at a predetermined call
date.
Thus,
an investment in a hybrid may entail significant market risks that are not
associated with a similar investment in a traditional, U.S.-dollar-denominated
bond with a fixed principal amount that pays a fixed rate or floating rate of
interest. The purchase of hybrids also exposes the Marketfield Fund to the
credit risk of the issuer of the hybrids. There is a risk that, under certain
conditions, the redemption value of a hybrid may be zero. Depending on the level
of the Fund’s investment in hybrids, these risks may cause significant
fluctuations in the Fund’s NAV. Certain issuers of hybrid
instruments
known as structured products may be deemed to be investment companies as defined
in the 1940 Act. As a result, the Fund’s investments in these products may be
subject to limits described below under the heading “Investment
Companies.”
Other
Capital Securities.
Other
capital securities give issuers flexibility in managing their capital structure.
The features associated with these securities are predominately debt like in
that they have coupons, pay interest and in most cases have a final stated
maturity. There are certain features that give the companies flexibility not
commonly found in fixed-income securities, which include, but are not limited
to, deferral of interest payments under certain conditions and subordination to
debt securities in the event of default. However, it should be noted that in an
event of default the securities would typically be expected to rank senior to
common equity. The deferral of interest payments is generally not an event of
default for an extended period of time and the ability of the holders of such
instruments to accelerate payment under terms of these instruments is generally
more limited than other debt securities.
Trust
Preferred Securities.
Trust
preferred securities are typically issued by corporations, generally in the form
of interest bearing notes with preferred securities characteristics, or by an
affiliated business trust of a corporation, generally in the form of beneficial
interests in subordinated debentures or similarly structured securities. The
trust preferred securities market consists of both fixed and adjustable coupon
rate securities that are either perpetual in nature or have stated maturity
dates.
Trust
preferred securities are typically junior and fully subordinated liabilities of
an issuer or the beneficiary of a guarantee that is junior and fully
subordinated to the other liabilities of the guarantor. Trust preferred
securities have many of the key characteristics of equity due to their
subordinated position in an issuer’s capital structure and because their quality
and value are heavily dependent on the profitability of the issuer rather than
on any legal claims to specific assets or cash flows.
Illiquid
Securities
The
Funds may invest in privately placed, restricted, Rule 144A or other
unregistered securities. Rule 144A securities are securities that are
eligible for resale without registration under the Securities Act of 1933, as
amended (the “1933 Act”), pursuant to Rule 144A under the 1933 Act.
The Funds may not acquire illiquid holdings if, as a result, more than 15% of
its net assets would be in illiquid investments. If a Fund determines at any
time that it owns illiquid securities in excess of 15% of its net assets, it
will cease to undertake new commitments to acquire illiquid securities until its
holdings are no longer in excess of 15% of its NAV, and, depending on
circumstances, may take additional steps to reduce its holdings of illiquid
securities. Subject to these limitations, each Fund may acquire investments that
are illiquid or have limited liquidity, such as private placements or
investments that are not registered under the 1933 Act and cannot be
offered for public sale in the United States without first being registered
under the 1933 Act. An investment is considered “illiquid” if a Fund
reasonably expects the investment cannot be sold or disposed of in current
market conditions in seven (7)
calendar days or less without the sale or disposition significantly changing the
market value of the investment. The price each Fund’s portfolio may pay for
illiquid securities or receive upon resale may be lower than the price paid or
received for similar securities with a more liquid market. Accordingly, the
valuation of these securities will take into account any limitations on their
liquidity.
The
SEC has adopted a liquidity risk management rule (the “Liquidity Rule”) that
requires each Fund to establish a liquidity risk management program (the
“LRMP”). The Trustees, including a majority of the Independent Trustees, have
designated each Sub-Adviser to administer the respective Fund’s LRMP and each
Sub-Adviser has formed a Liquidity Risk Management Committee to which it has
delegated
responsibilities for the ongoing operation and management of the LRMPs. Under
the LRMPs, each Sub-Adviser assesses, manages, and periodically reviews the
Fund’s liquidity risk. The Liquidity Rule defines “liquidity risk” as the risk
that a Fund could not meet requests to redeem shares issued by the Fund without
significant dilution of remaining investors’ interests in the Fund. The
liquidity of a Fund’s portfolio investments is determined based on relevant
market, trading and investment-specific considerations under the LRMP. To the
extent that an investment is deemed to be an illiquid investment or a less
liquid investment, a Fund can expect to be exposed to greater liquidity
risk.
Rule 144A
securities may be determined to be liquid or illiquid in accordance with the
guidelines established by the Adviser and approved by the Trustees. The Trustees
will monitor compliance with these guidelines on a periodic basis.
Investment
in these securities entails the risk to the Funds that there may not be a buyer
for these securities at a price that the Fund believes represents the security’s
value should a Fund wish to sell the security. If a security a Fund holds must
be registered under the 1933 Act before it may be sold, the Fund may be
obligated to pay all or part of the registration expenses. In addition, in these
circumstances, a considerable time may elapse between the time of the decision
to sell and the time a Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions develop, the Fund may obtain a less favorable price than when it
first decided to sell the security.
Industrial
Development and Pollution Control Bonds
Industrial
Development Bonds that pay tax-exempt interest are, in most cases, revenue bonds
and are issued by, or on behalf of, public authorities to raise money to finance
various privately operated facilities for business, manufacturing, housing,
sports, and pollution control. These bonds are also used to finance public
facilities such as airports, mass transit systems, ports, and parking.
Consequently, the credit quality of these securities depends upon the ability of
the user of the facilities financed by the bonds and any guarantor to meet its
financial obligations. These bonds are generally not secured by the taxing power
of the municipality but are secured by the revenues of the authority derived
from payments by the industrial user.
Industrial
Development and Pollution Control Bonds, although nominally issued by municipal
authorities, are generally not secured by the taxing power of the municipality
but are secured by the revenues of the authority derived from payments by the
industrial user. Industrial Development Bonds issued after the effective date of
the Tax Reform Act of 1986 (“TRA”), as well as certain other bonds, are now
classified as “private activity bonds.”
Industry
Concentration
The
1940 Act requires each Fund to state the extent, if any, to which it intends to
concentrate investments in a particular industry. While the 1940 Act does not
define what constitutes “concentration” in an industry, the staff of the SEC
takes the position that, in general, investments of more than 25% of a fund’s
assets in an industry constitutes concentration. The SEC staff has also taken
the position that a policy relating to industry concentration does not apply to
investments in “government securities” (as defined in the 1940 Act) or in
tax-exempt securities issued by U.S. federal, state and municipal governments or
political subdivisions of U.S. federal, state and municipal
governments.
Unless
otherwise provided, for purposes of determining whether a Fund’s investments are
concentrated in a particular industry or group of industries, the term
“industry” shall be defined by reference to the Global Industry Classification
Standard put forth by S&P and Morgan Stanley Capital
International.
Inflation-Linked
Bonds (CenterSquare Fund only)
To
the extent it may invest in fixed-income securities, the CenterSquare Fund may
invest in inflation-linked bonds, which are issued by the United States
government and foreign governments with a nominal return indexed to the
inflation rate in prices. Governments that issue inflation-indexed bonds may use
different conventions for purposes of structuring their bonds and different
inflation factors, with the same underlying principal of linking real returns
and inflation.
For
purposes of explanation, a United States TIPS bond will be used as an example of
how inflation-linked bonds work. Inflation-linked bonds, like nominal bonds, pay
coupons on a principal amount. For U.S. TIPS, and most inflation-linked bonds,
the value of the principal is adjusted for inflation. In the United States the
index used to measure inflation is the non-seasonally adjusted U.S. City Average
All Items Consumer Price Index for All Urban Consumers (“CPI-U”). Interest
payments are paid every six months, and are equal to a fixed percentage of the
inflation-adjusted value of the principal. The final payment of principal of the
security will not be less than the original par amount of the security at
issuance.
The
principal of the inflation-linked security is indexed to the non-seasonally
adjusted CPI-U. To calculate the inflation-adjusted principal value for a
particular valuation date, the value of the principal at issuance is multiplied
by the index ratio applicable to that valuation date. The index ratio for any
date is the ratio of the reference consumer price index (“CPI”) applicable to
such date, to the reference CPI applicable to the original issue date.
Semi-annual coupon interest is determined by multiplying the inflation-adjusted
principal amount by one-half of the stated rate of interest on each interest
payment date.
Inflation-adjusted
principal or the original par amount, whichever is larger, is paid on the
maturity date as specified in the applicable offering announcement. If at
maturity the inflation-adjusted principal is less than the original principal
value of the security, an additional amount is paid at maturity so that the
additional amount plus the inflation-adjusted principal equals the original
principal amount. Some inflation-linked securities may be stripped into
principal and interest components. In the case of a stripped security, the
holder of the stripped principal component would receive this additional amount.
The final interest payment, however, will be based on the final
inflation-adjusted principal value, not the original par amount.
If
the CenterSquare Fund invests in U.S. Treasury inflation-linked securities, it
will be required to treat as original issue discount any increase in the
principal amount of the securities that occurs during the course of its taxable
year. If the CenterSquare Fund purchases such inflation-linked securities that
are issued in stripped form, either as stripped bonds or coupons, it will be
treated as if it had purchased a newly issued debt instrument having “original
issue discount.” If the CenterSquare Fund holds an obligation with original
issue discount, it is required to accrue as ordinary income a portion of such
original issue discount even though it receives no corresponding interest
payment in cash. The CenterSquare Fund may have to sell other investments to
obtain cash needed to make income distributions, which may reduce the
CenterSquare Fund’s assets, increase its expense ratio and decrease its rate of
return.
Initial
Public Offerings (“IPOs”)
IPOs
occur when a company first offers its securities to the public. Although
companies can be any age or size at the time of their IPOs, they are often
smaller and have limited operating histories, which may involve a greater
potential for the value of their securities to be impaired following the
IPO.
Investors
in IPOs can be adversely affected by substantial dilution in the value of their
shares, by the issuance of additional shares and by concentration of control in
existing management and principal shareholders. In addition, all of the factors
that affect stock market performance may have a greater impact on the shares of
IPO companies.
The
price of a company’s securities may be highly unstable at the time of its IPO
and for a period thereafter due to market psychology prevailing at the time of
the IPO, the absence of a prior public market, the small number of shares
available and the limited availability of investor information. As a result of
this or other factors, each Sub-Adviser might decide to sell an IPO security
more quickly than it would otherwise, which may result in a significant gain or
loss and greater transaction costs to each Fund. Any gains from shares held for
one year or less may be treated as short-term gains, and be taxable as ordinary
income to each Fund’s shareholders. In addition, IPO securities may be subject
to varying patterns of trading volume and may, at times, be difficult to sell
without an unfavorable impact on prevailing prices.
The
effect of an IPO investment can have a magnified impact on each Fund’s
performance if each Fund’s asset base is small. Consequently, IPOs may
constitute a significant portion of each Fund’s returns particularly when each
Fund is small. Since the number of securities issued in an IPO is limited, it is
likely that IPO securities will represent a small component of each Fund’s
assets as it increases in size and therefore have a more limited effect on each
Fund’s performance.
There
can be no assurance that IPOs will continue to be available for each Fund to
purchase. The number or quality of IPOs available for purchase by each Fund may
vary, decrease or entirely disappear. In some cases, each Fund may not be able
to purchase IPOs at the offering price, but may have to purchase the shares in
the after-market at a price greatly exceeding the offering price, making it more
difficult for each Fund to realize a profit.
Investment
Companies
The
Funds may invest in securities of other investment companies, including
closed-end investment companies, ETFs and business development companies,
subject to limitations prescribed by the 1940 Act and any applicable
investment restrictions described in the Funds’ Prospectus and SAI. Among other
things, the 1940 Act limitations prohibit the Funds from: (1) acquiring
more than 3% of the voting shares of an investment company; (2) investing
more than 5% of each Fund’s total assets in securities of any one investment
company; and (3) investing more than 10% of each Fund’s total assets in
securities of all investment companies. These restrictions may not apply to
certain investments in money market funds. Each Fund indirectly will bear its
proportionate share of any management fees and other expenses paid by the
investment companies in which each Fund invests in addition to the fees and
expenses each Fund bears directly in connection with its own operations. These
securities represent interests in professionally managed portfolios that may
invest in various types of instruments pursuant to a wide range of investment
styles. Investing in other investment companies involves substantially the same
risks as investing directly in the underlying instruments, but may involve
duplicative management and advisory fees and operating expenses. Certain types
of investment companies, such as closed-end investment companies, issue a fixed
number of shares that trade on a stock exchange or OTC at a premium or a
discount to their NAV per share. Others are continuously offered at NAV per
share but may also be traded in the secondary market. In addition,
each
Fund may not acquire the securities of registered open-end investment companies
or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or
12(d)(1)(G) of the 1940 Act. For purposes of determining compliance with the
Fund’s policy on concentrating its investments in any one industry, each Fund
generally does not look through investments in underlying investment companies
for purposes of applying its concentration limitations, unless the underlying
investment company would be counted for purposes of calculating each Fund’s
concentration limitation.
However,
the SEC has granted orders for exemptive relief to certain ETFs that permit
investments in those ETFs by other investment companies (such as each Fund) in
excess of these limits. Each Fund may invest in ETFs that have received such
exemptive orders from the SEC, pursuant to the conditions specified in such
orders. For more information, please see the section entitled “Exchange-Traded
Funds.”
Rule
12d1-4 permits additional types of fund of fund arrangements without an
exemptive order. The rule imposes certain conditions, including limits on
control and voting of acquired funds’ shares, evaluations and findings by
investment advisers, fund investment agreements, and limits on most three-tier
fund structures.
Lending
of Portfolio Securities
Although
there is no immediate intent to do so, each Fund may lend portfolio securities
to certain broker/dealers and institutions to the extent permitted by the 1940
Act, as modified or interpreted by regulatory authorities having jurisdiction,
from time to time, in accordance with procedures adopted by the Board. By
lending its securities, each Fund attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would belong to each Fund. Such loans must be secured by collateral in cash or
U.S. government securities maintained on a current basis in an amount at least
equal to 100% of the current market value of the securities loaned. Each Fund
may call a loan and obtain the securities loaned at any time generally on less
than five days’ notice. For the duration of a loan, each Fund would continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities loaned and would also receive compensation from the investment of the
collateral. Each Fund would not, however, have the right to vote any securities
having voting rights during the existence of the loan, but each Fund would call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material matter
affecting the investment.
As
with other extensions of credit, there are risks of delay in recovery of, or
even loss of rights in, the collateral should the borrower of the securities
fail financially or breach its agreement with each Fund. Each Fund also bears
the risk that the borrower may fail to return the securities in a timely manner
or at all, either because the borrower fails financially or for other reasons.
Each Fund could experience delays and costs in recovering the loaned securities
or in gaining access to and liquidating the collateral, which could result in
actual financial loss and which could interfere with portfolio management
decisions or the exercise of ownership rights in the loaned securities. However,
the loans would be made only to firms deemed by each Sub-Adviser or their agent
to be creditworthy and when the consideration that can be earned currently from
securities loans of this type, justifies the attendant risk. If each
Sub-Adviser, as the case may be, determines to make securities loans, it is
intended that the value of the securities loaned will not exceed 33 1/3% of the
value of the total assets of the lending Fund.
While
securities are on loan, each Fund is subject to: the risk that the borrower may
default on the loan and that the collateral could be inadequate in the event the
borrower defaults; the risk that the
earnings
on the collateral invested may not be sufficient to pay fees incurred in
connection with the loan; the risk that the principal value of the collateral
invested may decline and may not be sufficient to pay back the borrower for
amount of the collateral posted; the risk that the borrower may use the loaned
securities to cover a short sale which may place downward pressure on the market
prices of the loaned securities; the risk that return of loaned securities could
be delayed and could interfere with portfolio management decisions; and the risk
that any efforts to recall the securities for purposes of voting may not be
effective.
Subject
to exemptive relief granted to each Fund from certain provisions of the 1940
Act, each Fund, subject to certain conditions and limitations, is permitted to
invest cash collateral and uninvested cash in one or more money market funds
that are affiliated with each Fund.
Loan
Participation Interests
The
Funds may invest in participation interests in loans. Each Fund’s investment in
loan participation interests may take the form of participation interests in, or
assignments or novations of a corporate loan (“Participation Interests”). The
Participation Interests may be acquired from an agent bank, co-lenders or other
holders of Participation Interests (“Participants”). In a novation, each Fund
would assume all of the rights of the lender in a corporate loan, including the
right to receive payments of principal and interest and other amounts directly
from the borrower and to enforce its rights as a lender directly against the
borrower. As an alternative, each Fund may purchase an assignment of all or a
portion of a lender’s interest in a corporate loan, in which case, each Fund may
be required generally to rely on the assigning lender to demand payment and
enforce its rights against the borrower, but would otherwise be entitled to all
of such lender’s rights in the corporate loan.
The
Funds also may purchase Participation Interests in a portion of the rights of a
lender in a corporate loan. In such a case, each Fund will be entitled to
receive payments of principal, interest and fees, if any, but generally will not
be entitled to enforce its rights directly against the agent bank or the
borrower; rather each Fund must rely on the lending institution for that
purpose. Each Fund will not act as an agent bank, guarantor or sole negotiator
of a structure with respect to a corporate loan.
In
a typical corporate loan involving the sale of Participation Interests, the
agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders that are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for registered investment companies. Each Fund generally will rely on
the agent bank or an intermediate Participant to collect its portion of the
payments on the corporate loan. The agent bank may monitor the value of the
collateral and, if the value of the collateral declines, may take certain
action, including accelerating the corporate loan, giving the borrower an
opportunity to provide additional collateral or seeking other protection for the
benefit of the Participants in the corporate loan, depending on the terms of the
corporate loan agreement. Furthermore, unless under the terms of a participation
agreement each Fund has direct recourse against the borrower (which is
unlikely), each Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for monitoring
compliance with covenants contained in the corporate loan agreement and for
notifying holders of corporate loans of any failures of compliance. Typically,
under corporate loan agreements, the agent bank is given discretion in enforcing
the corporate loan agreement, and is obligated to follow the terms of the loan
agreements and use only the same care it would use in the management of its own
property. For these services, the borrower compensates the agent bank. Such
compensation
may include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A
financial institution’s employment as an agent bank may be terminated in the
event that it fails to observe the requisite standard of care, becomes
insolvent, has a receiver, conservator, or similar official appointed for it by
the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. Generally, a successor agent bank will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of each Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank’s general or secured creditors, each Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate participants,
similar risks may arise.
When
each Fund acts as co-lender in connection with Participation Interests or when
each Fund acquires a Participation Interest the terms of which provide that each
Fund will be in privity of contract with the corporate borrower, each Fund will
have direct recourse against the borrower in the event the borrower fails to pay
scheduled principal and interest. In all other cases, each Fund will look to the
agent bank to enforce appropriate credit remedies against the borrower. In
acquiring Participation Interests each Sub-Adviser will conduct analysis and
evaluation of the financial condition of each such co-lender and participant to
ensure that the Participation Interest meets each Fund’s qualitative standards.
There is a risk that there may not be a readily available market for
Participation Interests and, in some cases, this could result in each Fund
disposing of such securities at a substantial discount from face value or
holding such security until maturity. When each Fund is required to rely upon a
lending institution to pay each Fund principal, interest, and other amounts
received by the lending institution for the loan participation, each Fund will
treat both the borrower and the lending institution as an “issuer” of the loan
participation for purposes of certain investment restrictions pertaining to the
diversification and concentration of each Fund’s portfolio.
Purchasers
of loans and other forms of direct indebtedness depend primarily upon the
creditworthiness of the corporate borrower for payment of principal and
interest. If each Fund does not receive scheduled interest or principal payments
on such indebtedness, each Fund’s share price and yield could be adversely
affected. Loans that are fully secured offer each Fund more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a secured
loan would satisfy the corporate borrower’s obligation, or that the collateral
can be liquidated.
The
Funds may invest in loan participations with credit quality comparable to that
of issuers of its portfolio investments. Indebtedness of companies whose
creditworthiness is poor involves substantially greater risks, and may be highly
speculative. Some companies may never pay off their indebtedness or may pay only
a small fraction of the amount owed. Consequently, when investing in
indebtedness of companies with poor credit, each Fund bears a substantial risk
of losing the entire amount invested.
Loans
and other types of direct indebtedness may not be readily marketable and may be
subject to restrictions on resale. In some cases, negotiations involved in
disposing of indebtedness may require weeks to complete. Consequently, some
indebtedness may be difficult or impossible to dispose of readily at what each
Sub-Adviser believes to be a fair price. In addition, valuation of illiquid
indebtedness involves a greater degree of judgment in determining each Fund’s
NAV than if that
value
were based on available market quotations and could result in significant
variations in each Fund’s daily share price. At the same time, some loan
interests are traded among certain financial institutions and accordingly may be
deemed liquid. As the market for different types of indebtedness develops, the
liquidity of these instruments is expected to improve.
Investment
in loans through a direct assignment of the financial institution’s interests
with respect to the loan may involve additional risks to each Fund. For example,
if a loan is foreclosed, each Fund could become part owner of any collateral,
and would bear the costs and liabilities associated with owning and disposing of
the collateral. In addition, it is conceivable that under emerging legal
theories of lender liability, each Fund could be held liable as co-lender. It is
unclear whether loans and other forms of direct indebtedness offer securities
law protections against fraud and misrepresentation. In the absence of
definitive regulatory guidance, each Fund will rely on each Sub-Adviser’s
research in an attempt to avoid situations where fraud or misrepresentation
could adversely affect each Fund.
Under
the 1940 Act, repurchase agreements are considered to be loans by the purchaser
collateralized by the underlying securities. The Adviser and Sub-Adviser monitor
the value of the underlying securities at the time the repurchase agreement is
entered into and at all times during the term of the agreement to ensure that
this value always equals or exceeds the agreed upon repurchase price to be paid
to each Fund. The Adviser and Sub-Adviser, in accordance with procedures
established by the Board, also evaluate the creditworthiness and financial
responsibility of the banks and brokers or dealers with which each Fund may
enter into repurchase agreements.
Floating
Rate Loans.
Floating
rate loans are provided by banks and other financial institutions to large
corporate customers. Companies undertake these loans to finance acquisitions,
buy-outs, recapitalizations or other leveraged transactions. Typically, these
loans are the most senior source of capital in a borrower’s capital structure
and have certain of the borrower’s assets pledged as collateral. The corporation
pays interest and principal to the lenders.
A
senior loan in which each Fund may invest typically is structured by a group of
lenders. This means that the lenders participate in the negotiations with the
borrower and in the drafting of the terms of the loan. The group of lenders
often consists of commercial and investment banks, thrift institutions,
insurance companies, finance companies, mutual funds and other institutional
investment vehicles or other financial institutions. One or more of the lenders,
referred to as the agent bank, usually administers the loan on behalf of all the
lenders.
The
Funds may invest in a floating rate loan in one of three ways: (1) it may make a
direct investment in the loan by participating as one of the lenders; (2) it may
purchase a participation interest; or (3) it may purchase an assignment.
Participation interests are interests issued by a lender or other financial
institution, which represent a fractional interest in a loan. Each Fund may
acquire participation interests from a lender or other holders of participation
interests. Holders of participation interests are referred to as participants.
An assignment represents a portion of a loan previously attributable to a
different lender. Unlike a participation interest, each Fund will become a
lender for the purposes of the relevant loan agreement by purchasing an
assignment.
The
Funds may make a direct investment in a floating rate loan pursuant to a primary
syndication and initial allocation process (i.e., buying an unseasoned loan
issue). A purchase can be effected by signing as a direct lender under the loan
document or by the purchase of an assignment interest from the underwriting
agent shortly after the initial funding on a basis which is consistent with the
initial
allocation
under the syndication process. This is known as buying in the “primary” market.
Such an investment is typically made at or about a floating rate loan’s “par”
value, which is its face value. From time to time, lenders in the primary market
will receive an up-front fee for committing to purchase a floating rate loan
that is being originated. In such instances, the fee received is reflected on
the books of each Fund as a discount to the loan’s par value. The discount is
then amortized over the life of the loan, which would effectively increase the
yield each Fund receives on the investment.
If
each Fund purchases an existing assignment of a floating rate loan, or purchases
a participation interest in a floating rate loan, it is said to be purchasing in
the “secondary” market. Purchases of floating rate loans in the secondary market
may take place at, above, or below the par value of a floating rate loan.
Purchases above par will effectively reduce the amount of interest being
received by each Fund through the amortization of the purchase price premium,
whereas purchases below par will effectively increase the amount of interest
being received by each Fund through the amortization of the purchase price
discount. Each Fund may be able to invest in floating rate loans only through
participation interests or assignments at certain times when reduced primary
investment opportunities in floating rate loans may exist. If each Fund
purchases an assignment from a lender, each Fund will generally have direct
contractual rights against the borrower in favor of the lenders. On the other
hand, if each Fund purchases a participation interest either from a lender or a
participant, each Fund typically will have established a direct contractual
relationship with the seller of the participation interest, but not with the
borrower. Consequently, each Fund is subject to the credit risk of the lender or
participant who sold the participation interest to each Fund, in addition to the
usual credit risk of the borrower. Therefore, when each Fund invests in floating
rate loans through the purchase of participation interests, each Sub-Adviser
must consider the creditworthiness of the agent bank and any lenders and
participants interposed between each Fund and a borrower. This secondary market
is private and unregulated, and there is no organized exchange or board of trade
on which floating rate loans are traded. Floating rate loans often trade in
large denominations. Trades can be infrequent, and the market may be
volatile.
Floating
rate loans generally are subject to extended settlement periods and may require
the consent of the borrower and/or agent prior to their sale or assignment.
These factors may impair each Fund’s ability to generate cash through the
liquidation of floating rate loans to repay debts, fund redemptions, or for any
other purpose.
Typically,
floating rate loans are secured by collateral. However, the value of the
collateral may not be sufficient to repay the loan. The collateral may consist
of various types of assets or interests including intangible assets. It may
include working capital assets, such as accounts receivable or inventory, or
tangible fixed assets, such as real property, buildings and equipment. It may
include intangible assets, such as trademarks, copyrights and patent rights, or
security interests in securities of subsidiaries or affiliates. The borrower’s
owners may provide additional collateral, typically by pledging their ownership
interest in the borrower as collateral for the loan. The borrower under a
floating rate loan must comply with various restrictive covenants contained in
any floating rate loan agreement between the borrower and the syndicate of
lenders. A restrictive covenant is a promise by the borrower not to take certain
action that may impair the rights of lenders. These covenants, in addition to
requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to shareholders,
provisions requiring the borrower to maintain specific financial ratios or
relationships and limits on total debt. In addition, a covenant may require the
borrower to prepay the floating rate loan with any excess cash flow. Excess cash
flow generally includes net cash flow after scheduled debt service payments and
permitted capital expenditures, among other things, as well as the proceeds from
asset dispositions or sales of
securities.
A breach of a covenant (after giving effect to any cure period) in a floating
rate loan agreement, which is not waived by the agent bank and the lending
syndicate normally, is an event of acceleration. This means that the agent bank
has the right to demand immediate repayment in full of the outstanding floating
rate loan.
Each
Sub-Adviser must determine that the investment is suitable for each Fund based
on each Sub-Adviser’s independent credit analysis and industry research.
Generally, this means that each Sub-Adviser has determined that the likelihood
that the corporation will meet its obligations is acceptable. In considering
investment opportunities, each Sub-Adviser will conduct extensive due diligence,
which may include, without limitation, management meetings, financial analysis,
industry research and reference verification from customers, suppliers and
rating agencies.
Floating
rate loans feature rates that reset regularly, maintaining a fixed spread over
SOFR
or the prime rates of large money-center banks. The interest rate on each Fund’s
investment securities will generally reset quarterly. During periods in which
short-term rates rapidly increase, each Fund’s NAV may be affected. Investment
in floating rate loans with longer interest rate reset periods or loans with
fixed interest rates may also increase fluctuations in each Fund’s NAV as a
result of changes in interest rates. However, each Fund may attempt to hedge its
fixed rate loans against interest rate fluctuations by entering into interest
rate swap or other derivative transactions.
Unfunded
Loan Commitments.
Each
Fund may enter into loan commitments that are unfunded at the time of
investment. A loan commitment is a written agreement under which the lender
(such as each Fund) commits itself to make a loan or loans up to a specified
amount within a specified time period. The loan commitment sets out the terms
and conditions of the lender’s obligation to make the loans. Loan commitments
are made pursuant to a term loan, a revolving credit line or a combination
thereof. A term loan is typically a loan in a fixed amount that borrowers repay
in a scheduled series of repayments or a lump-sum payment at maturity. A
revolving credit line allows borrowers to draw down, repay, and reborrow
specified amounts on demand. The portion of the amount committed by a lender
under a loan commitment that the borrower has not drawn down is referred to as
“unfunded.” Loan commitments may be traded in the secondary market through
dealer desks at large commercial and investment banks. Typically, each Fund will
enter into fixed commitments on term loans as opposed to revolving credit line
arrangements.
Borrowers
pay various fees in connection with loans and related commitments. In
particular, borrowers may pay a commitment fee to lenders on unfunded portions
of loan commitments and/or facility and usage fees, which are designed to
compensate lenders in part for having an unfunded loan commitment.
Unfunded
loan commitments expose lenders to credit risk—the possibility of loss due to a
borrower’s inability to meet contractual payment terms. A lender typically is
obligated to advance the unfunded amount of a loan commitment at the borrower’s
request, subject to certain conditions regarding the creditworthiness of the
borrower. Borrowers with deteriorating creditworthiness may continue to satisfy
their contractual conditions and therefore be eligible to borrow at times when
the lender might prefer not to lend. In addition, a lender may have assumptions
as to when a borrower may draw on an unfunded loan commitment when the lender
enters into the commitment. If the borrower does not draw as expected, the
commitment may not prove as attractive an investment as originally
anticipated.
Since
each Fund with an unfunded loan commitment has a contractual obligation to lend
money on short notice, it will maintain liquid assets in an amount at least
equal in value to the amount of the unfunded commitments. Liquid assets are
maintained to cover “senior securities transactions” which may include, but are
not limited to, each Fund’s unfunded loan commitments. The value of each Fund’s
“senior securities” holdings are marked-to-market daily to ensure proper
coverage.
Each
Fund records an investment when the borrower draws down the money and records
interest as earned.
Master
Limited Partnerships (“MLPs”)
MLPs
are formed as limited partnerships or limited liability companies under state
law and are generally treated as partnerships for U.S. federal income tax
purposes. The equity securities issued by many MLPs are publicly traded and
listed and traded on a U.S. exchange. An MLP typically issues general partner
and limited partner interests. The general partner manages and often controls,
has an ownership stake in, and is normally eligible to receive incentive
distribution payments from, the MLP. To be treated as a partnership for U.S.
federal income tax purposes, an MLP must derive at least 90% of its gross income
for each taxable year from certain qualifying sources as described in the Code.
These qualifying sources include natural resources-based activities such as the
exploration, development, mining, production, processing, refining,
transportation, storage and certain marketing of mineral or natural resources.
The general partner may be structured as a private or publicly-traded
corporation or other entity. The general partner typically controls the
operations and management of the entity through an up to 2% general partner
interest in the entity plus, in many cases, ownership of some percentage of the
outstanding limited partner interests. The limited partners, through their
ownership of limited partner interests, provide capital to the entity, are
intended to have no role in the operation and management of the entity and
receive cash distributions. Due to their structure as partnerships for U.S.
federal income tax purposes and the expected character of their income, MLPs
generally do not pay U.S. federal income taxes. Thus, unlike investors in
corporate securities, direct MLP investors are generally not subject to double
federal income taxation (i.e.,
corporate level tax and tax on corporate dividends).
While
most MLPs are currently subject to U.S. federal tax as partnerships, a change in
current tax law, or a change in the underlying business of a given MLP could
result in the MLP being treated as a corporation for U.S. federal income tax
purposes, which would result in such MLP being required to pay U.S. federal
income tax on its taxable income. Such treatment also would have the effect of
reducing the amount of cash available for distribution by the affected MLP.
Thus, if any MLP owned by each Fund were treated as a corporation for U.S.
federal income tax purposes, such treatment could result in a reduction in the
value of each Fund’s investment in such MLP. Certain MLPs are dependent on their
parents or sponsors for a majority of their revenues. Any failure by an MLP’s
parents or sponsors to satisfy their payments or obligations would impact the
MLP’s revenues and cash flows and ability to make distributions. Moreover, the
terms of an MLP’s transactions with its parent or sponsor are typically not
arrived at on an arm’s-length basis, and may not be as favorable to the MLP as a
transaction with a non-affiliate.
MLP
Equity Securities.
Equity securities issued by MLPs typically consist of common units, subordinated
units and a general partner interests.
•Common
Units. The common units of many MLPs are listed and traded on national
securities exchanges, including the NYSE, the NYSE MKT and the NASDAQ. Holders
of MLP common units typically have very limited control and voting rights.
Holders of such common
units
are typically entitled to receive the minimum quarterly distribution (the
“MQD”), including arrearage rights, from the issuer. In the event of a
liquidation, common unit holders are intended to have a preference to the
remaining assets of the issuer over holders of subordinated units. Each Fund may
invest in different classes of common units that may have different voting,
trading, and distribution rights.
•Subordinated
Units. Subordinated units, which, like common units, represent limited partner
interests, are not typically listed on an exchange or publicly traded. Holders
of such subordinated units are generally entitled to receive a distribution only
after the MQD and any arrearages from prior quarters have been paid to holders
of common units. Holders of subordinated units typically have the right to
receive distributions before any incentive distributions are payable to the
general partner. Subordinated units generally do not provide arrearage rights.
Most MLP subordinated units are convertible into common units after the passage
of a specified period of time or upon the achievement by the issuer of specified
financial goals. Each Fund may invest in different classes of subordinated units
that may have different voting, trading, and distribution rights.
•General
Partner Interests. The general partner interest in MLPs is typically retained by
the original sponsors of an MLP, such as its founders, corporate partners and
entities that sell assets to the MLP. The holder of the general partner interest
can be liable in certain circumstances for amounts greater than the amount of
the holder’s investment. General partner interests often confer direct board
participation rights in, and in many cases control over the operations of, the
MLP. General partner or managing member interests receive cash distributions,
typically in an amount of up to 2% of available cash, which is contractually
defined in the partnership or limited liability company agreement. In addition,
holders of general partner or managing member interests typically receive
incentive distribution rights, which provide them with an increasing share of
the entity’s aggregate cash distributions upon the payment of per common unit
distributions that exceed specified threshold levels above the MQD. Due to the
incentive distribution rights, GP MLPs have higher distribution growth prospects
than their underlying MLPs, but quarterly incentive distribution payments would
also decline at a greater rate than the decline rate in quarterly distributions
to common and subordinated unit holders in the event of a reduction in the MLP’s
quarterly distribution.
I-Shares.
I-Shares represent an ownership interest issued by an MLP affiliate. The MLP
affiliate uses the proceeds from the sale of I-Shares to purchase limited
partnership interests in the MLP in the form of I-units. Thus, I-Shares
represent an indirect limited partner interest in the MLP. I-units have features
similar to MLP common units in terms of voting rights, liquidation preference
and distribution. I-Shares differ from MLP common units primarily in that
instead of receiving cash distributions, holders of I-Shares will receive
distributions of additional I-Shares in an amount equal to the cash
distributions received by common unit holders. I-Shares are traded on the
NYSE.
Money
Market Instruments
Money
market instruments in which the Fund may invest include money market funds,
short- term U.S. Government securities, U.S. Government agency securities,
securities issued by U.S. Government-sponsored enterprises and U.S. Government
instrumentalities, bank obligations, commercial paper, corporate notes and
repurchase agreements. If market conditions improve while the Fund has invested
some or all of its assets in money market instruments, this strategy could
result in reducing the potential gain from the market upswing, thus reducing the
Fund’s opportunity to achieve its investment objectives.
Mortgage
Dollar Rolls
A
mortgage dollar roll (“MDR”) is a transaction in which each Fund sells
mortgage-related securities (“MBS”) from its portfolio to a counterparty from
whom it simultaneously agrees to buy a similar security on a delayed delivery
basis. Each Fund will maintain liquid assets having a value not less than the
repurchase price. MDR transactions involve certain risks, including the risk
that the MBS returned to each Fund at the end of the roll, while substantially
similar, could be inferior to what was initially sold to the
counterparty.
Mortgage-Related
and Other Asset-Backed Securities
Each
Fund may buy mortgage-related and other asset-backed securities. Typically,
mortgage-related securities are interests in pools of residential or commercial
mortgage loans or leases, including mortgage loans made by S&L institutions,
mortgage bankers, commercial banks and others. Pools of mortgage loans are
assembled as securities for sale to investors by various governmental,
government-related and private organizations (see “Mortgage Pass-Through
Securities”).
Like
other fixed-income securities, when interest rates rise, the value of a
mortgage-related security generally will decline. However, when interest rates
are declining, the value of a mortgage-related security with prepayment features
may not increase as much as other fixed-income securities. The value of these
securities may be significantly affected by changes in interest rates, the
market’s perception of issuers and the creditworthiness of the parties involved.
The ability of each Fund to successfully utilize these instruments may depend in
part upon the ability of each Sub-Adviser to forecast interest rates and other
economic factors correctly. Some securities may have a structure that makes
their reaction to interest rate changes and other factors difficult to predict,
making their value highly volatile. These securities may also be subject to
prepayment risk and, if the security has been purchased at a premium, the amount
of the premium would be lost in the event of prepayment.
Each
Fund, to the extent permitted in the Prospectus, or otherwise limited herein,
may also invest in debt securities that are secured with collateral consisting
of mortgage-related securities (see “Collateralized Mortgage Obligations”), and
in other types of mortgage-related securities. While principal and interest
payments on some mortgage-related securities may be guaranteed by the U.S.
government, government agencies or other guarantors, the market value of such
securities is not guaranteed.
Generally,
each Fund may invest in mortgage-related (or other asset-backed) securities
either (1) issued by U.S. government-sponsored corporations such as GNMA,
the Federal Home Loan Mortgage Corporation (“FHLMC”), and FNMA, or
(2) privately issued securities rated Baa3 or better by Moody’s or BBB- or
better by S&P or, if not rated, of comparable investment quality as
determined by the Adviser or Sub-Adviser. In addition, if any mortgage-related
(or other asset-backed) security is determined to be illiquid, each Fund will
limit its investments in these and other illiquid instruments subject to each
Fund’s limitation on investments in illiquid securities.
During
past market disruptions, rating agencies have placed on credit watch or
downgraded the ratings previously assigned to a large number of mortgage-related
securities (which may include certain of the mortgage-related securities in
which each Fund may invest) and may do so in the future. If a mortgage-related
security in which each Fund is invested is placed on credit watch or downgraded,
the value of the security may decline, and each Fund may experience
losses.
Further,
such disruptions in the residential mortgage-related securities market (and in
particular, the “sub-prime” residential mortgage market), the broader
mortgage-related securities market and the
asset-backed
securities market have in the past resulted in downward price pressures and
increasing foreclosures and defaults in residential and commercial real estate.
Concerns over inflation, energy costs, geopolitical issues, the availability and
cost of credit, the mortgage market and a declining real estate market have in
the past contributed to increased volatility and diminished expectations for the
economy and markets, and contributed to dramatic declines in the housing market,
with falling home prices and increasing foreclosures and unemployment, and
significant asset write-downs by financial institutions. Additionally, a lack of
credit liquidity and decreases in the value of real property may prevent
borrowers from refinancing their mortgages, which may increase the likelihood of
default on their mortgage loans.
Poor
economic conditions may reduce the cash flow that each Fund receives from such
securities and increase the incidence and severity of credit events and losses
in respect of such securities. In the event that interest rate spreads for
mortgage-related securities widen following the purchase of such assets by each
Fund, the market value of such securities is likely to decline and, in the case
of a substantial spread widening, could decline by a substantial amount.
Furthermore, adverse changes in market conditions could result in a severe
liquidity crisis in the market for mortgage-backed securities (including the
mortgage-related securities in which each Fund may invest) and increasing
unwillingness by banks, financial institutions and investors to extend credit to
servicers, originators and other participants in the mortgage-related securities
market for these securities and other asset-backed securities. As a result, the
liquidity and/or the market value of any mortgage-related securities that are
owned by each Fund may experience declines after they are purchased by each
Fund.
In
addition, the U.S. government, including the Federal Reserve, the Treasury, and
other governmental and regulatory bodies may take actions to address financial
or health crises, including initiatives to limit large-scale losses associated
with mortgage-related securities held on the books of certain U.S. financial
institutions and to support the credit markets generally. The impact such
actions could have on any of the mortgage-related securities that may be held by
each Fund is unknown.
Mortgage
Pass-Through Securities.
Each
Fund may invest in mortgage pass-through securities. Mortgage pass-through
securities are interests in pools of mortgage-related securities. Unlike
interests in other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with the payment of principal being made at
maturity or specified call dates, these securities provide a monthly payment
that consists of both interest and principal payments. In effect, these payments
are a “pass-through” of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs that may be incurred. Some
mortgage-related securities (such as securities issued by GNMA) are described as
“modified pass-through.” These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates, regardless of whether or not the mortgagor
actually makes the payment. Some mortgage pass-through certificates may include
securities backed by adjustable-rate mortgages that bear interest at a rate that
will be adjusted periodically.
Early
repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs that may be incurred) may expose each Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment,
the value of the premium would be lost. Reinvestments of prepayments may occur
at lower interest rates than the original investment, thus adversely affecting
each Fund’s yield. Prepayments may cause the yield of a mortgage-backed security
to differ from what was assumed when each Fund purchased the security.
Prepayments at a slower rate than expected may lengthen the effective life of a
mortgage-backed security. The value of securities with longer effective lives
generally fluctuates more widely in response to changes in interest rates than
the value of securities with shorter effective lives.
Payment
of principal and interest on some mortgage pass-through securities (but not the
market value of the securities themselves) may be guaranteed by the full faith
and credit of the U.S. government (in the case of securities guaranteed by
GNMA); or guaranteed by agencies or instrumentalities of the U.S. government (in
the case of securities guaranteed by FNMA or FHLMC), which are supported only by
the discretionary authority of the U.S. government to purchase the agency’s
obligations. Mortgage pass-through securities created by nongovernmental issuers
(such as commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other secondary market issuers) may
be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage
poolers.
Historically,
FNMA and FHLMC were government-sponsored corporations owned entirely by private
stockholders. However, in September 2008, in response to concerns regarding the
safety and soundness of FNMA and FHLMC, the U.S. Treasury announced that FNMA
and FHLMC had been placed in conservatorship by the Federal Housing Finance
Agency (“FHFA”), a newly created independent regulator. While FNMA and FHLMC
continue to be owned entirely by private shareholders, under the
conservatorship, the FHFA has taken over powers formerly held by each entity’s
shareholders, directors, and officers. In addition to placing the companies in
conservatorship, the U.S. Treasury announced additional steps that it intended
to take with respect to FNMA and FHLMC in order to support the conservatorship,
although some steps have since ended. No assurance can be given that these
initiatives will be successful in preserving the safety and soundness of FNMA
and FHLMC or ensuring their continued viability.
GNMA
Certificates. The principal governmental guarantor of mortgage-related
securities is GNMA. GNMA is a wholly owned U.S. government corporation within
the U.S. Department of Housing and Urban Development (“HUD”). GNMA is authorized
to guarantee, with the full faith and credit of the U.S. government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as S&Ls, commercial banks and mortgage bankers) and backed by
pools of FHA-insured or Veterans Administration-guaranteed mortgages. In order
to meet its obligations under such guarantee, GNMA is authorized to borrow from
the U.S. Treasury with no limitations as to amount. GNMA certificates differ
from typical bonds because principal is repaid monthly over the term of the loan
rather than returned in a lump sum at maturity. Although GNMA guarantees timely
payment even if homeowners delay or default, tracking the pass-through” payments
may, at times, be difficult. Expected payments may be delayed due to the delays
in registering the newly traded paper securities. The custodian’s policies for
crediting missed payments while errant receipts are tracked down may
vary.
Government-related
guarantors (i.e., not backed by the full faith and credit of the U.S.
government) include FNMA and FHLMC. FNMA is a government-sponsored corporation
owned entirely by private stockholders. It is subject to general regulation by
HUD and acts as a government instrumentality under authority granted by
Congress. FNMA purchases conventional (i.e., not insured
or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers that includes state and federally chartered S&Ls,
mutual savings banks, commercial banks, credit unions and mortgage bankers.
Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. government. FNMA is authorized to borrow from the U.S. Treasury to
meet its obligations.
FHLMC
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. It is a government-sponsored
corporation formerly owned by the twelve Federal Home Loan Banks and is now
owned entirely by private stockholders. FHLMC issues Participation Certificates
(“PCs”) that represent interests in conventional mortgages from FHLMC’s national
portfolio. FHLMC guarantees the timely payment of interest and collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
government.
If
either fixed or variable rate pass-through securities issued by the U.S.
government or its agencies or instrumentalities are developed in the future,
each Fund reserves the right to invest in them.
Although
the mortgage loans in the pool underlying a GNMA certificate will have
maturities of up to 30 years, the actual average life of a GNMA certificate
typically will be substantially less because the mortgages will be subject to
normal principal amortization and may be prepaid prior to maturity.
Private
Mortgage Pass-Through Securities.
Commercial
banks, S&Ls, private mortgage insurance companies, mortgage bankers and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers may, in addition, be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. However, timely payment of interest and principal
of these pools may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit. The insurance and guarantees are issued by governmental entities,
private insurers and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets each Fund’s investment quality
standards. There can be no assurance that the private insurers or guarantors can
meet their obligations under the insurance policies or guarantee arrangements.
Each Fund may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, each Sub-Adviser determines that the
securities meet each Fund’s quality standards. Although the market for such
securities is becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. Each Fund may purchase
mortgage-related securities or any other assets that, in the opinion of each
Sub-Adviser, are illiquid, subject to each Fund’s limitation on investments in
illiquid securities.
Collateralized
Mortgage Obligations (“CMOs”).
A
CMO is a hybrid between a mortgage-backed bond and a mortgage pass-through
security. Similar to a bond, interest and prepaid principal is paid, in most
cases, semiannually. CMOs may be collateralized by whole mortgage loans, but are
more typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC or FNMA, and their income streams. CMOs may offer a
higher yield than U.S. government securities, but they may also be subject to
greater price fluctuation and credit risk. In addition, CMOs typically will be
issued in a variety of classes or series, which have different maturities and
are retired in sequence. Privately issued CMOs are not government securities,
nor are they supported in any way
by
any governmental agency or instrumentality. In the event of a default by an
issuer of a CMO, there is no assurance that the collateral securing such CMO
will be sufficient to pay principal and interest. It is possible that there will
be limited opportunities for trading CMOs in the OTC market, the depth and
liquidity of which will vary from time to time.
CMOs
are typically structured into multiple classes or series, each bearing a
different stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
For
example, if it is probable that the issuer of an instrument will take advantage
of a maturity-shortening device, such as a call, refunding, or redemption
provision, the date on which the instrument will probably be called, refunded,
or redeemed may be considered to be its maturity date. Also, the maturities of
mortgage securities, including collateralized mortgage obligations, and some
asset-backed securities are determined on a weighted average life basis, which
is the average time for principal to be repaid. For a mortgage security, this
average time is calculated by estimating the timing of principal payments,
including unscheduled prepayments, during the life of the mortgage. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity.
An
obligation’s maturity is typically determined on a stated final maturity basis,
although there are some exceptions to this rule. Dollar-weighted average
maturity is derived by multiplying the value of each investment by the time
remaining to its maturity, adding these calculations, and then dividing the
total by the value of each Fund’s portfolio holdings. In a typical CMO
transaction, a corporation (“issuer”) issues multiple series (e.g., A, B, C, Z)
of CMO bonds (“Bonds”). Proceeds of the Bond offering are used to purchase
mortgages or mortgage pass-through certificates (“Collateral”). The Collateral
is pledged to a third-party trustee as security for the Bonds. Principal and
interest payments from the Collateral are used to pay principal on the Bonds in
the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest.
Interest on the Series Z Bond is accrued and added to principal and a like
amount is paid as principal on the Series A, B, or C Bonds currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
S&Ls) to borrow against their loan portfolios.
The
primary risk of CMOs is the uncertainty of the timing of cash flows that results
from the rate of prepayments on the underlying mortgages serving as collateral
and from the structure of the particular CMO transaction (that is, the priority
of the individual tranches). An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest rates) will affect
the yield, average life, and price of CMOs. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
FHLMC
Collateralized Mortgage Obligations (“FHLMC CMOs”).
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having
different maturity dates that are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC PCs, payments of
principal and interest on the FHLMC CMOs are made semiannually, as opposed to
monthly.
The amount of principal payable on each semiannual payment date is determined in
accordance with FHLMC’s mandatory sinking fund schedule, which, in turn, is
equal to approximately 100% of FHA prepayment experience applied to the mortgage
collateral pool. All sinking fund payments in the CMOs are allocated to the
retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC’s minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the “pass-through” nature of all principal payments received on the
collateral pool in excess of FHLMC’s minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity
date.
If
collection of principal (including prepayments) on the mortgage loans during any
semi-annual payment period is not sufficient to meet FHLMC’s minimum sinking
fund obligation on the next sinking fund payment date, FHLMC agrees to make up
the deficiency from its general funds.
Criteria
for the mortgage loans in the pool backing the CMOs are identical to those of
FHLMC PCs. FHLMC has the right to substitute collateral in the event of
delinquencies and/or defaults.
Other
Mortgage-Related Securities.
Other
mortgage-related securities include securities other than those described above
that directly or indirectly represent a participation in, or are secured by and
payable from, mortgage loans on real property, including CMO residuals or
stripped mortgage-backed securities, and may be structured in classes with
rights to receive varying proportions of principal and interest. Other
mortgage-related securities may be equity or debt securities issued by agencies
or instrumentalities of the U.S. government or by private originators of, or
investors in, mortgage loans, including S&Ls, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
Each
Sub-Adviser expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. The mortgages underlying these securities may include
alternative mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may differ from
customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, each Sub-Adviser will,
consistent with each Fund’s investment objectives, policies and quality
standards, consider making investments in such new types of mortgage-related
securities.
CMO
Residuals.
CMO
residuals are derivative mortgage securities issued by agencies or
instrumentalities of the U.S. government or by private originators of, or
investors in, mortgage loans, including S&Ls, homebuilders, mortgage banks,
commercial banks, investment banks and special purpose entities of the
foregoing.
The
cash flow generated by the mortgage assets underlying a series of CMOs is
applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the
yield
to maturity on CMO residuals is extremely sensitive to prepayments on the
related underlying mortgage assets, in the same manner as an interest-only class
of stripped mortgage-backed securities. See “Stripped Mortgage-Backed
Securities.” In addition, if a series of a CMO includes a class that bears
interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with respect
to stripped mortgage-backed securities, in certain circumstances, a portfolio
may fail to recoup fully its initial investment in a CMO residual.
CMO
residuals are generally purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers. The CMO residual
market has only very recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the 1933 Act. CMO residuals, whether or not registered under the 1933 Act, may
be subject to certain restrictions on transferability, and may be deemed
“illiquid” and subject to each Fund’s limitations on investment in illiquid
securities.
Under
certain circumstances, each Fund’s investment in residual interests in “real
estate mortgage investment conduits” (“REMICs”) may cause shareholders of each
Fund to be deemed to have taxable income in addition to their Fund’s dividends
and distributions, and such income may not be eligible to be reduced for tax
purposes by certain deductible amounts, including net operating loss deductions.
In addition, in some cases, each Fund may be required to pay taxes on certain
amounts deemed to be earned from a REMIC residual interest. Prospective
investors may wish to consult their tax advisors regarding REMIC residual
investments by each Fund.
CMOs
and REMICs may offer a higher yield than U.S. government securities, but they
may also be subject to greater price fluctuation and credit risk. In addition,
CMOs and REMICs typically will be issued in a variety of classes or series,
which have different maturities and are retired in sequence. Privately issued
CMOs and REMICs are not government securities, nor are they supported in any way
by any governmental agency or instrumentality. In the event of a default by an
issuer of a CMO or a REMIC, there is no assurance that the collateral securing
such CMO or REMIC will be sufficient to pay principal and interest. It is
possible that there will be limited opportunities for trading CMOs and REMICs in
the OTC market, the depth and liquidity of which will vary from time to time.
Holders of “residual” interests in REMICs (including each Fund) could be
required to recognize potential phantom income, as could shareholders (including
unrelated business taxable income for tax-exempt shareholders). Each Fund will
consider this rule in determining whether to invest in residual
interests.
Stripped
Mortgage-Backed Securities (“SMBS”).
SMBS
are derivative multi-class mortgage securities. SMBS may be issued by agencies
or instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including S&Ls, mortgage banks, commercial
banks, investment banks and special purpose entities of the
foregoing.
SMBS
are usually structured with two classes that receive different proportions of
the interest and principal distributions on a pool of mortgage assets. A common
type of SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In the most extreme case, one
class will receive all of the interest (the interest-only or “IO” class), while
the other class will
receive
all of the principal (the principal-only or “PO” class). The yield to maturity
on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on each Fund’s
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, each Fund may fail
to fully recoup its initial investment in these securities even if the security
is in one of the highest rating categories.
Although
SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, these securities may be deemed “illiquid” and
subject to each Fund’s limitations on investment in illiquid
securities.
Risks
Associated with Mortgage-Backed Securities.
As in the case with other fixed-income securities, when interest rates rise, the
value of a mortgage-backed security generally will decline; however, when
interest rates are declining, the value of mortgage-backed securities with
prepayment features may not increase as much as other fixed-income securities.
The value of some mortgage-backed securities in which each Fund may invest may
be particularly sensitive to changes in prevailing interest rates, and, like the
other investments of each Fund, the ability of each Fund to successfully utilize
these instruments may depend in part upon the ability of each Sub-Adviser to
forecast interest rates and other economic factors correctly. If each
Sub-Adviser incorrectly forecasts such factors and has taken a position in
mortgage-backed securities that is or becomes contrary to prevailing market
trends, each Fund could be exposed to the risk of a loss.
Investment
in mortgage-backed securities poses several risks, including prepayment,
extension market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment’s average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the
average life of the mortgage-backed security. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by changes in home values, ease of the refinancing process and local
economic conditions.
Market
risk reflects the chance that the price of the security may fluctuate over time.
The price of mortgage-backed securities may be particularly sensitive to
prevailing interest rates, the length of time the security is expected to be
outstanding, and the liquidity of the issue. In a period of unstable interest
rates, there may be decreased demand for certain types of mortgage-backed
securities, and each Fund may find it difficult to find a buyer, which may in
turn decrease the price at which the securities may be sold.
Credit
risk reflects the chance that each Fund may not receive all or part of its
principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities issued by private institutions is based on the
financial health of those institutions.
To
the extent that mortgages underlying a mortgage-related security are so-called
“subprime mortgages” (i.e., mortgages granted to borrowers whose credit history
is not sufficient to obtain a
conventional
mortgage), the risk of default is higher. Subprime mortgages also have higher
serious delinquency rates than prime loans.
Other
Asset-Backed Securities.
Each Sub-Adviser expects that other asset-backed securities (unrelated to
mortgage loans) will be offered to investors in the future. Several types of
asset-backed securities have already been offered to investors, including credit
card receivables and Certificates for Automobile Receivables(SM)
(“CARs”). CARs represent undivided fractional interests in a trust whose assets
consist of a pool of motor vehicle retail installment sales contracts and
security interests in the vehicles securing the contracts. Payments of principal
and interest on CARs are passed-through monthly to certificate holders, and are
guaranteed up to certain amounts and for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust.
An
investor’s return on CARs may be affected by early prepayment of principal on
the underlying vehicle sales contracts. If the letter of credit is exhausted,
the trust may be prevented from realizing the full amount due on a sales
contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
If
consistent with each Fund’s investment objective and policies, each Fund also
may invest in other types of asset-backed securities. Certain asset-backed
securities may present the same types of risks that may be associated with
mortgage-backed securities.
Municipal
Securities
Each
Fund may purchase municipal securities. Municipal securities generally are
understood to include debt obligations of state and local governments, agencies
and authorities. Municipal securities, which may be issued in various forms,
including bonds and notes, are issued to obtain funds for various public
purposes.
Municipal
bonds are debt obligations issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and
multi-state agencies or authorities (collectively,
“municipalities”).
Municipal
bonds include securities from a variety of sectors, each of which has unique
risks. They include, but are not limited to, general obligation bonds, limited
obligation bonds, and revenue bonds (including industrial development bonds, now
referred to as “private activity bonds,” issued pursuant to federal tax law).
General obligation bonds are obligations involving the credit of an issuer
possessing taxing power and are payable from such issuer’s general revenues and
not from any particular source. Limited obligation bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific revenue
source. Revenue bonds are issued for either project or enterprise financings in
which the bond issuer pledges to the bondholders the revenues generated by the
operating projects financed from the proceeds of the bond issuance. Revenue
bonds involve the credit risk of the underlying project or enterprise (or its
corporate user) rather than the credit risk of the issuing municipality. Under
the Code, interest paid on private activity bonds is treated as an item of tax
preference for purposes of calculating federal alternative minimum tax
liability. Tax-exempt private activity bonds and industrial development bonds
generally are also classified as revenue bonds and thus are not
payable
from the issuer’s general revenues. The credit and quality of private activity
bonds and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds are the responsibility of the corporate user (and/or any
guarantor).
Some
municipal bonds may be issued as variable or floating rate securities and may
incorporate market-dependent liquidity features. Some longer-term municipal
bonds give the investor the right to “put” or sell the security at par (face
value) within a specified number of days following the investor’s
request—usually one to seven days. This demand feature enhances a security’s
liquidity by shortening its effective maturity and enables it to trade at a
price equal to or very close to par. If a demand feature terminates prior to
being exercised, each Fund would hold the longer-term security, which could
experience substantially more volatility. Municipal bonds that are issued as
variable or floating rate securities incorporating market-dependent liquidity
features may have greater liquidity risk than other municipal
bonds.
Some
municipal bonds feature credit enhancements, such as lines of credit, letters of
credit, municipal bond insurance, and standby bond purchase agreements
(“SBPAs”). SBPAs include lines of credit that are issued by a third party,
usually a bank, to enhance liquidity and ensure repayment of principal and any
accrued interest if the underlying municipal bond should default. Municipal bond
insurance, which is usually purchased by the bond issuer from a private,
non-governmental insurance company, provides an unconditional and irrevocable
assurance that the insured bond’s principal and interest will be paid when due.
Insurance does not guarantee the price of the bond or the share price of each
Fund.
The
credit rating of an insured bond may reflect the credit rating of the insurer,
based on its claims-paying ability. The obligation of a municipal bond insurance
company to pay a claim extends over the life of each insured bond. Although
defaults on insured municipal bonds have historically been low and municipal
bond insurers historically have met their claims, there is no assurance this
will continue. A higher-than-expected default rate could strain the insurer’s
loss reserves and adversely affect its ability to pay claims to bondholders. The
number of municipal bond insurers is relatively small, and not all of them have
the highest credit rating. An SBPA can include a liquidity facility that is
provided to pay the purchase price of any bonds that cannot be remarketed. The
obligation of the liquidity provider (usually a bank) is only to advance funds
to purchase tendered bonds that cannot be remarketed and does not cover
principal or interest under any other circumstances. The liquidity provider’s
obligations under the SBPA are usually subject to numerous conditions, including
the continued creditworthiness of the underlying borrower or bond
issuer.
Municipal
bonds also include tender option bonds, which are municipal derivatives created
by dividing the income stream provided by an underlying municipal bond to create
two securities issued by a special-purpose trust, one short-term and one
long-term. The interest rate on the short-term component is periodically reset.
The short-term component has negligible interest rate risk, while the long-term
component has all of the interest rate risk of the original bond. After income
is paid on the short-term securities at current rates, the residual income goes
to the long-term securities.
Therefore,
rising short-term interest rates result in lower income for the longer-term
portion, and vice versa. The longer-term components can be very volatile and may
be less liquid than other municipal bonds of comparable maturity. These
securities have been developed in the secondary market to meet the demand for
short-term, tax-exempt securities.
Although
most municipal bonds are exempt from federal income tax, some are not. Taxable
municipal bonds include Build America Bonds (“BABs”), the borrowing costs of
which are subsidized by the federal government, but which are subject to state
and federal income tax. BABs were created pursuant to the American Recovery and
Reinvestment Act of 2009 (“ARRA”) to offer an alternative form of financing to
state and local governments whose primary means for accessing the capital
markets had been through the issuance of tax-free municipal bonds. BABs include
Recovery Zone Economic Development Bonds, which are subsidized more heavily by
the U.S. government than other BABs, and are designed to finance certain
types of projects in distressed geographic areas. Regulators recently finalized
rules which implement Section 619 and Section 941 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (commonly referred to as the “Volcker Rule”
and the “Credit Risk Retention Rules”). Both rules apply to tender option bond
programs and may require certain such programs to be restructured. The effects
of these rules are uncertain and there can be no assurance that appropriate
restructuring of existing programs will be possible or that the creation of new
programs will continue. As a consequence, the municipal securities market may
experience reduced demand or liquidity and increased financing
costs.
Under
ARRA, an issuer of a BAB is entitled to receive payments from the U.S. Treasury
Department over the life of the BAB equal to 35% of the interest paid (or 45% of
the interest paid in the case of a Recovery Zone Economic Development Bond). For
example, if a state or local government were to issue a BAB at a 10% taxable
interest rate, the U.S. Treasury Department would make a payment directly to the
issuing government of 3.5% of that interest (or 4.5% in the case of a Recovery
Zone Economic Development Bond). Thus, the state or local government’s net
borrowing cost would be 6.5% or 5.5%, respectively, on a bond that pays 10%
interest. In other cases, holders of a BAB receive a 35% or 45% tax credit,
respectively. Pursuant to ARRA, the issuance of BABs ceased on December 31,
2010. The BABs outstanding at such time will continue to be eligible for the
federal interest rate subsidy or tax credit, which continues for the life of the
BABs; however, no bonds issued following expiration of the program will be
eligible for federal payment or tax credit. Pursuant to the requirements of the
Balanced Budget and Emergency Deficit Control Act of 1985, as amended, subsidy
payments to issuers processed on or after October 1, 2020, and on or before
September 30, 2020, will be reduced 5.7%, unless Congress otherwise acts. In
addition to BABs, each Fund may invest in other municipal bonds that pay taxable
interest.
Prices
and yields on municipal bonds are dependent on a variety of factors, including
general money-market conditions, the financial condition of the issuer, general
conditions of the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. A number of these
factors, including the ratings of particular issues, are subject to change from
time to time. Information about the financial condition of an issuer of
municipal bonds may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Tax Anticipation Notes are
used to finance working capital needs of municipalities and are issued in
anticipation of various seasonal tax revenues, to be payable from these specific
future taxes. They are usually general obligations of the issuer, secured by the
taxing power for the payment of principal and interest.
Municipal
securities also include various forms of notes. These notes include, but are not
limited to, the following types:
•Revenue
anticipation notes which are issued in expectation of receipt of other kinds of
revenue, such as federal revenues. They, also, are usually general obligations
of the issuer.
•Bond
anticipation notes which are normally issued to provide interim financial
assistance until long-term financing can be arranged. The long-term bonds then
provide funds for the repayment of the notes.
•Construction
loan notes which are sold to provide construction financing for specific
projects. After successful completion and acceptance, many projects receive
permanent financing through the Federal Housing Administration (“FHA”) under the
FNMA or GNMA.
•Project
notes which are instruments sold by HUD but issued by a state or local housing
agency to provide financing for a variety of programs. They are backed by the
full faith and credit of the U.S. government, and generally carry a term of one
year or less.
•Short-term
discount notes (tax-exempt commercial paper), which are short-term (365 days or
less) promissory notes issued by municipalities to supplement their cash
flow.
An
entire issue of municipal securities may be purchased by one or a small number
of institutional investors such as each Fund. Thus, the issue may not be said to
be publicly offered. Unlike securities that must be registered under the 1933
Act prior to offer and sale, unless an exemption from such registration is
available, municipal securities that are not publicly offered may nevertheless
be readily marketable. A secondary market may exist for municipal securities
that were not publicly offered initially.
Municipal
securities are subject to credit risk. Information about the financial condition
of an issuer of municipal securities may not be as extensive as that which is
made available by corporations whose securities are publicly traded. Obligations
of issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency, and other laws affecting the rights and remedies of creditors.
Congress or state legislatures may seek to extend the time for payment of
principal or interest, or both, or to impose other constraints upon enforcement
of such obligations. There is also the possibility that, as a result of
litigation or other conditions, the power or ability of issuers to meet their
obligations for the payment of interest and principal on their municipal
securities may be materially affected or their obligations may be found to be
invalid or unenforceable. Such litigation or conditions may from time to time
have the effect of introducing uncertainties in the market for municipal
securities or certain segments thereof, or of materially affecting the credit
risk with respect to particular bonds. Adverse economic, business, legal, or
political developments might affect all or a substantial portion of each Fund’s
municipal securities in the same manner.
Municipal
securities are subject to interest rate risk. Interest rate risk is the chance
that security prices overall will decline over short or even long periods
because of rising interest rates. Interest rate risk is higher for long-term
bonds, whose prices are more sensitive to interest rate changes than are the
prices of shorter-term bonds. Generally, prices of longer maturity issues tend
to fluctuate more than prices of shorter maturity issues. Prices and yields on
municipal securities are dependent on a variety of factors, such as the
financial condition of the issuer, general conditions of the municipal
securities market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. A number of these factors, including the
ratings of particular issues, are subject to change from time to
time.
Municipal
bonds are subject to call risk. Call risk is the chance that during periods of
falling interest rates, a bond issuer will call—or repay—a higher-yielding bond
before its maturity date. Forced to reinvest the unanticipated proceeds at lower
interest rates, each Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with falling rates.
Call risk is generally high for long-term bonds. Municipal bonds may be deemed
to be illiquid as determined by or in accordance with methods adopted by the
Board.
High
yield municipal bonds are subject to increased liquidity and valuation risk as
compared to other municipal bonds and to high yield debt securities generally.
There may be no active market for a high yield municipal bond, or it may trade
in secondary markets on an infrequent basis. High yield municipal bonds may be
more likely than other municipal bonds to be considered illiquid and therefore
to be subject to each Fund’s limitation on investments in illiquid securities.
It may be difficult for each Fund to obtain an accurate or recent market
quotation for a high yield municipal bond, which may cause the security to be
“fair valued” in accordance with the fair valuation policies established by the
Board. For a more general discussion of the risks associated with high yield
securities, which generally also are applicable to high yield municipal bonds,
see “High Yield Securities.”
There
are, in addition, a variety of hybrid and special types of municipal
obligations, such as municipal lease obligations, as well as numerous
differences in the security of municipal securities both within and between the
two principal classifications described above. Municipal lease obligations are
municipal securities that may be supported by a lease or an installment purchase
contract issued by state and local government authorities to acquire funds to
obtain the use of a wide variety of equipment and facilities, such as fire and
sanitation vehicles, computer equipment and other capital assets. These
obligations, which may be secured or unsecured, are not general obligations and
have evolved to make it possible for state and local governments to obtain the
use of property and equipment without meeting constitutional and statutory
requirements for the issuance of debt. Thus, municipal lease obligations have
special risks not normally associated with municipal securities. These
obligations frequently contain “non-appropriation” clauses that provide that the
governmental issuer of the obligation has no obligation to make future payments
under the lease or contract unless money is appropriated for such purposes by
the legislative body on a yearly or other periodic basis. In addition to the
“non-appropriation” risk, many municipal lease obligations have not yet
developed the depth of marketability associated with municipal bonds; moreover,
although the obligations may be secured by the leased equipment, the disposition
of the equipment in the event of foreclosure might prove difficult. For the
purpose of each Fund’s investment restrictions, the identification of the
“issuer” of municipal securities that are not general obligation bonds is made
by each Sub-Adviser on the basis of the characteristics of the municipal
securities as described above, the most significant of which is the source of
funds for the payment of principal of and interest on such
securities.
The
liquidity of municipal lease obligations purchased by each Fund will be
determined pursuant to guidelines approved by the Board. Factors considered in
making such determinations may include: the frequency of trades and quotes for
the obligation; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; the willingness of dealers to
undertake to make a market in the security; the nature of marketplace trades;
the obligation’s rating; and, if the security is unrated, the factors generally
considered by a rating agency. If municipal lease obligations are determined to
be illiquid, then each Fund will limit its investment in these securities
subject to its limitation on investments in illiquid securities.
The
TRA limited the types and volume of municipal securities qualifying for the
federal income tax exemption for interest, and the Code treats tax-exempt
interest on certain municipal securities as a tax preference item included in
the alternative minimum tax base for non-corporate shareholders. Each Fund
intends to monitor developments in the municipal bond market to determine
whether any defensive action should be taken.
Options
(Marketfield only)
The
Marketfield Fund may use options for any lawful purposes consistent with its
investment objective, such as hedging or managing risk. An option is a contract
in which the “holder” (the buyer) pays a certain amount (the “premium”) to the
“writer” (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a “call”) or sell to the writer (in a “put”) a specific asset at
an agreed upon price (the “strike price” or “exercise price”) at or before a
certain time (the “expiration date”). The holder pays the premium at inception
and has no further financial obligation. The holder of an option will benefit
from favorable movements in the price of the underlying asset but is not exposed
to corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Marketfield Fund
may purchase (buy) or write (sell) put and call options on assets, such as
securities, currencies and indices of debt and equity securities (“underlying
assets”) and enter into closing transactions with respect to such options to
terminate an existing position. See “Derivative Instruments -- General
Discussion” for more information. Options used by the Marketfield Fund may
include European, American and Bermuda-style options. If an option is
exercisable only at maturity, it is a “European” option; if it is also
exercisable prior to maturity, it is an “American” option; if it is exercisable
only at certain times, it is a “Bermuda” option.
If
the Marketfield Sub-Adviser judges market conditions incorrectly or employs a
strategy that does not correlate well with the Marketfield Fund’s investments,
these techniques could result in a loss, regardless of whether the intent was to
reduce risk or increase return. These techniques may increase the volatility of
the Marketfield Fund’s NAV per share and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the counterparty to the transaction does not perform
as promised.
Purchasing
Options.
The Marketfield Fund may purchase put or call options that are traded on an
exchange or in the OTC market. Options traded in the OTC market may not be as
actively traded as those listed on an exchange and generally involve greater
credit risk than exchange-traded options, which are guaranteed by the clearing
organization of the exchange where they are traded. Accordingly, it may be more
difficult to value such options and to be assured that they can be closed out at
any time. The Marketfield Fund will engage in such transactions only with firms
Marketfield Sub-Adviser deems to be of sufficient creditworthiness so as to
minimize these risks. If such securities are determined to be illiquid, then the
Marketfield Fund will limit its investment in these securities subject to its
limitation on investments in illiquid securities.
The
Marketfield Fund may purchase put options on securities to protect their
holdings in an underlying or related security against a substantial decline in
market value. Securities are considered related if their price movements
generally correlate with one another. The purchase of put options on securities
held in the portfolio or related to such securities will enable the Marketfield
Fund to preserve, at least partially, unrealized gains occurring prior to the
purchase of the option on a portfolio security without actually selling the
security.
In
addition, the Marketfield Fund will continue to receive interest or dividend
income on the security. The put options purchased by the Marketfield Fund may
include, but are not limited to, “protective puts,” in which the security to be
sold is identical or substantially identical to a security already held by the
Marketfield Fund or to a security that the Marketfield Fund has the right to
purchase. In the case of a purchased call option, the Marketfield Fund would
ordinarily recognize a gain if the value of the securities decreased during the
option period below the exercise price sufficiently to cover the premium. The
Marketfield Fund would recognize a loss if the value of the securities remained
above the difference between the exercise price and the premium.
The
Marketfield Fund may also purchase call options on securities the Marketfield
Fund intends to purchase to protect against substantial increases in prices of
such securities pending their ability to invest in an orderly manner in such
securities. The purchase of a call option would entitle the Marketfield Fund, in
exchange for the premium paid, to purchase a security at a specified price upon
exercise of the option during the option period. The Marketfield Fund would
ordinarily realize a gain if the value of the securities increased during the
option period above the exercise price sufficiently to cover the premium. The
Marketfield Fund would have a loss if the value of the securities remained below
the sum of the premium and the exercise price during the option period. In order
to terminate an option position, the Marketfield Fund may sell put or call
options identical to those previously purchased, which could result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put or call option
when it was purchased.
Writing
Call Options. The
Marketfield Fund may sell (“write”) covered call options on its portfolio
securities in an attempt to enhance investment performance. A call option sold
by the Marketfield Fund is a short-term contract, having a duration of nine
months or less, which gives the purchaser of the option the right to buy, and
imposes on the writer of the option (in return for a premium received) the
obligation to sell, the underlying security at the exercise price upon the
exercise of the option at any time prior to the expiration date, regardless of
the market price of the security during the option period. A call option may be
covered by, among other things, the writer’s owning the underlying security
throughout the option period, or by holding, on a share-for-share basis, a call
on the same security as the call written, where the exercise price of the call
held is equal to or less than the price of the call written, or greater than the
exercise price of a call written if the Marketfield Fund maintains the
difference in liquid assets.
The
Marketfield Fund may write covered call options both to reduce the risks
associated with certain of its investments and to increase total investment
return through the receipt of premiums. In return for the premium income, the
Marketfield Fund will give up the opportunity to profit from an increase in the
market price of the underlying security above the exercise price so long as its
obligations under the contract continue, except insofar as the premium
represents a profit. Moreover, in writing the call option, the Marketfield Fund
will retain the risk of loss should the price of the security decline, which
loss the premium is intended to offset in whole or in part. The Marketfield
Fund, in writing “American Style” call options, must assume that the call may be
exercised at any time prior to the expiration of its obligations as a writer,
and that in such circumstances the net proceeds realized from the sale of the
underlying securities pursuant to the call may be substantially below the
prevailing market price. In contrast, “European Style” options may only be
exercised on the expiration date of the option. Covered call options and the
securities underlying such options will generally be listed on national
securities exchanges, except for certain transactions in options on debt
securities and foreign securities.
During
the option period, the covered call writer has, in return for the premium
received on the option, given up the opportunity to profit from a price increase
in the underlying securities above the exercise price, but as long as its
obligation as a writer continues, has retained the risk of loss should the price
of the underlying security decline.
The
Marketfield Fund may protect itself from further losses due to a decline in
value of the underlying security or from the loss of ability to profit from
appreciation by buying an identical option, in which case the purchase cost may
offset the premium. In order to do this, the Marketfield
Fund
makes a “closing purchase transaction”—the purchase of a call option on the same
security with the same exercise price and expiration date as the covered call
option that it has previously written on any particular security. The
Marketfield Fund will realize a gain or loss from a closing purchase transaction
if the amount paid to purchase a call option in a closing transaction is less or
more than the amount received from the sale of the covered call option. Also,
because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the closing out of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by the Marketfield
Fund. When a security is to be sold from the Marketfield Fund’s portfolio, the
Marketfield Fund will first effect a closing purchase transaction so as to close
out any existing covered call option on that security or otherwise cover the
existing call option.
A
closing purchase transaction may be made only on a national or foreign
securities exchange that provides a secondary market for an option with the same
exercise price and expiration date, except as discussed below. There is no
assurance that a liquid secondary market on an exchange or otherwise will exist
for any particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. If the Marketfield Fund
is unable to effect a closing purchase transaction involving an exchange-traded
option, the Marketfield Fund will not sell the underlying security until the
option expires, the Marketfield Fund otherwise covers the existing option
portion or the Marketfield Fund delivers the underlying security upon exercise.
Once an option writer has received an exercise notice, it cannot effect a
closing purchase transaction in order to terminate its obligation under the
option and must deliver or purchase the underlying securities at the exercise
price. OTC options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options. Therefore, a closing purchase transaction for an OTC option may in many
cases only be made with the other party to the option. If such securities are
determined to be illiquid, then the Marketfield Fund will limit its investment
in these securities subject to its limitation on investments in illiquid
securities.
The
Marketfield Fund pays brokerage commissions and dealer spreads in connection
with writing covered call options and effecting closing purchase transactions,
as well as for purchases and sales of underlying securities. The writing of
covered call options could result in significant increases in the Marketfield
Fund’s portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate. Subject to the limitation that all call
option writing transactions be covered, the Marketfield Fund may, to the extent
determined appropriate by the Marketfield Sub-Adviser, engage without limitation
in the writing of options on U.S. government securities.
Writing
Put Options.
The Marketfield Fund may also write covered put options. A put option is a
short-term contract that gives the purchaser of the put option, in return for a
premium, the right to sell the underlying security to the seller of the option
at a specified price during the term of the option. Put options written by the
Marketfield Fund are agreements by the Marketfield Fund, for a premium received
by the Marketfield Fund, to purchase specified securities at a specified price
if the option is exercised during the option period. A put option written by the
Marketfield Fund is “covered” if the Marketfield Fund maintains liquid assets
with a value equal to the exercise price. A put option is also “covered” if the
Marketfield Fund holds on a share-for-share basis 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, or less than the exercise price of
the put written if the Marketfield Fund maintains the difference in liquid
assets.
The
premium that the Marketfield Fund receives from writing a put option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.
A
covered put writer assumes the risk that the market price for the underlying
security will fall below the exercise price, in which case the writer would be
required to purchase the security at a higher price than the then-current market
price of the security. In both cases, the writer has no control over the time
when it may be required to fulfill its obligation as a writer of the
option.
The
Marketfield Fund may effect a closing purchase transaction to realize a profit
on an outstanding put option or to prevent an outstanding put option from being
exercised. The Marketfield Fund also may effect a closing purchase transaction,
in the case of a put option, to permit the Marketfield Fund to maintain its
holdings of the deposited U.S. Treasury obligations, to write another put option
to the extent that the exercise price thereof is secured by the deposited U.S.
Treasury obligations, or to utilize the proceeds from the sale of such
obligations to make other investments.
If
the Marketfield Fund is able to enter into a closing purchase transaction, the
Marketfield Fund will realize a profit or loss from such transaction if the cost
of such transaction is less or more, respectively, than the premium received
from the writing of the option. After writing a put option, the Marketfield Fund
may incur a loss equal to the difference between the exercise price of the
option and the sum of the market value of the underlying security plus the
premium received from the sale of the option.
In
addition, the Marketfield Fund may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the
Marketfield Fund may write covered put and call options and enter into so-called
“straddle” transactions involving put or call options may be limited by the
requirements of the Code for qualification as a RIC and the Marketfield Fund’s
intention that it qualify as such. Subject to the limitation that all put option
writing transactions be covered, the Marketfield Fund may, to the extent
determined appropriate by the Marketfield Sub-Adviser, engage without limitation
in the writing of options on U.S. government securities.
Married
Puts.
The
Marketfield Fund may engage in a strategy known as “married puts.” This strategy
is most typically used when the Marketfield Fund owns a particular common stock
or security convertible into common stock and wishes to effect a short sale
“against the box” (see “Short Sales”) but for various reasons is unable to do
so. The Marketfield Fund may then enter into a series of stock and related
option transactions to achieve the economic equivalent of a short sale against
the box. To implement this trading strategy, the Marketfield Fund will
simultaneously execute with the same broker a purchase of shares of the common
stock and an “in the money” OTC put option to sell the common stock to the
broker and generally will write an OTC “out of the money” call option in the
same stock with the same exercise price as the put option. The options are
linked and may not be exercised, transferred or terminated independently of the
other.
Holding
the put option places the Marketfield Fund in a position to profit on the
decline in price of the security just as it would by effecting a short sale and
to, thereby, hedge against possible losses in the value of a security or
convertible security held by the Marketfield Fund. The writer of the put option
may require that the Marketfield Fund write a call option, which would enable
the broker to profit in the event the price of the stock rises above the
exercise price of the call option (see “Writing Call Options” above). In the
event the stock price were to increase above the strike or exercise price
of
the option, the Marketfield Fund would suffer a loss unless it first terminated
the call by exercising the put.
Special
Risks Associated with Options on Securities.
The
Marketfield Fund’s purpose in selling covered options is to realize greater
income than would be realized on portfolio securities transactions alone. The
Marketfield Fund may forego the benefits of appreciation on securities sold
pursuant to call options, or pay a higher price for securities acquired pursuant
to put options written by the Marketfield Fund. If a put or call option
purchased by the Marketfield Fund is not sold when it has remaining value, and
if the market price of the underlying security, in the case of a put, remains
equal to or greater than the exercise price, or, in the case of a call, remains
less than or equal to the exercise price, the Marketfield Fund will not be able
to profitably exercise the option and will lose its entire investment in the
option. Also, the price of a put or call option purchased to hedge against price
movements in a related security may move more or less than the price of the
related security.
The
Marketfield Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Marketfield Fund would have a loss if the value of the
securities remained below the sum of the premium paid and the exercise price
during the option period. In addition, exchange markets in some securities
options are a relatively new and untested concept, and it is impossible to
predict the amount of trading interest that may exist in such options. The same
types of risks apply to OTC trading in options. There can be no assurance that
viable markets will develop or continue in the United States or
abroad.
The
ability of the Marketfield Fund to successfully utilize options may depend in
part upon the ability of the Marketfield Sub-Adviser to forecast interest rates
and other economic factors correctly.
The
hours of trading for options on securities may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
Options
on Securities Indices. The
Marketfield Fund may purchase call and put options on securities indices for the
purpose of hedging against the risk of unfavorable price movements that may
adversely affect the value of the Marketfield Fund’s securities. Unlike a
securities option, which gives the holder the right to purchase or sell
specified securities at a specified price, an option on a securities index gives
the holder the right to receive a cash “exercise settlement amount” equal to (1)
the difference between the value of the underlying securities index on the
exercise date and the exercise price of the option, multiplied by (2) a fixed
“index multiplier.” In exchange for undertaking the obligation to make such a
cash payment, the writer of the securities index option receives a
premium.
A
securities index fluctuates with changes in the market values of the securities
included in the index. For example, some securities index options are based on a
broad market index such as the S&P 500®
Composite Price Index or the NYSE Composite Index, or a narrower market index
such as the S&P 100®
Index. Indices may also be based on an industry or market segment such as the
NYSE MKT Oil and Gas Index or the Computer and Business Equipment Index. Options
on stock indices are traded on, among other exchanges, the Chicago Board Options
Exchange and the NYSE.
The
effectiveness of hedging through the purchase of securities index options will
depend upon the extent to which price movements in the portion of the securities
portfolio being hedged correlate with
price
movements in the selected securities index. Perfect correlation is not possible
because the securities held or to be acquired by the Marketfield Fund will not
exactly match the securities represented in the securities indices on which
options are based. The principal risk involved in the purchase of securities
index options is that the premium and transaction costs paid by the Marketfield
Fund in purchasing an option will be lost as a result of unanticipated movements
in prices of the securities comprising the securities index on which the option
is based. Gains or losses on the Marketfield Fund’s transactions in securities
index options depend on price movements in the securities market generally (or,
for narrow market indices, in a particular industry or segment of the market)
rather than the price movements of individual securities held by the Marketfield
Fund.
The
Marketfield Fund may sell securities index options prior to expiration in order
to close out its positions in securities index options that it has purchased.
The Marketfield Fund may also allow options to expire unexercised.
Options
on Foreign Currencies.
To
the extent that it invests in foreign currencies, the Marketfield Fund may
purchase and write options on foreign currencies. The Marketfield Fund may use
foreign currency options contracts for various reasons, including: to manage its
exposure to changes in currency exchange rates; as an efficient means of
adjusting its overall exposure to certain currencies; or in an effort to enhance
its return through exposure to a foreign currency. The Marketfield Fund may, for
example, purchase and write put and call options on foreign currencies for the
purpose of protecting against declines in the U.S. dollar value of foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
securities to be acquired. The Marketfield Fund may also use foreign currency
options to protect against potential losses in positions denominated in one
foreign currency against another foreign currency in which the Marketfield
Fund’s assets are or may be denominated. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such declines in the
value of portfolio securities, the Marketfield Fund may purchase put options on
the foreign currency. If the value of the currency does decline, the Marketfield
Fund will have the right to sell such currency for a fixed amount of dollars
that exceeds the market value of such currency, resulting in a gain that may
offset, in whole or in part, the negative effect of currency depreciation on the
value of the Marketfield Fund’s securities denominated in that
currency.
Conversely,
if a rise in the dollar value of a currency in which securities to be acquired
are denominated is projected, thereby increasing the cost of such securities,
the Marketfield Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Marketfield Fund to purchase currency for a fixed amount of dollars that is less
than the market value of such currency, resulting in a gain that may offset, at
least partially, the effect of any currency-related increase in the price of
securities the Marketfield Fund intends to acquire. As in the case of other
types of options transactions, however, the benefit the Marketfield Fund derives
from purchasing foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, if currency exchange rates
do not move in the direction or to the extent anticipated, the Marketfield Fund
could sustain losses on transactions in foreign currency options that would
deprive it of a portion or all of the benefits of advantageous changes in such
rates.
The
Marketfield Fund may also write options on foreign currencies for hedging
purposes. For example, if the Marketfield Fund anticipates a decline in the
dollar value of foreign currency-denominated securities due to declining
exchange rates, it could, instead of purchasing a put option,
write
a call option on the relevant currency. If the expected decline occurs, the
option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received by the
Marketfield Fund.
Similarly,
instead of purchasing a call option to hedge against an anticipated increase in
the dollar cost of securities to be acquired, the Marketfield Fund could write a
put option on the relevant currency. If rates move in the manner projected, the
put option will expire unexercised and allow each Fund to offset such increased
cost up to the amount of the premium. As in the case of other types of options
transactions, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move in
the expected direction. If unanticipated exchange rate fluctuations occur, the
option may be exercised and the Marketfield Fund would be required to purchase
or sell the underlying currency at a loss that may not be fully offset by the
amount of the premium. As a result of writing options on foreign currencies, the
Marketfield Fund also may be required to forego all or a portion of the benefits
that might otherwise have been obtained from favorable movements in currency
exchange rates.
A
call option written on foreign currency by the Marketfield Fund is “covered” if
the Marketfield Fund owns the underlying foreign currency subject to the call or
securities denominated in that currency or has an absolute and immediate right
to acquire that foreign currency without additional cash consideration upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if the Marketfield Fund holds a call on the same foreign
currency for the same principal amount as the call written where the exercise
price of the call held (1) is equal to or less than the exercise price of the
call written or (2) is greater than the exercise price of the call written if
the Marketfield Fund maintains the difference in liquid assets.
Options
on foreign currencies to be written or purchased by the Marketfield Fund will be
traded on U.S. and foreign exchanges or over- the- counter. Exchange traded
options generally settle in cash, whereas options traded over the counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option. As with other kinds of option transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received, and the Marketfield Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may constitute
an effective hedge against exchange rate fluctuations, although, in the event of
rate movements adverse to the Marketfield Fund’s position, the Marketfield Fund
may forfeit the entire amount of the premium plus related transaction
costs.
The
Marketfield Fund also may use foreign currency options to protect against
potential losses in positions denominated in one foreign currency against
another foreign currency in which the Marketfield Fund’s assets are or may be
denominated. There can be no assurance that a liquid market will exist when the
Marketfield Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Marketfield
Fund may be unable to close out a position. If foreign currency options are
determined to be illiquid, then the Marketfield Fund will limit its investment
in these securities subject to its limitation on investments in illiquid
securities.
Currency
options traded on U.S. or other exchanges may be subject to position limits that
may limit the ability of the Marketfield Fund to reduce foreign currency risk
using such options. OTC options differ from traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller and generally do not have as much market liquidity as exchanged-traded
options.
Foreign currency exchange-traded options generally settle in cash, whereas
options traded OTC may settle in cash or result in delivery of the underlying
currency upon exercise of the option.
Private
Investments in Public Equity
The
Funds may purchase equity securities in a private placement that are issued by
issuers who have outstanding, publicly-traded equity securities of the same
class (“private investments in public equity” or “PIPES”). 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 each 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.
Pay-In-Kind
Bonds (CenterSquare Fund only)
The
CenterSquare Fund may invest in pay-in-kind bonds. These bonds pay “interest”
through the issuance of additional bonds, thereby adding debt to the issuer’s
balance sheet. The market prices of these securities are likely to respond to
changes in interest rates to a greater degree than the prices of securities
paying interest currently. Pay-in-kind bonds carry additional risk in that,
unlike bonds that pay interest throughout the period to maturity, the
CenterSquare Fund will realize no cash until the cash payment date and the
CenterSquare Fund may obtain no return at all on its investment if the issuer
defaults. The holder of a pay-in-kind bond must accrue income with respect to
these securities prior to the receipt of cash payments thereon. The CenterSquare
Fund may have to sell other investments to obtain cash needed to make income
distributions, which may reduce the CenterSquare Fund’s assets, increase its
expense ratio and decrease its rate of return.
Real
Estate Investment Trusts (“REITs”)
The
Funds may invest in REITs. REITs are pooled investment vehicles that invest
primarily in either real estate or real estate related loans. A REIT is not
taxed on income distributed to its shareholders or unitholders if it complies
with a regulatory requirement to distribute at least 90% of its taxable income
for each taxable year. Generally, REITs can be classified as equity REITs,
mortgage REITs or hybrid REITs. Equity REITs invest a majority of their assets
directly in real property and derive their income primarily from rents and
capital gains from appreciation realized through property sales. Equity REITs
are further categorized according to the types of real estate securities they
own, e.g., apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and
mixed-property types. Mortgage REITs invest a majority of their assets in real
estate mortgages and derive their income primarily from income payments. Hybrid
REITs combine the characteristics of both equity and mortgage
REITs.
The
Funds will not invest in real estate directly, but only in securities issued by
real estate companies. However, to the extent that each Fund invests in REITs,
each Fund is also subject to the risks associated with the direct ownership of
real estate, including but not limited to: declines in the value of real estate;
risks related to general and local economic conditions; possible lack of
availability of mortgage funds; overbuilding; extended vacancies of properties;
increased competition; increases in property taxes and operating expenses;
changes in zoning laws; losses due to costs resulting from the clean-up of
environmental problems; liability to third parties for damages resulting from
environmental problems; casualty or condemnation losses; limitations on rents;
changes in neighborhood values and the appeal of properties to tenants; and
changes in interest rates. Thus, the
value
of each Fund’s shares may change at different rates compared to the value of
shares of a mutual fund with investments in a mix of different industries.
REITs
are dependent upon management skills and generally may not be diversified. REITs
are also subject to heavy cash flow dependency, defaults by borrowers and
self-liquidation. In addition, REITs could possibly fail to qualify for tax-free
pass-through of income under the Code, or to maintain their exemptions from
registration under the 1940 Act. The above factors may also adversely affect a
borrower’s or a lessee’s ability to meet its obligations to the REIT. In the
event of a default by a borrower or lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting its investments. In addition, even the larger REITs
in the industry tend to be small to medium-sized companies in relation to the
equity markets as a whole. Accordingly, REIT shares can be more volatile than —
and at times will perform differently from — larger capitalization stocks such
as those found in the Dow Jones Industrial Average.
Some
REITs may have limited diversification and may be subject to risks inherent to
investments in a limited number of properties, in a narrow geographic area, or
in a single property type. Equity REITs may be affected by changes in underlying
property values. Mortgage REITs may be affected by the quality of the credit
extended. REITs also involve risks such as refinancing, interest rate
fluctuations, changes in property values, general or specific economic risk on
the real estate industry, dependency on management skills, and other risks
similar to small company investing. Although each Fund is not allowed to invest
in real estate directly, it may acquire real estate as a result of a default on
the REIT securities it owns. The Funds, therefore, may be subject to certain
risks associated with the direct ownership of real estate, including
difficulties in valuing and trading real estate, declines in the value of real
estate, risks related to general and local economic conditions, adverse changes
in the climate for real estate, environmental liability risks, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, limitation on rents, changes in neighborhood values, the
appeal of properties to tenants and increases in interest rates.
In
addition, because smaller-capitalization stocks are typically less liquid than
larger capitalization stocks, REIT shares may sometimes experience greater
share-price fluctuations than the stocks of larger companies.
In
general, qualified REIT dividends that an investor receives directly from a REIT
are automatically eligible for the 20% qualified business income deduction. The
IRS has issued final Treasury Regulations that permit a dividend or part of a
dividend paid by a RIC and reported as a “section 199A dividend” to be treated
by the recipient as a qualified REIT dividend for purposes of the 20% qualified
business income deduction, if certain holding period and other requirements have
been satisfied by the recipient with respect to its Fund shares. The final
Treasury Regulations do not extend such conduit treatment to qualified publicly
traded partnership income, as defined under Section 199A of the Code, earned by
a RIC. Therefore, non-corporate shareholders may not include any qualified
publicly traded partnership income earned through each Fund in their qualified
business income deduction. The IRS and Treasury Department are continuing to
evaluate whether it is appropriate to provide such conduit
treatment.
Regulatory
Matters
Each
of the exchanges and other trading facilitates on which options are traded has
established limitations on the maximum number of put or call options on a given
underlying security that may be written by a single investor or group of
investors acting in concert, regardless of whether the options
are
written on different exchanges or through one or more brokers. These position
limits may restrict the number of listed options which each Fund may write.
Option positions of all investment companies advised by each Sub-Adviser are
combined for purposes of these limits. An exchange may order the liquidation of
positions found to be in excess of these limits and may impose certain other
sanctions or restrictions.
Repurchase
Agreements
The
Funds may enter into domestic or foreign repurchase agreements with certain
sellers pursuant to guidelines adopted by the Board.
A
repurchase agreement, which provides a means for each Fund to earn income on
uninvested cash for periods as short as overnight, is an arrangement under which
the purchaser (i.e., each Fund) purchases a security, usually in the form of a
debt obligation (the “Obligation”) and the seller agrees, at the time of sale,
to repurchase the Obligation at a specified time and price. Repurchase
agreements with foreign banks may be available with respect to government
securities of the particular foreign jurisdiction. The custody of the Obligation
will be maintained by a custodian appointed by each Fund. Each Fund attempts to
assure that the value of the purchased securities, including any accrued
interest, will at all times exceed the value of the repurchase agreement. The
repurchase price may be higher than the purchase price, the difference being
income to each Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to each Fund together with the repurchase price
upon repurchase. In either case, the income to each Fund is unrelated to the
interest rate on the Obligation subject to the repurchase
agreement.
Each
Fund will limit its investment in repurchase agreements maturing in more than
seven days subject to each Fund’s limitation on investments in illiquid
securities.
In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, each Fund may encounter delays and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. If the court characterizes the transaction
as a loan and each Fund has not perfected a security interest in the Obligation,
each Fund may be required to return the Obligation to the seller’s estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, each
Fund would be at risk of losing some or all of the principal and income involved
in the transaction. Apart from the risk of bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the security. In
the event of the bankruptcy of the seller or the failure of the seller to
repurchase the securities as agreed, each Fund could suffer losses, including
loss of interest on or principal of the security and costs associated with delay
and enforcement of the repurchase agreement. In addition, if the market value of
the Obligation subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), each Fund will direct the seller
of the Obligation to deliver additional securities so that the market value of
all securities subject to the repurchase agreement equals or exceeds the
repurchase price.
The
Board has delegated to the Adviser and Sub-Adviser the authority and
responsibility to monitor and evaluate each Fund’s use of repurchase agreements,
which includes: (i) the identification of sellers whom they believe to be
creditworthy; (ii) the authority to enter into repurchase agreements with such
sellers; and (iii) the responsibility to determine, at the time the repurchase
agreement is entered into, that the collateral, other than cash or government
securities are issued by an issuer that has an “exceptionally strong capacity”
to meet its financial obligations on the securities collateralizing the
repurchase agreement, and are sufficiently liquid that they can be sold by each
Fund
at approximately their carrying value in the ordinary course of business within
seven calendar days. As with any unsecured debt instrument purchased for each
Fund, the Adviser and Sub-Adviser seek to minimize the risk of loss from
repurchase agreements by analyzing, among other things, sufficiency of the
collateral.
For
purposes of the 1940 Act, a repurchase agreement has been deemed to be a loan
from each Fund to the seller of the Obligation. It is not clear whether a court
would consider the Obligation purchased by each Fund subject to a repurchase
agreement as being owned by each Fund or as being collateral for a loan by each
Fund to the seller.
See
“Cash Equivalents” for more information.
Restricted
Securities – Rule 144A Securities and Section 4(a)(2) Commercial
Paper
Restricted
securities have no ready market and are subject to legal restrictions on their
sale (other than those eligible for resale pursuant to Rule 144A under
Section 4(a)(2) of the 1933 Act determined to be liquid pursuant to
guidelines adopted by the Board). Difficulty in selling securities may result in
a loss or be costly to each Fund. Restricted securities generally can be sold
only in privately negotiated transactions, pursuant to an exemption from
registration under the 1933 Act, or in a registered public offering. Where
registration is required, the holder of an unregistered security may be
obligated to pay all or part of the registration expense, and a considerable
period may elapse between the time a holder decides to seek registration and the
time when the holder can sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the holder of a restricted security (e.g., each
Fund) might obtain a less favorable price than prevailed when it decided to seek
registration of the security.
The
Funds may invest in Rule 144A securities and in 4(a)(2) commercial paper.
Certain securities may only be sold subject to limitations imposed under federal
securities laws. Among others, two categories of such securities are
(1) restricted securities that may be sold only to certain types of
purchasers pursuant to the limitations of Rule 144A under the 1933 Act
(“Rule 144A securities”) and (2) commercial debt securities that are
not sold in a public offering and therefore exempt from registration under
Section 4(a)(2) of the 1933 Act (“4(a)(2) commercial paper”). The resale
limitations on these types of securities may affect their liquidity. The
Trustees have the ultimate responsibility for determining whether specific
securities are liquid or illiquid.
The
Trustees have delegated the function of making day-to-day determinations of
liquidity to the Adviser, pursuant to guidelines approved by the
Trustees.
Reverse
Repurchase Agreements
The
Funds may enter into reverse repurchase agreements with banks or broker-dealers,
which involve the sale of a security by each Fund and its agreement to
repurchase the instrument at a specified time and price. Under a reverse
repurchase agreement, each Fund continues to receive any principal and interest
payments on the underlying security during the term of the agreement. These
agreements involve the sale of debt securities, or Obligations, held by each
Fund, with an agreement to repurchase the Obligations at an agreed upon price,
date and interest payment. The proceeds will be used to purchase other debt
securities either maturing, or under an agreement to resell, at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement. Reverse repurchase agreements will be utilized, when permitted by
law, only when the interest income to be earned from the investment of the
proceeds from the transaction is greater than the interest expense of the
reverse repurchase transaction.
The
use of reverse repurchase agreements by each Fund creates leverage that
increases each Fund’s investment risk. If the income and gains on securities
purchased with the proceeds of reverse repurchase agreements exceed the cost of
the agreements, each Fund’s earnings or NAV will increase faster than otherwise
would be the case; conversely, if the income and gains fail to exceed the costs,
earnings or NAV would decline faster than otherwise would be the
case.
If
the buyer of the Obligation subject to the reverse repurchase agreement becomes
bankrupt, realization upon the underlying securities may be delayed, and there
is a risk of loss due to any decline in their value.
Securities
Lending
Although
there is no present intent to do so, each Fund may lend its portfolio securities
to realize additional income. This lending is subject to the Funds’ policies and
restrictions. Each Fund may lend its investment securities so long as
(1) the loan is secured by collateral having a market value at all times
not less than 102% (105% in the case of certain foreign securities) of the value
of the securities loaned, (2) such collateral is marked to market on a
daily basis, (3) the loan is subject to termination by the Funds at any
time, and (4) the Funds receive reasonable interest on the loan. When cash
is received as collateral, the Funds will invest the cash received in short-term
instruments to earn additional income. The Funds will bear the risk of any loss
on any such investment; however, the Funds’ securities lending agent has agreed
to indemnify the Funds against loss on the investment of the cash collateral.
The Funds may pay reasonable finders, administrative and custodial fees to
persons that are unaffiliated with the Funds for services in connection with
loans of portfolio securities. While voting rights may pass with the loaned
portfolio securities, to the extent possible, the loan will be recalled on a
reasonable efforts basis and the securities voted by the Funds.
Short
Sales (Marketfield Fund only)
In
accordance with the restrictions set forth in the Prospectus and this SAI, the
Marketfield Fund may engage in any type of short sales, including short sales
“against the box.”
In
a short sale transaction, the Fund sells a security it does not own in
anticipation of a decline in the market value of that security. To enter into a
short sale, the Fund borrows the security and delivers it to a buyer. To close
out the short sale, the Fund purchases the security borrowed at the market price
and returns it to the party from which it originally borrowed the security. The
price at the time the Marketfield Fund closes out a short sale may be more or
less than the price at which the Fund sold the security to enter into the short
sale. Until the Fund replaces the security, the Fund is required to pay to the
lender amounts equal to any dividend which accrues during the period of the
loan. To borrow the security, the Fund also may be required to pay a premium,
which would increase the cost of the security sold. There may also be other
costs associated with short sales. The Fund will incur a loss as a result of the
short sale if the price of the security increases between the date when each
Fund enters into the sale and the date when the Fund closes out the short
position. The Fund will realize a gain if the security declines in price between
those dates. There is no guarantee that the Fund will be able to close out a
short position at any particular time or at an acceptable price. During the time
that each Fund is short a security, it is subject to the risk that the lender of
the security will terminate the loan at a time when the Fund is unable to borrow
the same security from another lender. If that occurs, the Fund may be “bought
in” at the price required to purchase the security needed to close out the short
position, which may be a disadvantageous price. Unlike a long position in a
security, theoretically there is no limit to the amount the Fund could lose in a
short sale transaction.
In
a short sale “against the box,” the Fund enters into a short sale of a security
that the Fund owns or has the right to obtain the security or one of like kind
and amount at no additional cost. The effect of a short sale against the box is
to “lock in” appreciation of a long position by hedging against a possible
market decline in the value of the long position. The short sale against the box
counterbalances the related long position such that gains in the long position
will be offset by equivalent losses in the short position, and vice versa. In
some cases, the proceeds of the short sale are retained by the broker pursuant
to applicable margin rules. If a broker with which the Fund has open short sales
were to become bankrupt, the Fund could experience losses or delays in
recovering gains on short sales.
If
the Fund effects a short sale of securities against the box at a time when it
has an unrealized gain on the securities, it may be required to recognize that
gain as if it had actually sold the securities (as a “constructive sale”) on the
date it effects the short sale. However, such constructive sale treatment may
not apply if the Fund closes out the short sale with securities other than the
appreciated securities held at the time of the short sale and if certain other
conditions are satisfied.
Stripped
Securities
Stripped
securities are the separate income or principal components of a debt security.
The risks associated with stripped securities are similar to those of other debt
securities, although stripped securities may be more volatile, and the value of
certain types of stripped securities may move in the same direction as interest
rates. U.S. Treasury securities that have been stripped by a Federal Reserve
Bank are obligations issued by the U.S. Treasury.
Privately
stripped government securities are created when a dealer deposits a U.S.
Treasury security or other U.S. government security with a custodian for
safekeeping. The custodian issues separate receipts for the coupon payments and
the principal payment, which the dealer then sells.
A
number of banks and brokerage firms have separated (“stripped”) the principal
portions (“corpus”) from the coupon portions of the U.S. Treasury bonds and
notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). The investment and
risk characteristics of “zero coupon” Treasury securities described below under
“U.S. Government Securities” are shared by such receipts or certificates. The
staff of the SEC has indicated that receipts or certificates representing
stripped corpus interests in U.S. Treasury securities sold by banks and
brokerage firms should not be deemed U.S. government securities but rather
securities issued by the bank or brokerage firm involved.
Swap
Agreements (Marketfield Fund only)
In
accordance with its investment strategies and only with Board approval, the
Marketfield Fund may enter into interest rate, equity, credit default, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Fund than if the Fund had
invested directly in an instrument that yielded that desired return or for other
portfolio management purposes. The Fund may enter into swap agreements,
including credit default swaps, only to the extent that obligations under such
agreements represent not more than 30% of the Fund’s net assets. Swap agreements
can be individually negotiated and structured to include exposure to a variety
of different types of investments or market factors. Depending on their
structure, swap agreements may increase or decrease the Fund’s exposure to long-
or short-term interest rates (in the United States or abroad), foreign currency
values, mortgage securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many different
forms and are known by a variety of names.
Most
swap agreements entered into by the Marketfield Fund would calculate the
obligations of the parties to the agreements on a “net” basis. Consequently, the
Fund’s obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the “net
amount”). The Fund’s obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of liquid
assets to avoid any potential leveraging of the Fund’s portfolio.
The
Fund will not enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund’s total assets. This limitation will only apply to OTC
swap transactions and will not apply to swap transactions that are centrally
cleared. The Marketfield Sub-Adviser will consider, among other factors,
creditworthiness, size, market share, execution ability, pricing and reputation
in selecting swap counterparties for the Fund.
Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few days to more than one year. In a
standard “swap” transaction, two parties agree to exchange the returns,
differentials in rates of return of some other amount earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or “swapped” between the
parties are calculated with respect to a “notional amount,” i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a “basket” of
securities representing a particular index. The “notional amount” of the swap
agreement is only a fictive basis on which to calculate the obligations that the
parties to a swap agreement have agreed to exchange. An equity swap is a
two-party contract that generally obligates one party to pay the positive return
and the other party to pay the negative return on a specified reference
security, basket of securities, security index or index component (“asset”)
during the period of the swap. The payments based on the reference asset may be
adjusted for transaction costs, interest payments, the amount of dividends paid
on the referenced asset or other economic factors.
Whether
the Marketfield Fund’s use of swap agreements will be successful in furthering
its investment objective will depend on the Marketfield Sub-Adviser’s ability to
correctly predict whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. If such securities are determined to be illiquid,
then the Fund will limit its investment in these securities subject to its
limitation on investments in illiquid securities. Moreover, each Fund bears the
risk of loss of the amount expected to be received under a swap agreement in the
event of the default or bankruptcy of a swap agreement counterparty. The
Marketfield Sub-Adviser will cause the Fund to enter into swap agreements only
with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Fund’s repurchase agreement guidelines.
Certain restrictions imposed on the Fund by the Code may limit the Fund’s
ability to use swap agreements. The Fund may be able to eliminate its exposure
under a swap agreement either by assignment or other disposition, or by entering
into an offsetting swap agreement with the same party or a similarly
creditworthy party. The swaps market is a relatively new market and largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Fund’s ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
Many
swaps currently are, and others eventually are expected to be, required to be
cleared through a central counterparty. Central clearing is designed to reduce
counterparty credit risk and increase liquidity compared to OTC swaps, but it
does not eliminate those risks completely. The CFTC, SEC and federal banking
regulators also have imposed margin requirements on non-cleared OTC derivatives.
As applicable, margin requirements will increase the overall expenses of the
fund. With cleared swaps, there is also a risk of loss by the Fund of its
initial and variation margin deposits in the event of bankruptcy of the futures
commission merchant (FCM) with which the Fund has an open position, or the
central counterparty in a swap contract. With cleared swaps, the Fund may not be
able to obtain as favorable terms as it would be able to negotiate for a
bilateral, uncleared swap. In addition, an FCM may unilaterally amend the terms
of its agreement with the Fund, which may include the imposition of position
limits or additional margin requirements with respect to the Fund’s investment
in certain types of swaps. The regulation of cleared and uncleared swaps, as
well as other derivatives, is a rapidly changing area of law and is subject to
modification by government and judicial action. In addition, the SEC, Commodity
Futures Trading Commission (CFTC) and the exchanges are authorized to take
extraordinary actions in the event of a market emergency. It is not possible to
predict fully the effects of current or future regulation.
Equity
Swaps (Total Return Swaps / Index Swaps).
Equity
swap contracts may be structured in different ways. For example, when the
Marketfield Fund takes a long position, the counterparty may agree to pay the
Fund the amount, if any, by which the notional amount of the equity swap would
have increased in value had it been invested in a particular stock (or group of
stocks), plus the dividends that would have been received on the stock. In these
cases, the Fund may agree to pay to the counterparty interest on the notional
amount of the equity swap plus the amount, if any, by which that notional amount
would have decreased in value had it been invested in such stock. Therefore, in
this case the return to the Fund on the equity swap should be the gain or loss
on the notional amount plus dividends on the stock less the interest paid by the
Fund on the notional amount. In other cases, when the Fund takes a short
position, a counterparty may agree to pay the Fund the amount, if any, by which
the notional amount of the equity swap would have decreased in value had the
Fund sold a particular stock (or group of stocks) short, less the dividend
expense that the Fund would have paid on the stock, as adjusted for interest
payments or other economic factors. In these situations, the Fund may be
obligated to pay the amount, if any, by which the notional amount of the swap
would have increased in value had it been invested in such stock.
Equity
swaps normally do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is normally
limited to the net amount of payments that the Marketfield Fund is contractually
obligated to make. If the other party to an equity swap defaults, the Fund’s
risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive, if any.
Equity
swaps are derivatives and their value can be very volatile. To the extent that
the Marketfield Sub-Adviser does not accurately analyze and predict future
market trends, the values of assets or economic factors, the Fund may suffer a
loss, which may be substantial. The swap markets in which many types of swap
transactions are traded have grown substantially in recent years, with a large
number of banks and investment banking firms acting both as principals and as
agents. As a result, the markets for certain types of swaps have become
relatively liquid.
Interest
Rate Swaps.
An
interest rate swap is an agreement between two parties (known as counterparties)
where one stream of future interest payments is exchanged for another based on a
specified
principal amount. Interest rate swaps often exchange a fixed payment for a
floating payment that is linked to an interest rate. A company will typically
use interest rate swaps to limit, or manage, its exposure to fluctuations in
interest rates, or to obtain a marginally lower interest rate than it would have
been able to get without the swap.
Swap
agreements will tend to shift the Marketfield Fund’s investment exposure from
one type of investment to another. For example, if the Fund agreed to pay fixed
rates in exchange for floating rates while holding fixed-rate bonds, the swap
would tend to decrease the Fund’s exposure to long-term interest rates.
Depending on how they are used, swap agreements may increase or decrease the
overall volatility of the Fund’s investments and its share price and yield. The
most significant factor in the performance of swap agreements is the change in
the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by the Fund, the Fund must be prepared to make such payments when
due.
Credit
Default Swaps.
To the extent consistent with its investment objective and subject to the Fund’s
general limitations on investing in swap agreements, the Fund may invest in
credit default swaps. Credit default swaps are contracts whereby one party, the
protection “buyer,” makes periodic payments to a counterparty, the protection
“seller,” in exchange for the right to receive from the seller a payment equal
to the par (or other agreed-upon value (the “value”) of a particular debt
obligation (the “referenced debt obligation”) in the event of a default by the
issuer of that debt obligation. A credit default swap may use one or more
securities that are not currently held by the Fund as referenced debt
obligations. The Fund may be either the buyer or the seller in the transaction.
The use of credit default swaps may be limited by the Fund’s limitations on
illiquid investments. When used for hedging purposes, the Fund would be the
buyer of a credit default swap contract. In that case, each Fund would be
entitled to receive the value of a referenced debt obligation from the seller in
the event of a default by a third party, such as a U.S. or non-U.S. issuer, on
the debt obligation. In return, the Fund would pay to the seller a periodic
stream of payments over the term of the contract provided that no event of
default has occurred. If no default occurs, the Fund would have spent the stream
of payments and received no benefit from the contract. Credit default swaps
involve the risk that, in the event that the Marketfield Sub-Adviser incorrectly
evaluates the creditworthiness of the issuer on which the swap is based, the
investment may expire worthless and would generate income only in the event of
an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial instability). They also
involve credit risk that the seller may fail to satisfy its payment obligations
to the Fund in the event of a default.
When
the Marketfield Fund is the seller of a credit default swap contract, it
receives the stream of payments but is obligated to pay upon default of the
referenced debt obligation. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total assets, the Fund
would be subject to investment exposure on the notional amount of the
swap.
In
addition to the risks applicable to derivatives generally, credit default swaps
involve special risks because they are difficult to value, are highly
susceptible to liquidity and credit risk, and generally pay a return to the
party that has paid the premium only in the event of an actual default by the
issuer of the underlying obligation (as opposed to a credit downgrade or other
indication of financial difficulty).
The
Marketfield Fund may also invest in a CDX index, which is an equally-weighted
credit default swap index that is designed to track a representative segment of
the credit default swap market (e.g., investment
grade, high volatility, below investment grade or emerging markets) and provides
an
investor
with exposure to specific “baskets” of issuers of certain debt instruments. CDX
index products potentially allow an investor to obtain the same investment
exposure as an investor who invests in an individual credit default swap, with
an increased level of diversification. Generally, the value of the CDX index
will fluctuate in response to changes in the perceived creditworthiness or
default experience of the basket of issuers of debt instruments to which the CDX
index provides exposure. An investor’s investment in a tranche of a CDX index
provides customized exposure to certain segments of the CDX index’s potential
loss distribution. The lowest or riskiest tranche, known as the equity tranche,
has exposure to the first losses experienced by the basket. The mezzanine and
senior tranches are higher in the capital structure but may also be exposed to
losses in value. Investment in a CDX index is susceptible to liquidity risk,
along with credit risk, counterparty risk and others risks associated with an
investment in a credit default swaps, as discussed above.
Swaptions.
The
Marketfield Fund also may enter into swaptions. A swaption is a contract that
gives a counterparty the right (but not the obligation) in return for payment of
a premium, to enter into a new swap agreement or to shorten, extend, cancel or
otherwise modify an existing swap agreement, at some designated future time on
specified terms. The Fund may write (sell) and purchase put and call
swaptions.
Whether
the Fund’s use of swap agreements or swaptions will be successful in furthering
its investment objective will depend on the Marketfield Sub-Adviser’s ability to
predict whether certain types of investments are likely to produce greater
returns than other investments. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Fund will enter into
swap agreements only with counterparties that meet certain standards of
creditworthiness. Certain restrictions imposed on the Fund by the Code may limit
the Fund’s ability to use swap agreements. Currently, the swaps market is
largely unregulated. It is possible that developments in the swaps market,
including additional government regulation, could adversely affect the Fund’s
ability to terminate existing swap agreements or to realize amounts to be
received under such agreements.
Temporary
Defensive Positions
In
times of unusual or adverse market, economic or political conditions, for
temporary defensive purposes, each Fund may invest outside the scope of its
principal investment focus. Under such conditions, each Fund may not invest in
accordance with its investment objective or investment strategies, including
substantially reducing or eliminating its short positions, and, as a result,
there is no assurance that each Fund will achieve its investment objective.
Under such conditions, each Fund may invest without limit in cash and cash
equivalents as
described above.
These include, but are not limited to: short-term obligations issued or
guaranteed as to interest and principal by the U.S. government or any agency or
instrumentality thereof (including repurchase agreements collateralized by such
securities; see “Repurchase Agreements” and “Reverse Repurchase Agreements” for
a description of the characteristics and risks of repurchase agreements and
reverse repurchase agreements); obligations of banks CDs, bankers’ acceptances
and time deposits) and obligations of other banks or S&Ls if such
obligations are federally insured; commercial paper (as described in this SAI);
investment grade corporate debt securities or money market instruments, for this
purpose including U.S. government securities having remaining maturities of one
year or less; and other debt instruments not specifically described above if
such instruments are deemed by the Adviser or Sub-Adviser to be of comparable
high quality and liquidity.
Also,
a portion of each Fund’s assets may be maintained in money market instruments as
described above in such amount as the Adviser or Sub-Adviser deem appropriate
for cash reserves.
See
“Cash Equivalents” for more information.
To-Be-Announced
(“TBA”) Purchase Commitments
TBA
purchase commitments are commitments to purchase mortgage-backed securities for
a fixed price at a future date. At the time of purchase, the seller does not
specify the particular mortgage-backed securities to be delivered. Instead, each
Fund agrees to accept any mortgage-backed security that meets specified terms.
Thus, each Fund and the seller would agree upon the issuer, interest rate and
terms of the underlying mortgages, but the seller would not identify the
specific underlying mortgages until shortly before it issues the mortgage-backed
security.
Unsettled
TBA purchase commitments are valued at the current market value of the
underlying securities. Each Fund will set aside cash or other liquid assets in
an amount equal to 100% of its commitment to purchase securities on a
to-be-announced basis. These assets will be marked-to-market daily, and each
Fund will increase the aggregate value of the assets, as necessary, to ensure
that the assets are at least equal to 100% of the amount of each Fund’s
commitments. On
delivery for such transactions, each Fund will meet its obligations from
maturities or sales of the segregated securities and/or from cash flow.
TBA
purchase commitments may be considered securities in themselves, and purchasing
a security on a to be announced basis can involve the risk that the market price
at the time of delivery may be lower than the agreed-upon purchase price, in
which case there could be an unrealized loss at the time of delivery. Default by
or bankruptcy of the counterparty to a TBA transaction would expose each Fund to
possible loss because of adverse market action and expenses or delays in
connection with the purchase of the mortgage-backed securities specified in the
TBA transaction. Mortgage-backed securities purchased on a to-be-announced basis
increase interest rate risks to each Fund because the underlying mortgages may
be less favorable than anticipated. No interest or dividends accrue to the
purchaser prior to the settlement date.
U.S.
Government Securities
The
Funds may invest in direct obligations of the U.S. Treasury. These obligations
include Treasury bills, notes and bonds, all of which have their principal and
interest payments backed by the full faith and credit of the U.S. Government.
Securities issued or guaranteed by the United States government or its agencies
or instrumentalities include various U.S. Treasury securities, which differ only
in their interest rates, maturities and times of issuance. U.S. Treasury bills
have initial maturities of one year or less; U.S. Treasury notes have initial
maturities of one to ten years; and U.S. Treasury bonds generally have initial
maturities of greater than ten years. Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, such as GNMA pass-through
certificates, are supported by the full faith and credit of the U.S. government.
Other securities, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the U.S. Treasury. Additionally, other
securities, such as those issued by FNMA, are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the agency
or instrumentality, while others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality. U.S. government securities also include government-guaranteed
mortgage-backed securities.
While
the U.S. government provides financial support to U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, and it is not so obligated by law. Because the U.S. government is not
obligated by law to provide support to an instrumentality it sponsors, each Fund
will invest in obligations issued by such an instrumentality only if each
Sub-
Adviser
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by each Fund.
U.S.
government securities do not generally involve the credit risks associated with
other types of interest bearing securities. As a result, the yields available
from U.S. government securities are generally lower than the yields available
from other interest bearing securities. Like other fixed-income securities, the
values of U.S. government securities change as interest rates fluctuate. When
interest rates decline, the values of U.S. government securities can be expected
to increase, and when interest rates rise, the values of U.S. government
securities can be expected to decrease.
See
“Cash Equivalents” for more information.
Warrants
To
the extent that each Fund invests in equity securities, each Fund may invest in
warrants. The holder of a warrant has the right to purchase a given number of
shares of a particular issuer at a specified price until expiration of the
warrant. Such investments can provide a greater potential for profit or loss
than an equivalent investment in the underlying security. Prices of warrants do
not necessarily move in tandem with the prices of the underlying securities, and
are speculative investments. Warrants pay no dividends and confer no rights
other than a purchase option. If a warrant is not exercised by the date of its
expiration, each Fund will lose its entire investment in such
warrant.
When-Issued
Securities
The
Funds may from time to time purchase securities on a “when-issued” basis. When
purchasing a security on a when-issued basis, each Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
fluctuations, and takes such fluctuations into account when determining its NAV.
Debt securities, including municipal securities, are often issued in this
manner. The price of such securities, which may be expressed in yield terms, is
fixed at the time a commitment to purchase is made, but delivery of and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase (60 days for municipal
bonds and notes). During the period between purchase and settlement, no payment
is made by each Fund, and no interest accrues to each Fund. To the extent that
assets of each Fund are held in cash pending the settlement of a purchase of
securities, each Fund would earn no income; however, it is each Fund’s intention
that each Fund will be fully invested to the extent practicable and subject to
the policies stated herein and in the Prospectus. Although when-issued
securities may be sold prior to the settlement date, each Fund intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons.
When-issued
transactions are entered into in order to secure what is considered to be an
advantageous price and yield to each Fund and not for purposes of leveraging
each Fund’s assets. However, each Fund will not accrue any income on these
securities prior to delivery. The value of when-issued securities may vary prior
to and after delivery depending on market conditions and changes in interest
rate levels. There is a risk that a party with whom each Fund has entered into
such transactions will not perform its commitment, which could result in a gain
or loss to each Fund.
Each
Fund does not believe that each Fund’s NAV per share or income will be exposed
to additional risk by the purchase of securities on a when-issued basis. At the
time each Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the amount due and the value
of the security in determining each Fund’s NAV per share. The market
value
of the when-issued security may be more or less than the purchase price payable
at the settlement date. Liquid assets are maintained to cover “senior securities
transactions” which may include, but are not limited to, each Fund’s commitments
to purchase securities on a when-issued basis. The value of each Fund’s “senior
securities” holdings are marked-to-market daily to ensure proper coverage. Such
securities either will mature or, if necessary, be sold on or before the
settlement date.
Zero-Coupon
Bonds
The
Funds may purchase zero coupon bonds, which are debt obligations issued without
any requirement for the periodic payment of interest. Zero coupon bonds are
issued at a significant discount from their face value. The discount
approximates the total amount of interest the bonds would accrue and compound
over the period until maturity at a rate of interest reflecting the market rate
at the time of issuance. Because interest on zero coupon obligations is not paid
to each Fund on a current basis but is, in effect, compounded, the value of the
securities of this type is subject to greater fluctuations in response to
changing interest rates than the value of debt obligations that distribute
income regularly. Zero coupon bonds tend to be subject to greater market risk
than interest paying securities of similar maturities. The discount represents
income, a portion of which each Fund must accrue and distribute every year even
though each Fund receives no payment on the investment in that year. Zero coupon
bonds tend to be more volatile than conventional debt securities.
Investment
Restrictions
Fundamental
Investment Restrictions
The
Trust (on behalf of the Funds) has adopted the following restrictions as
fundamental policies, which may not be changed without the affirmative vote of
the holders of a “majority of the outstanding voting securities” of each Fund,
as defined under the 1940 Act. Under the 1940 Act, the vote of the holders of a
“majority of the outstanding voting securities” means the vote of the holders of
the lesser of (i) 67% of the shares of each Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented; or
(ii) more than 50% of the outstanding shares of each Fund.
The
Marketfield Fund may not:
1.Issue
senior securities, borrow money or pledge its assets, except that (i) the Fund
may borrow from banks in amounts not exceeding one-third of its total assets
(including the amount borrowed), and (ii) this restriction will not prohibit the
Fund from engaging in options transactions or short sales in accordance with its
objectives and strategies;
2.Act
as underwriter (except to the extent the Fund may be deemed to be an underwriter
in connection with the sale of securities in its investment
portfolio);
3.Invest
25% or more of its net assets, calculated at the time of purchase and taken at
market value, in securities of issuers in any one industry or group of
industries (other than (i) securities issued or guaranteed as to principal
and/or interest by the U.S. Government, its agencies or instrumentalities; or
(ii) repurchase agreements collateralized by the instruments described in clause
(i).
4.Purchase
or sell real estate unless acquired as a result of ownership of securities
(although the Fund may purchase and sell securities that are secured by real
estate and securities of companies that invest or deal in real
estate);
5.Purchase
or sell commodities, unless acquired as a result of ownership of securities or
other instruments and provided that this restriction does not prevent the Fund
from engaging in transactions involving currencies and futures contracts and
options thereon or investing in securities or other instruments that are secured
by commodities;
6.Make
loans of money (except for the lending of its portfolio securities, purchases of
debt securities consistent with the investment policies of the Fund and
repurchase agreements); or
7.With
respect to 75% of its total assets, invest more than 5% of its total assets in
securities of a single issuer or hold more than 10% of the voting securities of
such issuer (with the exception that these restrictions do not apply to the
Fund’s investments in the securities of the U.S. Government, its agencies or
instrumentalities or other investment companies).
The
CenterSquare Fund,
Foresight Fund, and Greenspring Fund:
1.May
issue senior securities to the extent permitted by the Investment Company Act of
1940, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time, or by regulatory guidance or
interpretations of, or any exemptive order or other relief issued by the SEC or
any successor organization or their staff under, such Act, rules or
regulations.
2.May
borrow money to the extent permitted by the Investment Company Act of 1940, or
the rules or regulations thereunder, as such statute, rules or regulations may
be amended from time to time, or by regulatory guidance or interpretations of,
or any exemptive order or other relief issued by the SEC or any successor
organization or their staff under, such Act, rules or regulations.
3.May
lend money to the extent permitted by the Investment Company Act of 1940, or the
rules or regulations thereunder, as such statute, rules or regulations may be
amended from time to time, or by regulatory guidance or interpretations of, or
any exemptive order or other relief issued by the SEC or any successor
organization or their staff under, such Act, rules or regulations.
4.May
underwrite securities to the extent permitted by the Investment Company Act of
1940, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time, or by regulatory guidance or
interpretations of, or any exemptive order or other relief issued by the SEC or
any successor organization or their staff under, such Act, rules or
regulations.
5.May
purchase and sell commodities to the extent permitted by the Investment Company
Act of 1940, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time, or by regulatory guidance or
interpretations of, or any exemptive order or other relief issued by the SEC or
any successor organization or their staff under, such Act, rules or
regulations.
6.May
purchase and sell real estate to the extent permitted by the Investment Company
Act of 1940, or the rules or regulations thereunder, as such statute, rules or
regulations may be amended from time to time, or by regulatory guidance or
interpretations of, or any exemptive order or other relief issued by the SEC or
any successor organization or their staff under, such Act, rules or
regulations.
7.(CenterSquare
Fund only)
Will
concentrate investments in a particular industry or group of industries, as
concentration is defined or interpreted under the Investment Company Act of
1940, and the rules and regulations thereunder, as such statute, rules or
regulations may be amended from time to time, and under regulatory guidance or
interpretations of such Act, rules or regulations. The Fund will concentrate
investments in stocks of companies principally engaged in the real estate
industry, including Real Estate Investment Trusts.
8.(Foresight
Fund only)
Will not invest 25% or more of the market value of its total assets in the
securities of companies engaged in any one industry, except that the Fund will
invest over 25% of
its
net assets in the securities issued by companies operating in the infrastructure
industry. (Does not apply to investments in the securities of other investment
companies or securities of the U.S. government, its agencies or
instrumentalities.)
9.(Greenspring
Fund only)
May with respect to 75% of its total assets, invest no more than 5% of its total
assets in securities of a single issuer or hold no more than 10% of the voting
securities of such issuer.
10.(Greenspring
Fund only)
May not purchase any securities which would cause more than 25% of its total
assets at the time of such purchase to be concentrated in the securities of
issuers engaged in any one industry.
The
Tran Fund may:
1.Issue
senior securities or borrow money, except as permitted under the 1940 Act and
the rules and regulations thereunder, and then not in excess of 33-1/3% of the
Fund’s total assets (including the amount of the senior securities issued but
reduced by any liabilities not constituting senior securities) at the time of
the issuance or borrowing, except that the Fund may borrow up to an additional
5% of its total assets (not including the amount borrowed) for temporary
purposes such as clearance of portfolio transactions and share redemptions. For
purposes of these restrictions, the purchase or sale of securities on a
when-issued, delayed delivery or forward commitment basis, the purchase and sale
of options and futures contracts and collateral arrangements with respect
thereto are not deemed to be the issuance of a senior security, a borrowing or a
pledge of assets.;
2.Invest
25% or more of the value of the Fund’s assets in securities of issuers in any
one industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or to
securities issued by other investment companies.;
3.Pledge,
mortgage or hypothecate its assets except to secure indebtedness permitted to be
incurred by the Fund. (For the purpose of this restriction, the deposit in
escrow of securities in connection with the writing of put and call options,
collateralized loans of securities by and collateral arrangements with respect
to margin for future contracts by the Fund are not deemed to be pledges or
hypothecations).
4.Underwrite
any issue of securities, except to the extent that the Fund may be considered to
be acting as underwriter in connection with the disposition of any portfolio
security;
5.Purchase
or sell real estate or interests therein, although the Fund may purchase
securities of issuers which engage in real estate operations and securities
secured by real estate or interests therein, including real estate investment
trusts;
6.Purchase
or sell physical commodities, unless acquired as a result of owning securities
or other instruments, but the Fund may purchase, sell or enter into financial
options and futures, forward and spot currency contracts, swap transactions and
other financial contracts or derivative instruments;
7.Make
loans, except loans of portfolio securities or through repurchase agreements,
provided that for purposes of this restriction, the acquisition of bonds,
debentures, other debt securities or instruments, or participations or other
interests therein and investments in government obligations, commercial paper,
certificates of deposit, bankers’ acceptances or similar instruments will not be
considered the making of a loan;
8.Engage
in short sales of securities or maintain a short position, except that the Fund
may (a) sell short “against the box” and (b) maintain short positions in
connection with its use of financial
options
and futures, forward and spot currency contracts, swap transactions and other
financial contracts or derivative instruments; or
9.Purchase
securities on margin except for the use of short-term credit necessary for the
clearance of purchases and sales of portfolio securities, provided that the Fund
may make initial and variation margin deposits in connection with permitted
transactions in options and futures, forward and spot currency contracts, swap
transactions and other financial contracts or derivative
instruments.
10.When
engaging in options, futures and forward currency contract strategies, the Fund
will either: (1) earmark or set aside cash or liquid securities in a segregated
account with the custodian in the prescribed amount; or (2) hold securities or
other options or futures contracts whose values are expected to offset (“cover”)
its obligations thereunder. Securities, currencies or other options or futures
contracts used for cover cannot be sold or closed out while the strategy is
outstanding, unless they are replaced with similar assets.
With
respect to the fundamental policy relating to issuing senior securities set
forth above, “senior securities” are defined as 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 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 for any purpose. A fund also may
borrow 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.
The issuance of senior securities by a fund can increase the speculative
character of the fund’s outstanding shares through leveraging. Leveraging of a
Fund’s portfolio through the issuance of senior securities magnifies the
potential for gain or loss on monies, because even though the Fund’s net assets
remain the same, the total risk to investors is increased to the extent of the
Fund’s gross assets. The policy above will be interpreted not to prevent
collateral arrangements with respect to swaps, options, forward or futures
contracts or other derivatives, or the posting of initial or variation
margin.
With
respect to the fundamental policy relating to borrowing money set forth above,
the 1940 Act permits a fund to borrow money in amounts of up to one-third
of the fund’s total assets from banks for any purpose, and to borrow up to 5% of
the fund’s total assets from banks or other lenders for temporary purposes. (A
fund’s total assets include the amounts being borrowed.) To limit the risks
attendant to borrowing, the 1940 Act requires a fund to maintain an “asset
coverage” of at least 300% of the amount of its borrowings, provided that in the
event that the fund’s asset coverage falls below 300%, the fund is required to
reduce the amount of its borrowings so that it meets the 300% asset coverage
threshold within three days (not including Sundays and holidays). Asset coverage
means the ratio that the value of a fund’s total assets (including amounts
borrowed), minus liabilities other than borrowings, bears to the aggregate
amount of all borrowings. Certain trading practices and investments, such as
reverse repurchase agreements, may be considered to be borrowings, and thus
subject to the 1940 Act restrictions. Borrowing money to increase portfolio
holdings is known as “leveraging.” Borrowing, especially when used for leverage,
may cause the value of a Fund’s shares to be more volatile than if the Fund did
not borrow. This is because borrowing tends to magnify the effect of any
increase or decrease in the value of the Fund’s portfolio holdings. Borrowed
money thus creates an opportunity for greater gains, but also greater losses. To
repay borrowings, the Funds may have to sell securities at a time and at a price
that is unfavorable to the Funds. There also are costs associated with borrowing
money, and these costs would offset and could eliminate the Fund’s net
investment income in any given period. Currently, the Funds do not have any
intention of borrowing money for leverage. The policy above will be interpreted
to permit the Funds to engage in trading
practices
and investments that may be considered to be borrowing to the extent permitted
by the 1940 Act. Short-term credits necessary for the settlement of securities
transactions and arrangements with respect to securities lending will not be
considered to be borrowings under the policy. Practices and investments that may
involve leverage but are not considered to be borrowings are not subject to the
policy.
With
respect to the fundamental policy relating to lending set forth above, the
1940 Act does not prohibit a fund from making loans; however, SEC staff
interpretations currently prohibit funds from lending more than one-third of
their total assets, except through the purchase of debt obligations or the use
of repurchase agreements. (A repurchase agreement is an agreement to purchase a
security, coupled with an agreement to sell that security back to the original
seller on an agreed-upon date at a price that reflects current interest rates.
The SEC frequently treats repurchase agreements as loans.) While lending
securities may be a source of income to a Fund, as with other extensions of
credit, there are risks of delay in recovery or even loss of rights in the
underlying securities should the borrower fail financially. However, loans would
be made only when a Fund’s Sub-Adviser believes the income justifies the
attendant risks. The Funds also will be permitted by this policy to make loans
of money, including to other funds. The Funds would have to obtain exemptive
relief from the SEC to make loans to other funds. The policy above will be
interpreted not to prevent the Funds from purchasing or investing in debt
obligations and loans. In addition, collateral arrangements with respect to
options, forward currency and futures transactions and other derivative
instruments, as well as delays in the settlement of securities transactions,
will not be considered loans.
With
respect to the fundamental policy relating to underwriting set forth above, the
1940 Act does not prohibit a fund from engaging in the underwriting
business or from underwriting the securities of other issuers; in fact, the
1940 Act permits a fund to have underwriting commitments of up to 25% of
its assets under certain circumstances. Those circumstances currently are that
the amount of the fund’s underwriting commitments, when added to the value of
the fund’s investments in issuers where the fund owns more than 10% of the
outstanding voting securities of those issuers, cannot exceed the 25% cap. A
fund engaging in transactions involving the acquisition or disposition of
portfolio securities may be considered to be an underwriter under the
1933 Act. Under the 1933 Act, an underwriter may be liable for
material omissions or misstatements in an issuer’s registration statement or
prospectus. Securities purchased from an issuer and not registered for sale
under the 1933 Act are considered restricted securities. There may be a
limited market for these securities. If these securities are registered under
the 1933 Act, they may then be eligible for sale but participating in the
sale may subject the seller to underwriter liability. These risks could apply to
a fund investing in restricted securities. Although it is not believed that the
application of the 1933 Act provisions described above would cause the
Funds to be engaged in the business of underwriting, the policy above will be
interpreted not to prevent the Funds from engaging in transactions involving the
acquisition or disposition of portfolio securities, regardless of whether the
Funds may be considered to be an underwriter under the
1933 Act.
With
respect to the fundamental policy relating to commodities set forth above, the
1940 Act does not prohibit a fund from owning commodities, whether physical
commodities and contracts related to physical commodities (such as oil or grains
and related futures contracts), or financial commodities and contracts related
to financial commodities (such as currencies and, possibly, currency futures).
However, a fund is limited in the amount of illiquid assets it may purchase. To
the extent that investments in commodities are considered illiquid, an SEC rule
limits a fund’s purchases of illiquid securities to 15% of net assets. If the
Funds were to invest in a physical commodity or a physical commodity-related
instrument, the Funds would be subject to the additional risks of the particular
physical
commodity and its related market. The value of commodities and commodity-related
instruments may be extremely volatile and may be affected either directly or
indirectly by a variety of factors. There also may be storage charges and risks
of loss associated with physical commodities. The policy above will be
interpreted to permit investments in exchange traded funds that invest in
physical and/or financial commodities.
With
respect to the fundamental policy relating to real estate set forth above, the
1940 Act does not prohibit a fund from owning real estate; however, a fund
is limited in the amount of illiquid assets it may purchase. Investing in real
estate may involve risks, including that real estate is generally considered
illiquid and may be difficult to value and sell. Owners of real estate may be
subject to various liabilities, including environmental liabilities. To the
extent that investments in real estate are considered illiquid, an SEC rule
limits a fund’s purchases of illiquid securities to 15% of net assets. The
policy above will be interpreted not to prevent the Funds from investing in real
estate-related companies, companies whose businesses consist in whole or in part
of investing in real estate, instruments (like mortgages) that are secured by
real estate or interests therein, or real estate investment trust
securities.
With
respect to the fundamental policy relating to concentration set forth above, the
1940 Act does not define what constitutes “concentration” in an industry. The
SEC staff has taken the position that investment of 25% or more of a fund’s
total assets in one or more issuers conducting their principal activities in the
same industry or group of industries constitutes concentration. It is possible
that interpretations of concentration could change in the future. A fund that
invests a significant percentage of its total assets in a single industry may be
particularly susceptible to adverse events affecting that industry and may be
more risky than a fund that does not concentrate in an industry. The policy
above will be interpreted to refer to concentration as that term may be
interpreted from time to time. The policy also will be interpreted to permit
investment without limit in the following: securities of the U.S. government and
its agencies or instrumentalities; securities of state, territory, possession or
municipal governments and their authorities, agencies, instrumentalities or
political subdivisions; and repurchase agreements collateralized by any such
obligations. Accordingly, issuers of the foregoing securities will not be
considered to be members of any industry. There also will be no limit on
investment in issuers domiciled in a single jurisdiction or country. The policy
also will be interpreted to give broad authority to the Fund as to how to
classify issuers within or among industries or groups of
industries.
The
Funds’ fundamental policies will be interpreted broadly. For example, the
policies will be interpreted to refer to the 1940 Act and the related rules
as they are in effect from time to time, and to interpretations and
modifications of or relating to the 1940 Act by the SEC and others as they
are given from time to time. When a policy provides that an investment practice
may be conducted as permitted by the 1940 Act, the policy will be
interpreted to mean either that the 1940 Act expressly permits the practice
or that the 1940 Act does not prohibit the practice.
Any
restriction on investments or use of assets, including, but not limited to,
market capitalization, geographic, rating and/or any other percentage
restrictions, set forth in this SAI or the Funds’ Prospectus shall be measured
only at the time of investment, and any subsequent change, whether in the value,
market capitalization, rating, percentage held or otherwise, will not constitute
a violation of the restriction, other than with respect to investment
restriction above related to borrowings by the Funds.
In
addition, each Fund will consider the investments of underlying investment
companies when determining compliance with its concentration policy, to the
extent each Fund has sufficient information about such investments.
Non-Fundamental
Investment Restrictions
The
following non-fundamental investment restrictions can be changed by the Board of
Trustees, but the change will only be effective after 60 days’ prior written
notice is given to shareholders of each Fund.
Marketfield
Fund, Tran Fund, and Greenspring Fund
The
Marketfield Fund, Tran Fund, and Greenspring Fund may not:
1.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.
2.except
with respect to the limitations on borrowing and acquisitions of illiquid
investments, if the Fund is in compliance with a percentage or rating
restriction on investment or use of assets set forth herein or in the Prospectus
at the time that a transaction is effected, later changes in percentage
resulting from any cause other than actions by each Fund will not be considered
a violation.
3.(Greenspring
Fund only) invest
in any issuer for purposes of exercising control or management. Also, the
investment policy of the Fund concerning “80% of the Fund’s net assets” may be
changed by the Board of Trustees without shareholder approval, but shareholders
would be given at least 60 days’ prior notice.
Investments
in any other investment companies in which each Fund may invest have adopted
their own investment policies, which may be more or less restrictive than those
listed above, thereby allowing each Fund to participate in certain investment
strategies indirectly that are prohibited under the fundamental and
non-fundamental investment policies listed above.
CenterSquare
Fund and Foresight Fund
The
CenterSquare Fund and the Foresight Fund may not (except as noted):
1.Purchase
securities on margin, provided that the Fund may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of securities,
except that the Fund may make margin deposits in connection with futures
contracts;
2.Make
short sales of securities or maintain a short position, except that the Fund may
sell short “against the box.”
Management
of the Funds
Board
of Trustees
The
management and affairs of the Funds are supervised by the Board of Trustees. The
Board of Trustees consists of four individuals. The Trustees are fiduciaries for
each Fund’s shareholders and are governed by the laws of the State of Delaware
in this regard. The Board of Trustees establishes policies for the operation of
each Fund and appoints the officers who conduct the daily business of each
Fund.
Trustees
and Officers
The
Trustees and the officers of the Trust are listed below with their addresses,
present positions with the Trust and principal occupations over at least the
last five years.
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| Name,
Address and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
| Independent
Trustees |
R.
Alastair Short
615 E. Michigan Street
Milwaukee, WI 53202
Year of
Birth: 1953 |
Trustee
and Lead Independent |
Indefinite
Term; Since September 2021 |
6 |
President,
Apex Capital Corporation (personal investment vehicle). |
Independent
Director of Contingency Capital LLC (a multi-product asset manager that
sponsors and manages litigation finance related investment funds) from
2021 to present; Trustee, VanEck Funds (mutual fund, 13 series) from 2004
to present; Trustee, VanEck Vectors ETF Trust (mutual fund, 98 series)
from 2006 to present; Trustee, VanEck VIP Trust (mutual fund, 7 series)
from 2004 to present; Chairman and Independent Director, EULAV Asset
Management; Trustee, Kenyon Review; Trustee, Children’s
Village.
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| Name,
Address and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
Thomas
F. Mann
615 E. Michigan Street
Milwaukee, WI 53202
Year of Birth:
1950 |
Trustee |
Indefinite
Term; Since September 2021 |
6 |
Private
Investor (2012 to present). |
Trustee,
Trust for Advisor Solutions/ Hatteras Alternative Mutual Funds Trust
(mutual fund) from 2002 to 2019; Hatteras Closed End Core Institutional
Funds (2009-Present).
|
Sanjeev
Handa
615 E. Michigan Street
Milwaukee, WI 53202
Year of Birth:
1961 |
Trustee |
Indefinite
Term; Since June 2023
|
6 |
Managing
Member, Old Orchard Lane, LLC (2014-present); Adjunct Professor of
Finance, Fairfield University (2020-present). |
Independent
Trustee, Vertical Capital Income Fund from 2023 to present; Independent
Trustee, Alti Private Equity Access Fund from February 2023 to
May 2023; Advisory Board Member, White Oak Partners (a company that
invests in multi family real estate) from 2021 to present; Independent
Director, OHA CLO Enhanced Equity II Genpar LLP (general partner of a fund
that packages bank loans into collateralized loan obligations) from 2021
to present; Independent Trustee of Carlyle Tactical Private Credit Fund
from 2018 to present, and Independent Trustee of Carlyle Credit Income
Fund from July 2023 to present. |
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| Name,
Address and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Number
of Portfolios in Trust Overseen by Trustee |
Principal
Occupation(s) During the Past Five Years |
Other
Directorships Held by Trustee During the Past Five Years |
| Interested
Trustee and Officers |
Michael
J. Weckwerth
c/o U.S. Bank Global Fund Services
615 E. Michigan
Street
Milwaukee, WI 53202
Year of Birth: 1973
|
Trustee,
Chairman, and President |
Indefinite
Term; Since September 2021 |
6 |
Senior
Vice President, U.S. Bank Global Fund Services (1996 -
present).
|
Chairman
and Interested Trustee, Trust for Advisor Solutions/ Hatteras Alternative
Mutual Funds Trust (mutual fund) from 2016 to 2018.
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Elaine
E. Richards
c/o U.S. Bank Global Fund Services
615 E. Michigan
Street
Milwaukee, WI 53202
Year of Birth: 1968
|
Secretary
and Vice President |
Indefinite
Term; Since September 2021 |
N/A |
Senior
Vice President, U.S. Bank Global Fund Services (2007 -
present).
|
N/A |
Kyle
L. Kroken
c/o U.S. Bank Global Fund Services
615 E. Michigan
Street
Milwaukee, WI 53202
Year of Birth: 1986
|
Treasurer
and Vice President |
Indefinite
Term; Since November 2022 |
N/A |
Vice
President, U.S. Bank Global Fund Services (2009-present).
|
N/A |
Gazala
Khan
c/o U.S. Bank Global Fund Services
615 E. Michigan
Street
Milwaukee, WI 53202
Year of Birth: 1969 |
Chief
Compliance Officer, Anti-Money Laundering Officer and Senior Vice
President |
Indefinite
Term; Since July 2023 |
N/A |
Senior
Vice President and Compliance Officer, U.S. Bank Global Fund Services
since July 2022; Chief Compliance Officer Matthews Asia Fund (May
2019-July 2022); Chief Compliance Officer GS Trust/VIT (June 2009-May
2019). |
N/A |
Role
of the Board
The
Board of Trustees provides oversight of the management and operations of the
Trust. Like all mutual funds, the day-to-day responsibility for the management
and operation of the Trust is the responsibility of various service providers to
the Trust and its individual series, such as the Adviser, Sub-Advisers, and the
Funds’ distributor, administrator, custodian, and transfer agent, each of whom
are discussed in greater detail in this SAI. The Board approves all significant
agreements with the Adviser, Sub-Advisers and the Funds’ distributor,
administrator, custodian and transfer agent. The Board has appointed various
individuals of certain of these service providers as officers of the Trust, with
responsibility to monitor and report to the Board on the Trust’s day-to-day
operations. In conducting this oversight, the Board receives regular reports
from these officers and service providers regarding the Trust’s operations. The
Board has appointed a CCO who reports directly to the Board and who administers
the Trust’s compliance program and regularly reports to the Board as to
compliance matters, including an annual compliance review. Some of these reports
are provided as part of formal board meetings, which are generally held four
times per year, and such other times as the Board determines is necessary, and
involve the Board’s review of recent Trust operations. From time to time one or
more members of the Board may also meet with Trust officers in less formal
settings, between formal Board Meetings, to discuss various topics. In all
cases, however, the role of the Board and of any individual Trustee is one of
oversight and not of management of the day-to-day affairs of the Trust, and its
oversight role does not make the Board a guarantor of the Trust’s investments,
operations or activities.
Board
Leadership Structure
The
Board has structured itself in a manner that it believes allows it to perform
its oversight function effectively. It has established two standing committees,
a Nominating and Governance Committee and an Audit Committee, which also serves
as the Qualified Legal Compliance Committee, which are discussed in greater
detail below under “Trust Committees.” The Board is comprised of four Trustees,
three of whom are Independent Trustees, which are Trustees that are not
affiliated with the Adviser, the principal underwriter, or their affiliates. The
Nominating and Governance Committee, Audit Committee and Qualified Legal
Compliance Committee are comprised of all of the Independent Trustees. The
Chairperson of the Board is an Interested Trustee. The Board has also appointed
a Lead Independent Trustee. The Board has determined to combine the Chairperson
position with the President/Principal Executive Officer position, who is also a
Senior Vice President of U.S. Bank Global Fund Services. The Board reviews
its structure and the structure of its committees annually. The Board has
determined that the structure and composition of the Board, and the function and
composition of its various committees are appropriate means to address any
potential conflicts of interest that may arise.
Board
Oversight of Risk Management
As
part of its oversight function, the Board receives and reviews various risk
management reports and assessments and discusses these matters with appropriate
management and other personnel, including personnel of the Trust’s service
providers. Because risk management is a broad concept composed of many elements
(such as, for example, investment risk, issuer and counterparty risk, compliance
risk, operational risks, business continuity risks, etc.) the oversight of
different types of risks is handled in different ways. For example, the CCO
regularly reports to the Board during Board Meetings and meets in executive
session with the Independent Trustees and their legal counsel to discuss
compliance and operational risks. In addition, the Independent Trustee
designated as the Audit Committee’s “audit committee financial expert” meets
with the Treasurer and the Trust’s independent registered public accounting firm
to discuss, among other things, the internal control structure of the Trust’s
financial reporting function. The full Board receives reports from the
investment advisers to
the
underlying funds and the portfolio managers as to investment risks as well as
other risks that may be discussed during Audit Committee meetings.
Trustee
Qualifications
The
Board believes that each of the Trustees has the qualifications, experience,
attributes and skills appropriate to his continued service as a Trustee of the
Trust in light of the Trust’s business and structure. The Trustees have
substantial business and professional backgrounds that indicate they have the
ability to critically review, evaluate and assess information provided to them.
Certain of these business and professional experiences are set forth in detail
in the table above. In addition, the Trustees have substantial board experience
and, in their service to the Trust, have gained substantial insight as to the
operation of the Trust. The Board annually conducts a “self-assessment” wherein
the effectiveness of the Board and the individual Trustees is
reviewed.
In
addition to the information provided in the table above, below is certain
additional information concerning each individual Trustee. The information
provided below, and in the table above, is not all-inclusive. Many of the
Trustees’ qualifications to serve on the Board involve intangible elements, such
as intelligence, integrity, work ethic, the ability to work together, the
ability to communicate effectively, the ability to exercise judgment, the
ability to ask incisive questions, and commitment to shareholder interests. In
conducting its annual self-assessment, the Board has determined that the
Trustees have the appropriate attributes and experience to continue to serve
effectively as Trustees of the Trust.
R.
Alastair Short. Mr. Short’s
Trustee Attributes include his experience as an investor in structured,
negotiated deals. He is a co-founder of two private equity investment firms and
has financial, operational, and transactional experience as well as a legal
background. He is an experienced director, executive and investor, with strong
strategic, financial and analytical skills and substantial asset management and
Board industry experience. He currently serves on the Boards of the Van Eck
mutual funds and ETFs, Contingency Capital LLC, and EULAV Asset Management,
advisor to the ValueLine mutual funds. The Board believes Mr. Short’s
experience, qualifications, attributes and skills on an individual basis and in
combination with those of the other Trustees support the conclusion that he
possesses the requisite skills and attributes as a Trustee to carry out
oversight responsibilities with respect to the Trust.
Thomas
F. Mann. Mr. Mann’s
Trustee Attributes include 45 years of experience in various senior strategic
and operational management positions in large, global, financial institutions
and small, entrepreneurial environments. He was the Founder of MannMaxx
Management, LLC, providing Institutional Asset Solutions as a director and
banker to a broad range of asset managers, global banks and Fintech companies.
He is an experienced, independent director of diversified mutual fund complexes;
chaired the valuation committee for Hatteras Funds; chaired the nominating and
governance committee for VIRTUS; and served on two audit committees qualifying
as a “financial expert” under the SEC definition. He has also served as an
advisory board member of a boutique asset management M&A advisory firm as
well as Amundi North America, AnchorPath Financial Wavelength Capital
Management. He has prior experience serving as a director of multiple, privately
owned asset management and technology companies; trustee of a corporate pension
and 401(k) plans and multiple non-profits organizations. The Board believes
Mr. Mann’s experience, qualifications, attributes or skills on an
individual basis and in combination with those of the other Trustees led to the
conclusion that he possesses the requisite skills and attributes as a Trustee to
carry out oversight responsibilities with respect to the Trust.
Sanjeev
Handa. Mr. Handa’s
Trustee Attributes includes over 30 years in the financial industry sector,
including global experience in the financial, real estate and securitization
markets. Mr. Handa is also an advisory board member of White Oak Partners
(since 2021), an independent director of OHA CLO Enhanced Equity II Genpar LLP
(since 2021). an Investment Committee member of The Cooper Union for Advancement
of Science and Art (since 2016) and a board member of Greenpath Financial
Wellness/Homeownership Preservation Foundation (2011-2022). He also formerly
served as an independent director of Fitch Ratings, Inc. and Fitch Ratings, Ltd.
(2015-2020). Mr. Handa has extensive experience with respect to investments
and also to compliance and corporate governance matters as a result of, among
other things, his service as an established board member and an Audit Committee
financial expert for the Trust. The Board believes Mr. Handa’s experience,
qualifications, attributes or skills on an individual basis and in combination
with those of the other Trustees led to the conclusion that he possesses the
requisite skills and attributes as a Trustee to carry out oversight
responsibilities with respect to the Trust.
Michael
J. Weckwerth. Mr.
Weckwerth’s Trustee Attributes include his 25 years of experience in servicing
registered and private investment companies, including more than 15 years as a
senior vice president of U.S. Bancorp Fund Services, LLC (“Fund Services”). The
Board believes Mr. Weckwerth’s experience, qualifications, attributes or
skills on an individual basis and in combination with those of the other
Trustees led to the conclusion that he possesses the requisite skills and
attributes as a Trustee to carry out oversight responsibilities with respect to
the Trust.
Trustee
Ownership of Fund Shares
The
following table shows the amount of shares in each Fund*
and the amount of shares in other portfolios of the Trust owned by the Trustees
as of the calendar year ended December 31, 2023.
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| Independent
Trustees |
Interested
Trustee |
|
| R.
Alastair Short |
Thomas
F. Mann |
Sanjeev
Handa |
Michael
J. Weckwerth |
| CenterSquare
Fund |
None |
None |
None |
None |
| Marketfield
Fund |
None |
None |
None |
Over
$100,000 |
| Tran
Fund |
None |
None |
None |
None |
| Foresight
Fund |
None |
None |
None |
None |
| Greenspring
Fund |
None |
None |
None |
None |
| Aggregate
Dollar Amount of Shares in All Funds of the Trust |
None |
None |
None |
Over
$100,000 |
* Securities
“beneficially owned” as defined by rules promulgated under the Securities
Exchange Act of 1934, as amended (the “1934 Act”), include direct and or
indirect ownership of securities where the Trustee’s economic interest is tied
to the securities, the Trustee can exert voting power and where the Trustee has
authority to sell the securities. The dollar ranges are: None, $1-$10,000,
$10,001-$50,000, $50,001-$100,000 and over $100,000.
Furthermore,
as of the date of this SAI, neither the Trustees who are not “interested”
persons of the Funds, nor members of their immediate families, own securities
beneficially, or of record, in the Adviser, the Distributor or any of their
affiliates. Accordingly, neither the Trustees who are not “interested” persons
of each Fund nor members of their immediate families, have a direct or indirect
interest, the value of which exceeds $120,000, in the Adviser, the Distributor
or any of their affiliates. In addition, during the two most recently completed
years, neither the Independent Trustees nor members of their immediate families
have had a direct or indirect interest, the value of which exceeds
$120,000
in (i) the Adviser, the Distributor or any of their affiliates, or (ii) any
transaction or relationship in which such entity, the Funds, any officer of the
Trust, or any of their affiliates was a party.
Board
Committees
Audit
Committee.
The Trust has an Audit Committee, which is composed of all of the Independent
Trustees. The Audit Committee reviews financial statements and other
audit-related matters for the Funds. The Audit Committee also holds discussions
with management and with the Funds’ independent auditor concerning the scope of
the audit and the auditor’s independence. Mr. Handa is designated as the
Audit Committee chairperson and serves as the Audit Committee’s “audit committee
financial expert,” as stated in the annual reports relating to the series of the
Trust. The Audit Committee met four times during the fiscal year ended
December 31, 2023.
Nominating
and Governance Committee.
The Trust has a Nominating and Governance Committee, which is composed of all of
the Independent Trustees. Mr. Mann is designated as the Nominating and
Governance Committee chairperson. The Nominating and Governance Committee is
responsible for seeking and reviewing candidates for consideration as nominees
for the position of trustee and meets only as necessary. As part of this
process, the Nominating and Governance Committee considers criteria for
selecting candidates sufficient to identify a diverse group of qualified
individuals to serve as trustees.
The
Nominating and Governance Committee will consider nominees recommended by
shareholders for vacancies on the Board of Trustees. Recommendations for
consideration by the Nominating and Governance Committee should be sent to the
President of the Trust in writing together with the appropriate biographical
information concerning each such proposed nominee, and such recommendation must
comply with the notice provisions set forth in the Trust’s Nominating and
Governance Committee Charter. To comply with such procedures, such nominations,
together with all required information, must be delivered to and received by the
President of the Trust at the principal executive office of the Trust not later
than 60 days prior to the shareholder meeting at which any such nominee would be
voted on. Shareholder recommendations for nominations to the Board of Trustees
will be accepted on an ongoing basis and such recommendations will be kept on
file for consideration when there is a vacancy on the Board of Trustees. The
Nominating and Governance Committee met
twice
during the fiscal year ended December 31, 2023.
Trustee
Compensation
The
Independent Trustees receive from the Trust a retainer fee of $40,000 per year,
$1,500 for each regular Board meeting of the Trust attended and between $500 and
$1,500 for each special Board meeting attended depending on the subject matter,
as well as reimbursement for expenses incurred in connection with attendance at
Board meetings. Effective January 1, 2024, the chairman of the Nominating
and Governance Committee receives an annual retainer of $1,500, the chairman of
the Audit Committee receives an annual retainer of $4,000, and the Lead
Independent Trustee receives an annual retainer of $6,000. Interested Trustees
do not receive any compensation for their service as Trustee. For
the Funds’ fiscal year ended December 31, 2023,
the Trustees received the following compensation:
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| Name
of Person/Position |
Aggregate
Compensation From the CenterSquare Fund(1) |
Aggregate
Compensation From the Marketfield Fund(1) |
Aggregate
Compensation From the Foresight Fund(1) |
Aggregate
Compensation From the Greenspring Fund(1) |
Aggregate
Compensation From the Tran Fund(1) |
Pension
or Retirement Benefits Accrued as Part of Fund Expenses |
Estimated
Annual Benefits Upon Retirement |
Total
Compensation from the Fund and the Trust(2)
Paid
to Trustees |
|
R.
Alastair Short
Independent
Trustee(3) |
$15,069 |
$16,247 |
$6,669 |
$1,598 |
$8,917 |
None |
None |
$48,500 |
|
Thomas
F. Mann
Independent
Trustee(3) |
$14,413 |
$15,591 |
$6,221 |
$1,514 |
$8,261 |
None |
None |
$46,000 |
|
Julie
Thomas
Independent
Trustee(5) |
$11,296 |
$12,014 |
$4,236 |
$0 |
$6,579 |
None |
None |
$34,125 |
|
Sanjeev
Handa
Independent
Trustee(4)(6) |
$3,511 |
$3,971 |
$2,253 |
$1,564 |
$2,076 |
None |
None |
$13,375 |
(1)Trustees’
fees and expenses are allocated among the Funds and the other series comprising
the Trust.
(2)There
is currently one other series comprising the Trust.
(3)Audit
Committee member.
(4)Audit
Committee chairman.
(5)Ms.
Thomas resigned as Independent Trustee as of June 29, 2023.
(6)Mr.
Handa was appointed as Trustee effective June 29, 2023.
Control
Persons and Principal Shareholders
As
of April 4, 2024, the Trustees and officers of the Trust, as a group,
beneficially owned less than 1% of the outstanding shares of each
Fund.
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of each Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. A controlling
person possesses the ability to control the outcome of matters submitted for
shareholder vote by each Fund.
As
of April 4, 2024, the following shareholders were considered to be
principal shareholders of the CenterSquare Fund:
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| Investor
Class |
|
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| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
| Charles
Schwab & Co., Inc.
Special
Custody Acct for the Exclusive Benefit of Our Customers
Attn:
Mutual Funds
101
Montgomery Street
San
Francisco, CA 94104-4151
|
35.81% |
Record |
The
Charles Schwab Corporation |
DE |
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| Investor
Class |
|
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| |
Pershing,
LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002
|
19.87% |
Record |
N/A |
N/A |
|
National
Financial Services LLC
For
the Exclusive Benefit of Our Customers
499
Washington Boulevard, FL 5
Jersey
City, NJ 07310-2010 |
18.58% |
Record |
N/A |
N/A |
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| |
| Institutional
Class |
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
National
Financial Services LLC
For
the Exclusive Benefit of Our Customers
Attn:
Mutual Funds Department, 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995
|
76.25% |
Record |
FMR,
LLC |
DE |
| Capinco
C/O US Bank, N.A.
1555
N. RiverCenter Drive, Suite 302
Milwaukee,
WI 53212-3958 |
14.14% |
Record |
N/A |
N/A |
As
of April 4, 2024, the following shareholders were considered to be
principal shareholders of the Marketfield Fund:
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| |
| Investor
Class |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
National
Financial Services LLC
For
the Exclusive Benefit of Our Customers
Attn:
Mutual Funds Department, 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995
|
14.38% |
Record |
N/A |
N/A |
|
Morgan
Stanley Smith Barney LLC
For
the Exclusive Benefit of its Customers
1
New York Plaza, Floor 12
New
York, NY 10004-1965
|
14.19% |
Record |
N/A |
N/A |
UBS
WM USA
Special Custody Account
1000 Harbor Boulevard
Weehawken,
NJ 07086-6761
|
12.79% |
Record |
N/A |
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Investor
Class |
|
Wells
Fargo Clearing Services LLC
Special
Custody Account for the Exclusive Benefit of Customers
2801
Market Street
St.
Louis, MO 63103-2523
|
12.33% |
Record |
N/A |
N/A |
|
Merrill
Lynch Pierce, Fenner & Smith
For
the Sole Benefit of its Customers
4800
Deer Lake Drive East
Jacksonville,
FL 32246-6484
|
10.61% |
Record |
N/A |
N/A |
|
Charles
Schwab & Co. Inc.
Special
Custody A/C FBO Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901
|
6.35% |
Record |
N/A |
N/A |
Pershing,
LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002 |
5.45% |
Record |
N/A |
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Institutional
Class |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
National
Financial Services LLC
For
the Exclusive Benefit of Our Customers
Attn:
Mutual Funds Department, 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995
|
21.67% |
Record |
N/A |
N/A |
UBS
WM USA
Special Custody Account
1000 Harbor Boulevard
Weehawken,
NJ 07086-6761
|
16.12% |
Record |
N/A |
N/A |
|
Charles
Schwab & Co. Inc.
Special
Custody A/C FBO Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901
|
15.00% |
Record |
N/A |
N/A |
Michael
Shaoul
c/o Marketfield Asset Management
369 Lexington Avenue, 3rd
Floor
New York, NY 10017 |
11.40% |
Beneficial |
N/A |
N/A |
As
of April 4, 2024, the following shareholders were considered to be
principal shareholders of the Tran Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Investor
Class |
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
Merrill
Lynch Pierce Fenner & Smith Inc.
For
the Sole Benefit of its Customers
4800
Deer Lake Drive E
Jacksonville,
FL 32246-6486
|
14.41% |
Record |
N/A |
N/A |
National
Financial Services LLC
499 Washington Boulevard, Floor 4th
Jersey
City, NJ 07310-2010
|
9.79% |
Record |
N/A |
N/A |
Pershing
LLC
1 Pershing Plaza
Jersey City, NJ 07399-0002
|
7.19% |
Record |
N/A |
N/A |
Oppenheimer
& Co. Inc
FBO BLS 63 LLC
745 5th Ave., FL 31
New York, NY
10151-0002
|
5.61% |
Record |
N/A |
N/A |
Morgan
Stanley Smith Barney, LLC
For the Exclusive Benefit of its
Customers
1 New York Plaza, 12th Floor
New York, NY
10004-1901 |
5.53% |
Record |
N/A |
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Institutional
Class |
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
Charles
Schwab & Co., Inc.
Special Custody A/C FBO Customers
Attn:
Mutual Funds
101 Montgomery Street
San Francisco, CA
94104-4151
|
25.89% |
Record |
The
Charles Schwab Corporation |
DE |
DCGT
AS TTEE AND/OR CUST
FBO PLIC Various Retirement Plans
Omnibus
711
High Street
Des Moines, IA 50392-0001
|
14.93% |
Record |
N/A |
N/A |
JP
Morgan Securities LLC
825 S Main Street
Yreka, CA
96097-3320
|
8.79% |
Record |
N/A |
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Institutional
Class |
|
|
| |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
National
Financial Services LLC
499 Washington Boulevard, Floor 4th
Jersey
City, NJ 07310-2010
|
8.75% |
Record |
N/A |
N/A |
RBC
Capital Markets LLC
Mutual Fund Omnibus Processing
Attn: Mutual Fund
Ops Manager
250 Nicollet Mall, Suite 1200
Minneapolis, MN
55401-7754
|
7.61% |
Record |
N/A |
N/A |
Wells
Fargo Clearing Services, LLC
Special Custody Account for the Exclusive
Benefit of Customers
2801 Market Street
St Louis, MO
63103-2523 |
5.71% |
Record |
N/A |
N/A |
As
of April 4, 2024, the following shareholders were considered to be
principal shareholders of the Foresight Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Institutional
Class |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
Blackmead
Infrastructure Limited c/o Foresight Group LLP
The
Shard 32 London Bridge Street
London
SE1 9SG
United
Kingdom |
99.13% |
Record |
N/A |
N/A |
As
of April 4, 2024, the following shareholders were considered to be
principal shareholders of the Greenspring Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Institutional
Class |
| Name
and Address |
%
Ownership |
Type
of Ownership |
Parent
Company |
Jurisdiction |
|
Charles
Schwab & Co. Inc.
Special
Custody A/C FBO Customers
Attn:
Mutual Funds
211
Main Street
San
Francisco, CA 94105-1901
|
24.15% |
Record |
N/A |
N/A |
|
National
Financial Services LLC
For
the Exclusive Benefit of Our Customers
Attn:
Mutual Funds Department, 4th Floor
499
Washington Boulevard
Jersey
City, NJ 07310-1995 |
20.96% |
Record |
N/A |
N/A |
Investment
Adviser
As
stated in the Prospectus, investment advisory services are provided to each Fund
by Cromwell Investment Advisors, LLC, located at 810 Gleneagles Court,
Suite 106, Baltimore, Maryland 21286, pursuant to an investment advisory
agreement (the “Advisory Agreement”). Brian Nelson is a control person of the
Adviser. Subject to such policies as the Board of Trustees may determine, the
Adviser has delegated its responsibility for making investment decisions for
each Fund to the respective sub-advisers. The Adviser is also responsible for
performing oversight of each Fund’s sub-adviser as described below. Pursuant to
the terms of the Advisory Agreement, the Adviser provides each Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of each Fund’s investments.
After
an
initial
two-year
period,
the
Advisory Agreement continues in effect from year to year with respect to each
Fund, only if such continuance is specifically approved at least annually by:
(i) the Board of Trustees or the vote of a majority of each Fund’s outstanding
voting securities; and (ii) the vote of a majority of the trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on the Advisory Agreement. The Advisory
Agreement is terminable without penalty by the Trust, on behalf of each Fund,
upon 60 days’ written notice to the Adviser when authorized by either:
(i) a majority vote of the outstanding voting securities of each Fund; or
(ii) by a vote of a majority of the Board of Trustees, or by the Adviser
upon 60 days’ written notice to the Trust. The Advisory Agreement will
automatically terminate in the event of its “assignment” under the 1940 Act. The
Advisory Agreement provides that the Adviser under such agreement shall not be
liable for any error of judgment or mistake of law or for any loss arising out
of any investment or for any act or omission in the execution of portfolio
transactions for each Fund, except for willful misfeasance, bad faith or
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties thereunder.
In
consideration of the services provided by the Adviser pursuant to the Advisory
Agreement, the Adviser is entitled to receive from each Fund a management fee
which is calculated daily and paid monthly. For its
services, the Funds will pay the Adviser the respective management fees that is
calculated at the annual rate of its average daily net assets, to be paid
monthly.
|
|
|
|
|
| |
|
| Management
Fee |
| CenterSquare
Fund |
0.60% |
| Marketfield
Fund |
1.40% |
| Tran
Fund |
0.85% |
| Foresight
Fund |
0.85% |
| Greenspring
Fund |
0.75% |
The
Adviser may voluntarily agree to waive a portion of the management fees payable
to it.
For
the fiscal period ended December 31, 2023, the Funds paid the following
amounts to the Adviser:
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fund
Name |
Fees
Accrued |
Fees
(Waived)/Recoupment |
Net
Advisory Fees Paid |
|
CenterSquare
Fund |
$763,293 |
$(7,275) |
$756,018 |
|
Marketfield
Fund |
$2,139,411 |
$(343,145) |
$1,796,266 |
|
Tran
Fund1 |
$186,458 |
$(168,346) |
$18,112 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fund
Name |
Fees
Accrued |
Fees
(Waived)/Recoupment |
Net
Advisory Fees Paid |
|
Foresight
Fund |
$352,772 |
$(131,437) |
$221,335 |
|
Greenspring
Fund |
$922,484 |
$0 |
$922,484 |
1
On November 1, 2023, the Tran Fund changed its fiscal year from
April 30 to December 31. Accordingly, the 2023 information above
reflects advisory fees paid for the period May 1, 2023 through
December 31, 2023. Advisory fees paid prior to the change in fiscal year
end by the Tran Fund and its predecessor fund are noted below.
CenterSquare
Fund
For
fiscal period indicated below, the CenterSquare Fund paid the following amounts
to the Adviser:
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fees
Accrued |
Fees
(Waived)/Recoupment |
Net
Advisory Fees Paid |
March
7, 2022 through
December 31, 2022 |
$895,718 |
$16,213 |
$911,931 |
The
CenterSquare Fund reorganized into the Trust on March 7, 2022. The
information provided below reflects advisory fees paid by the Predecessor
CenterSquare Fund to AMG
Funds LLC, the
investment adviser to the Predecessor CenterSquare Fund pursuant to a previous
advisory agreement between AMG Funds LLC and AMG Funds I, on behalf of the
Predecessor CenterSquare Fund.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fees
Accrued |
Fees
(Waived)/Recoupment1 |
Net
Advisory Fees Paid |
January 1,
2022 -
March 7, 2022 |
$236,982 |
$8,056 |
$245,038 |
Year
Ended
December 31, 2021 |
$1,224,130 |
$0 |
$1,224,130 |
1
The Predecessor CenterSquare Fund’s investment adviser had arrangements whereby
it received a cash payment from certain service providers that compensated for
providing, directly or through an agent, administrative, sub-transfer agent and
other shareholder services. Additionally, the Predecessor CenterSquare Fund’s
investment adviser voluntarily agreed to waive or reimburse a portion of its
management fee in the amount of the cash payments it received under these
agreements, amounts which are reflected in the table as amounts
waived/reimbursed. Such voluntary waiver or reimbursement was not
recoverable.
Marketfield
Fund
For
fiscal period indicated below, the Marketfield Fund paid the following amounts
to the Adviser:
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Fees
Accrued |
Fees
(Waived)/Recoupment |
Net
Advisory Fees Paid |
| March
14, 2022 through December 31, 2022 |
$1,651,863 |
$(214,168) |
$1,437,695 |
The
Marketfield Fund reorganized into the Trust on March 14, 2022. The
information provided below reflects advisory fees paid by the Predecessor
Marketfield Fund to the Marketfield Sub-Adviser pursuant to a previous advisory
agreement between Marketfield Asset Management LLC and Trust for Professional
Managers, on behalf of the Predecessor Marketfield Fund.
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Fees
Accrued |
Fees
(Waived)/Recoupment |
Net
Advisory Fees Paid |
January 1,
2022 -
March 14, 2022 |
$416,556 |
$(69,999) |
$346,557 |
Year
Ended
December 31, 2021 |
$2,261,120 |
$(333,102) |
$1,928,018 |
Tran
Fund
On
November 1, 2023, the Tran Fund changed its fiscal year from April 30
to December 31. Additionally, the Tran Fund reorganized into the Trust on
August 8, 2022. For the fiscal period indicated below, the Fund paid the
Adviser the following amounts of advisory fees pursuant to an advisory agreement
between the Adviser and the Trust, on behalf of the Fund.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fiscal
Period |
Advisory
Fee |
Recoupment
/ (Waiver)* |
Advisory
Fee
After Recoupment / (Waiver) |
| August
8, 2022 through April 30, 2023 |
$241,449 |
$(237,031) |
$4,418 |
The
information provided below reflects advisory fees paid by the Predecessor Tran
Fund to the Tran Capital Management L.P. (“Tran Capital Management” or “Tran
Sub-Adviser”) pursuant to a previous advisory agreement between Tran and
FundVantage Trust, on behalf of the Predecessor Tran Fund.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fiscal
Period |
Advisory
Fee |
Recoupment
/ (Waiver)* |
Advisory
Fee
After Recoupment / (Waiver) |
May
1, 2022 through
August 8, 2022 |
$100,439 |
$(111,445) |
$(11,006) |
May
1, 2021 through
April 30, 2022 |
$529,497 |
$(428,844) |
$100,653 |
May
1, 2020 through
April 30, 2021 |
$421,884 |
$(360,045) |
$61,839 |
Greenspring
Fund
For
the Greenspring Fund, the following table shows the advisory fees the
Predecessor Fund paid the Sub-Adviser in advisory fees pursuant to a previous
advisory agreement between the Sub-Adviser and Greenspring Fund,
Inc.
|
|
|
|
|
| |
Advisory
Fees
Paid During Fiscal Years Ended December 31, |
| 2022 |
2021 |
| $1,111,714 |
$1,202,393 |
Fund
Expenses
Each
Fund is responsible for its own operating expenses. Pursuant to an operating
expense limitation agreement, the Adviser has agreed to waive its management
fees and/or reimburse Fund expenses to ensure that Total Annual Fund Operating
Expenses (exclusive of contingent deferred sales loads, taxes, leverage,
interest, brokerage commissions, expenses incurred in connection with any merger
or reorganization, dividends
or interest expenses on short positions, acquired fund fees and expenses and
extraordinary expenses) do not exceed the amounts shown in the table below,
through at least April 30, 2025.
However, the current amount reflected in the table below for the Tran Fund
represents what the Expense Cap will be as of August 31, 2024. From now until
August 31, 2024, the Expense Caps for the Tran Fund’s Investor Class shares and
Institutional Class shares will be 1.10% and 0.85%, respectively. The
operating expense limitation agreement can be terminated only by, or with the
consent of, the Trust’s Board of Trustees (the “Board of Trustees”). The Adviser
may request recoupment of previously waived fees and paid expenses from each
Fund for up to 36 months from the date such fees and expenses were waived or
paid, subject to the operating expense limitation agreement, if such
reimbursement will not cause the Fund’s expense ratio, after recoupment has been
taken into account, to exceed the lesser of: (1) the expense limitation in
place at the time of the waiver and/or expense payment; or (2) the expense
limitation in place at the time of the recoupment. The Expense Cap for each
class of each Fund is shown
below:
|
|
|
|
|
|
|
|
| |
| Fund |
Investor
Class |
Institutional
Class |
| CenterSquare
Fund |
1.12% |
1.02% |
| Marketfield
Fund |
1.80% |
1.55% |
| Tran
Fund* |
1.35% |
1.10% |
| Foresight
Fund |
1.30% |
1.05% |
| Greenspring
Fund |
1.46% |
1.21% |
*
The current Expense Caps for the Tran Fund’s Investor Class shares and
Institutional Class shares are 1.10% and 0.85%, respectively, through
August 31, 2024. Effective September 1, 2024, the Expense Caps for the
Fund’s Investor Class shares and Institutional Class shares are 1.35% and 1.10%
through April 30, 2025.
Manager-of-Managers
Arrangement
Section
15(a) of the 1940 Act requires that all contracts pursuant to which persons
serve as investment advisers to investment companies be approved by
shareholders. This requirement also applies to the appointment of sub-advisers
to each Fund. The Trust and the Adviser have obtained exemptive relief from the
SEC (the “Order”), which permits the Adviser, on behalf of each Fund and subject
to the approval of the Board, including a majority of the independent members of
the Board, to hire, and to modify any existing or future sub-advisory agreement
with, unaffiliated sub-advisers and affiliated sub-advisers, including
sub-advisers that are wholly-owned subsidiaries (as defined in
the
1940 Act) of the Adviser or its parent company and sub-advisers that are
partially-owned by, or otherwise affiliated with, the Adviser or its parent
company (the “Manager-of-Managers Structure”). The Adviser has the ultimate
responsibility for overseeing each Fund’s sub-advisers and recommending their
hiring, termination and replacement, subject to oversight by the Board. The
Order also provides relief from certain disclosure obligations with regard to
sub-advisory fees. With this relief, each Fund may elect to disclose the
aggregate fees payable to the Adviser and wholly-owned sub-advisers and the
aggregate fees payable to unaffiliated sub-advisers and sub-advisers affiliated
with Adviser or its parent company, other than wholly-owned sub-advisers. The
Order is subject to various conditions, including that each Fund will notify
shareholders and provide them with certain information required by the exemptive
order within 90 days of hiring a new sub-adviser. Each Fund may also rely on any
other current or future laws, rules or regulatory guidance from the SEC or its
staff applicable to the Manager-of-Managers Structure. The sole initial
shareholder of each Fund has approved the operation of each Fund under a
Manager-of-Managers Structure with respect to any affiliated or unaffiliated
sub-adviser, including in the manner that is permitted by the Order.
The
Manager-of-Managers Structure will enable the Trust to operate with greater
efficiency by not incurring the expense and delays associated with obtaining
shareholder approvals for matters relating to sub-advisers or sub-advisory
agreements. Operation of each Fund under the Manager-of-Managers Structure will
not permit management fees paid by the respective Fund to the Adviser to be
increased without shareholder approval. Shareholders will be notified of any
changes made to sub-advisers or material changes to sub-advisory agreements
within 90 days of the change.
The
Adviser and its affiliates may have other relationships, including significant
financial relationships, with current or potential sub-advisers or their
affiliates, which may create a conflict of interest. However, in making
recommendations to the Board to appoint or to change a sub-adviser, or to change
the terms of a sub-advisory agreement, the Adviser considers the sub-adviser’s
investment process, risk management, and historical performance with the goal of
retaining sub-advisers for each Fund that the Adviser believes are skilled and
can deliver appropriate risk-adjusted returns over a full market cycle. The
Adviser does not consider any other relationship it or its affiliates may have
with a sub-adviser or its affiliates, and the Adviser discloses to the Board the
nature of any material relationships it has with a sub-adviser or its affiliates
when making recommendations to the Board to appoint or to change a sub-adviser,
or to change the terms of a sub-advisory agreement.
Investment
Sub-Advisers
CenterSquare
Investment Management LLC
CenterSquare
Investment Management LLC
serves as the sub-adviser to the Fund (“CenterSquare” or the “CenterSquare
Sub-Adviser”). CenterSquare, which is headquartered at 630 West Germantown Pike,
Suite 300, Plymouth Meeting, Pennsylvania 19462, is a Delaware limited liability
company and is 100% owned by CenterSquare Investment Management Holdings LLC
(“CSIM Holdings LLC”). The majority partners of CSIM Holdings include a private
equity fund sponsored and managed by Lovell Minnick Partners LLC along with a
limited liability company holding the investments of over 30 employees of
CenterSquare. The Sub-Adviser is an employee-owned firm, with no one individual
owning 25% or more of the Sub-Adviser’s voting securities. Subject to such
policies as the Board of Trustees may determine, the Sub-Adviser is ultimately
responsible for investment decisions for the Fund. Pursuant to the terms of the
Sub-Advisory Agreement, the Sub-Adviser provides the Fund with such investment
advice and supervision as it deems necessary for the proper supervision of the
Fund’s investments.
The
investment adviser to the Predecessor CenterSquare Fund paid the CenterSquare
Sub-Adviser out of its own pockets the following fees shown for the three years
indicated below:
|
|
|
|
|
| |
| Sub-Advisory
Fees paid to CenterSquare Sub-Adviser |
| January 1,
2022 - March 7, 2022 |
$147,430 |
| Fiscal
Year Ended December 31, 2021 |
$771,563 |
| Fiscal
Year Ended December 31, 2020 |
$642,590 |
Marketfield
Asset Management LLC
Marketfield
Asset Management LLC serves as Sub-Adviser to the Marketfield Fund
(“Marketfield” or the “Marketfield Sub-Adviser”). Marketfield, which is
headquartered at 369 Lexington Avenue, 3rd Floor, New York, New York 10017, is a
Delaware limited liability company. The Adviser is an employee-owned firm, with
no one individual owning 25% or more of the Adviser’s voting
securities.
Foresight
Group LLP
Foresight
Group LLP, The
Shard, 32 London Bridge Street, London SE1 9SG, United Kingdom
serves as the sub-adviser to the Foresight Fund (“Foresight” or the “Foresight
Sub-Adviser”). Bernard W. Fairman, Executive Chairman, is a control person of
Foresight owning more than 25% of the Sub-Adviser’s voting securities. Subject
to such policies as the Board of Trustees may determine, the Sub-Adviser is
ultimately responsible for investment decisions for the Fund. Pursuant to the
terms of the Sub-Advisory Agreement, the Sub-Adviser provides the Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of the Fund’s investments.
Corbyn
Investment Management, Inc.
Corbyn
Investment Management, Inc., 2330 West Joppa Road, Suite 108, Lutherville,
Maryland 21093 serves as the sub-adviser to the Greenspring Fund (“Corbyn” or
the “Corbyn Sub-Adviser”). Corbyn was organized in 1973 and provides investment
management services for its clients. The Corbyn Investment Management Employee
Stock Ownership Plan and Trust (the “Plan”) has ownership of approximately 14%
of Corbyn’s outstanding voting securities. The Plan is a qualified, defined
contribution employee benefit plan subject to the Employee Retirement Income
Security Act of 1974, as amended, designed to invest primarily in the common
stock of Corbyn, the sponsoring employer. Charles vK. Carlson is the Trustee of
the Plan and a control person of Corbyn due to his ownership of approximately
41% of Corbyn’s common stock (33% directly and 8% through the Plan). The Plan
Committee, which is composed of three members, including Mr. Carlson, has voting
power over the Corbyn shares held by the Plan, except with respect to certain
extraordinary transactions as to which Plan participants may direct voting.
Subject to such policies as the Board of Trustees may determine, the Sub-Adviser
is ultimately responsible for investment decisions for the Fund. Pursuant to the
terms of the Sub-Advisory Agreement, the Sub-Adviser provides the Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of the Fund’s investments.
Tran
Capital Management, L.P.
Tran
Capital Management, L.P. serves as the sub-adviser to the Tran Fund. The Tran
Sub-Adviser is a registered investment adviser located at 1000 Fourth
Street, Suite 800, San Rafael, California 94901. The Tran Sub-Adviser was
founded in 1974 and, in addition to serving as the sub-adviser to the Tran Fund,
provides portfolio management services to individuals, corporate pension plans,
charitable foundations and academic endowments. Lateef General Partners, LLC may
be deemed to control the Tran Sub-Adviser by virtue of its holding of 100% of
the voting interest in the Tran Sub-Adviser.
Lateef
General Partners, LLC is owned by Lateef Management LLC and Lateef MGL, LLC.
Subject to such policies as the Board of Trustees may determine, the Sub-Adviser
is ultimately responsible for investment decisions for the Fund. Pursuant to the
terms of the Sub-Advisory Agreement, the Sub-Adviser provides the Fund with such
investment advice and supervision as it deems necessary for the proper
supervision of the Fund’s investments.
The
Adviser provides investment management evaluation services by performing initial
due diligence on each Sub-Adviser and thereafter monitoring each Sub-Adviser’s
performance for compliance with each Fund’s investment objective and strategies,
as well as adherence to its investment style. The Adviser also conducts
performance evaluations through in-person, telephonic and written consultations.
In evaluating each Sub-Adviser, the Adviser considers, among other factors:
their level of expertise; relative performance and consistency of performance
over a minimum period of time; level of adherence to investment discipline or
philosophy; personnel, facilities and financial strength; and quality of service
and client communications.
The
Adviser has the responsibility for communicating performance expectations and
evaluations to each Sub-Adviser and ultimately recommending to the Board of
Trustees whether its sub-advisory agreement should be renewed, modified or
terminated. The Adviser provides written reports to the Board of Trustees
regarding the results of its evaluation and monitoring functions. The Trust has
received
an exemptive order with respect to each Fund that permits
the Adviser, subject to certain conditions, to hire new sub-advisers or to
continue the employment of the existing Sub-Adviser after events that would
otherwise cause an automatic termination of a sub-advisory agreement. This
arrangement has been approved by the Board of Trustees and each Fund’s initial
shareholder. Within 90 days of retaining a new sub-adviser, shareholders of each
Fund will receive notification of the change.
The
Adviser pays each Sub-Adviser out of the advisory fee paid by each Fund to the
Adviser pursuant to the Advisory Agreement. Each Sub-Adviser is responsible for
the day-to-day management of each Fund in accordance with each Fund’s investment
objective and policies. For its services, the Adviser will pay each Sub-Adviser
a management fee. The management fee paid to each Sub-Adviser is paid by the
Adviser and not each Fund. Each Fund is not responsible for the payment of the
sub-advisory fees.
The
Adviser is also responsible for conducting all operations of each Fund, except
those operations contracted to each Sub-Adviser, the Custodian, the
Administrator or each Fund’s transfer agent. Although each Sub-Adviser’s
activities are subject to oversight by the Board of Trustees and the officers of
the Trust, the Board of Trustees, the officers and the Adviser do not evaluate
the investment merits of each Sub-Adviser’s individual security selections. Each
Sub-Adviser has complete discretion to purchase, manage and sell portfolio
securities for the portions of each Fund’s portfolios that it manages, subject
to each Fund’s investment objective, policies and limitations. Each Fund’s
portfolio is managed by several portfolio managers (each, a “Portfolio Manager”)
as discussed in the Funds’ prospectus.
The
manager of managers exemptive order permits the Funds to disclose, in aggregate,
the sub-advisory fees paid to each Sub-Adviser by the Adviser.
Portfolio
Managers
As
disclosed in the Prospectus, Dean Frankel and Eric Rothman (the “Portfolio
Managers”) are the portfolio managers for the CenterSquare Fund; Michael C.
Aronstein is the portfolio manager for the
Marketfield
Fund; Nick
Scullion is the lead portfolio manager of the Foresight Fund, and Eric Bright,
CFA®
is
the co-portfolio manager for the Foresight Fund; Quoc Tran and Michael Im are
the portfolio managers for the Tran Fund; Charles vK. Carlson and Michael
Goodman are the portfolio managers for the Greenspring Fund. Each portfolio
manager is primarily responsible for the day-to-day management of the respective
Fund’s portfolio.
CenterSquare
Fund
Other
Accounts Managed by the Portfolio Managers
The
table below identifies, for each Portfolio Manager, the number of accounts
managed (excluding the Fund) and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, and other accounts. To the extent that any of these
accounts are subject to an advisory fee which is based on account performance,
this information is reflected in a separate table below. Asset amounts have been
rounded as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Number
of Other Accounts Managed and Total Assets by Account Type |
|
Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance
Based2 |
|
Name
of
Portfolio
Manager1 |
Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
| Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
|
|
|
|
|
|
|
|
|
|
|
| |
| CenterSquare
Fund |
|
|
|
|
|
|
|
|
|
| |
| Dean
Frankel |
5
accounts with $762,000,000 in assets |
|
6
accounts with $457,000,000 in assets |
|
38
accounts with $5,500,000 in assets |
|
None |
|
None |
|
4
accounts with $565,000,000 in assets2 |
| Eric
Rothman |
5
accounts with $2,278,000 in assets |
|
5
accounts with $253,000,000 in assets |
|
4
accounts with $54,000,000 in assets |
|
None |
|
None |
|
None |
1
Each Portfolio Manager is a listed co-manager of multiple Registered Investment
Company accounts. The accounts and their assets have been counted in the number
and the total assets for both Portfolio Managers. The accounts and assets are
thus duplicated in the totals.
2
These accounts, which are a subset of the accounts in the total columns, are
subject to a performance-based advisory fee. Each of the five accounts has a
different performance hurdle due to the specificity of the underlying mandate.
Performance for fee purposes is measured on a one-year period from the
anniversary of account inception and is measured based on the agreed upon
methodology (pre- or post-tax).
Portfolio
Manager Compensation
The
Portfolio Managers’ compensation is a fixed salary that is set by reference to
industry standards and is not based on performance of the CenterSquare Fund or
the value of assets held in the CenterSquare Fund’s portfolio. The Portfolio
Managers may also receive an annual bonus that is based on a minimum percentage
of the management fee received by the Adviser for its services to the
CenterSquare Fund but may be increased on a discretionary basis.
Material
Conflicts of Interest
The
CenterSquare Sub-Adviser manages other accounts in addition to the CenterSquare
Fund, some of which may include portfolios of investments substantially similar
to the CenterSquare Fund. All portfolio transactions for the CenterSquare Fund
and the CenterSquare Sub-Adviser’s other accounts will be implemented according
to the CenterSquare Sub-Adviser’s trade allocation procedures. These procedures,
among other things, ensure that all trades allocated to advisory clients
(including the
CenterSquare
Fund) fulfill the CenterSquare Sub-Adviser’s fiduciary duty to each client and
otherwise allocate securities on a basis that is fair and nondiscriminatory.
Such procedures are generally applied in numerous instances, including, among
other things, block and bunched trades, cross transactions and private
placements. In determining a fair allocation, the procedures take into account a
number of factors, including among other things, the CenterSquare Sub-Adviser’s
fiduciary duty to each client, any potential conflicts of interest, the size of
the transaction, the relative size of a client’s portfolio, the cash available
for investment, suitability, and each advisory client’s investment
objectives.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the
CenterSquare Fund beneficially owned by each portfolio manager as of December
31, 2023.
|
|
|
|
|
| |
|
| Dollar
Range of Fund Shares Beneficially Owned |
| CenterSquare
Fund |
|
| Dean
Frankel |
None |
| Eric
Rothman |
$10,001
- $50,000 |
Marketfield
Fund
Other
Accounts Managed by the Portfolio Manager
The
table below identifies, for the Portfolio Manager, the number of accounts
managed (excluding the Fund) and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, and other accounts. To the extent that any of these
accounts are subject to an advisory fee which is based on account performance,
this information is reflected in a separate table below. Asset amounts have been
rounded as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Number
of Other Accounts Managed and Total Assets by Account Type |
| Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance Based |
Name
of
Portfolio Manager |
Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
| Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Marketfield
Fund |
|
|
|
|
|
|
|
|
|
| |
|
Michael
C. Aronstein |
1
account with $139,308,000 in assets |
|
None |
|
1
account with $17,178,000 in assets |
|
None |
|
None |
|
None |
Portfolio
Manager Compensation
The
Portfolio Manager’s compensation is a fixed salary that is set by reference to
industry standards and is not based on performance of the Marketfield Fund or
the value of assets held in the Marketfield Fund’s portfolio. The Portfolio
Manager may also receive an annual bonus that is based on a minimum percentage
of the management fee received by the Adviser for its services to the
Marketfield Fund but may be increased on a discretionary basis.
Material
Conflicts of Interest
The
Marketfield Sub-Adviser manages other accounts in addition to the Marketfield
Fund, some of which may include portfolios of investments substantially similar
to the Marketfield Fund. All portfolio transactions for the Marketfield Fund and
the Marketfield Sub-Adviser’s other accounts will
be
implemented according to the Marketfield Sub-Adviser’s trade allocation
procedures. These procedures, among other things, ensure that all trades
allocated to advisory clients (including the Marketfield Fund) fulfill the
Marketfield Sub-Adviser’s fiduciary duty to each client and otherwise allocate
securities on a basis that is fair and nondiscriminatory. Such procedures are
generally applied in numerous instances, including, among other things, block
and bunched trades, cross transactions and private placements. In determining a
fair allocation, the procedures take into account a number of factors, including
among other things, the Marketfield Sub-Adviser’s fiduciary duty to each client,
any potential conflicts of interest, the size of the transaction, the relative
size of a client’s portfolio, the cash available for investment, suitability,
and each advisory client’s investment objectives.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the
Marketfield Fund beneficially owned by the portfolio manager as of December 31,
2023.
|
|
|
|
|
| |
|
| Dollar
Range of Fund Shares Beneficially Owned |
|
Marketfield
Fund |
|
| Michael
C. Aronstein |
Over
$1,000,000 |
Tran
Fund
Other
Accounts Managed by the Portfolio Managers
The
table below identifies, for each Portfolio Manager, the number of accounts
managed (excluding the Fund) and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, and other accounts. To the extent that any of these
accounts are subject to an advisory fee which is based on account performance,
this information is reflected in a separate table below. Asset amounts have been
rounded as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Number
of Other Accounts Managed and Total Assets by Account Type |
| Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance Based |
Name
of
Portfolio Manager |
Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
| Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Tran
Fund |
|
|
|
|
|
|
|
|
|
| |
|
Quoc
Tran |
None |
|
None |
|
337
accounts with $913,000,000 in assets |
|
None |
|
None |
|
None |
|
Michael
Im |
None |
|
None |
|
None |
|
None |
|
None |
|
None |
Portfolio
Manager Compensation
Tran
Capital Management compensates the Tran Fund’s portfolio managers for management
of the Fund. Messrs. Tran and Im are compensated with a base salary and a
discretionary bonus. The bonus is determined by the Managing Partners of Tran
Capital Management’s General Partner and is based on, firm, fund and individual
performance. Tran Capital Management’s compensation strategy is to provide
reasonable base salaries commensurate with an individual’s responsibilities.
Tran Capital Management also makes an annual contribution to the firm’s
retirement plan and benefit plan for
Messrs.
Tran and Im. In addition, a portfolio manager who is an owner of the firm
receives a partnership distribution based on ownership share at the end of each
year.
Material
Conflicts of Interest
Tran
Capital Management provides advisory services to other clients which invest in
securities of the same type in which the Tran Fund invests. Tran Capital
Management is aware of its obligation to ensure that when orders for the same
securities are entered on behalf of the Tran Fund and other accounts, the Tran
Fund receives fair and equitable allocation of these orders, particularly where
affiliated accounts may participate. Tran Capital Management attempts to
mitigate potential conflicts of interest by adopting policies and procedures
regarding trade execution, brokerage allocation and order aggregation which
provide a methodology for ensuring fair treatment for all clients in situations
where orders cannot be completely filled or filled at different
prices.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the Tran
Fund beneficially owned by each portfolio manager as of December 31,
2023.
|
|
|
|
|
| |
|
| Dollar
Range of Fund Shares Beneficially Owned |
|
Tran
Fund |
|
| Quoc
Tran |
Over
$1,000,000 |
| Michael
Im |
$100,001
- $500,000 |
Foresight
Fund
Other
Accounts Managed by the Portfolio Managers
The
table below identifies, for each Portfolio Manager, the number of accounts
managed (excluding the Fund) and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, and other accounts. To the extent that any of these
accounts are subject to an advisory fee which is based on account performance,
this information is reflected in a separate table below. Asset amounts have been
rounded as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Number
of Other Accounts Managed and Total Assets by Account Type |
| Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance Based |
Name
of
Portfolio Manager |
Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
| Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foresight
Fund |
|
|
|
|
|
|
|
|
|
| |
|
Nick
Scullion |
None |
| 6
accounts with $1.1 billion in assets |
|
None |
|
None |
|
None |
|
None |
|
Eric
Bright, CFA |
None |
| 6
accounts with $1.1 billion in assets |
|
None |
|
None |
|
None |
|
None |
Portfolio
Manager Compensation
Foresight’s
compensation structure is comprised of base pay and annual incentive
compensation. Individuals’ packages are designed with the appropriate component
combinations to match specific positions.
Material
Conflicts of Interest
From
time to time, potential conflicts of interest may arise between a portfolio
manager’s management of the investments of the Foresight Fund, on the one hand,
and the management of other accounts, on the other. The portfolio managers
oversee the investment of various types of accounts in the same strategy, such
as mutual funds, pooled investment vehicles and separate accounts for
individuals and institutions. Investment decisions generally are applied to all
accounts utilizing that particular strategy, taking into consideration client
restrictions, instructions and individual needs. A portfolio manager may manage
an account whose fees may be higher or lower than the fee charged to the
Foresight Fund to provide for varying client circumstances. Management of
multiple funds and accounts may create potential conflicts of interest relating
to the allocation of investment opportunities, and the aggregation and
allocation of client trades. Additionally, the management of the Foresight Fund
and other accounts may result in a portfolio manager devoting unequal time and
attention to the management of the Foresight Fund or other
accounts.
During
the normal course of managing assets for multiple clients of varying types and
asset levels, the portfolio managers may encounter conflicts of interest, that
could, if not properly addressed, be harmful to one or more of our clients.
Those of a material nature that are encountered most frequently involve security
selection, employee personal securities trading, proxy voting and the allocation
of securities. To mitigate these conflicts and ensure its clients are not
impacted negatively by the adverse actions of the Foresight Sub-Adviser or its
employees, the Foresight Sub-Adviser has implemented a series of policies
including, but not limited to, its Code of Ethics, which addresses avoidance of
conflicts of interest; policies included in the Code of Ethics including the
Personal Security Trading Policies, which addresses personal security trading
and requires the use of approved brokers; Trade Allocation/Aggregation Policy,
which addresses fairness of trade allocation to client accounts, and the Proxy
and Trade Error Policies, which are designed to prevent and detect conflicts
when they occur. The Foresight Sub-Adviser reasonably believes that these and
other policies combined with the periodic review and testing performed by its
compliance professionals adequately protects the interest of its clients. A
portfolio manager may also face other potential conflicts of interest in
managing the Foresight Fund, and the description above is not a complete
description of every conflict of interest that could be deemed to exist in
managing both the Foresight Fund and the other accounts listed
above.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the
Foresight Fund beneficially owned by each portfolio manager as of December 31,
2023.
|
|
|
|
|
| |
|
| Dollar
Range of Fund Shares Beneficially Owned |
|
Foresight
Fund |
|
| Nick
Scullion |
None |
| Eric
Bright, CFA |
None |
Greenspring
Fund
Other
Accounts Managed by the Portfolio Managers
The
table below identifies, for each Portfolio Manager, the number of accounts
managed (excluding the Fund) and the total assets in such accounts, within each
of the following categories: registered investment companies, other pooled
investment vehicles, and other accounts. To the extent that any
of
these accounts are subject to an advisory fee which is based on account
performance, this information is reflected in a separate table below. Asset
amounts have been rounded as of December 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Number
of Other Accounts Managed and Total Assets by Account Type |
| Number
of Other Accounts and Total Assets for Which Advisory Fee is
Performance Based |
Name
of
Portfolio Manager |
Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
| Registered
Investment
Companies |
| Other
Pooled
Investment
Vehicles |
| Other
Accounts |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Greenspring
Fund |
|
|
|
|
|
|
|
|
|
| |
|
Charles
vK Carlson |
1
account with $227,000,000 in assets |
|
None |
|
610
accounts with $593,000,000 in assets |
|
None |
|
None |
|
None |
|
Michael
Goodman |
None |
|
None |
|
None |
|
None |
|
None |
|
None |
Portfolio
Manager Compensation
Mr. Carlson
is not directly compensated by the Fund. See Management of the Fund and
“Investment Sub-Advisers” for a discussion of Mr. Carlson’s affiliation
with Corbyn. As of December 31, 2023, Mr. Carlson’s compensation from
Corbyn is in the form of a fixed salary and bonuses payable based on the overall
profitability of Corbyn and such other factors as Corbyn takes into account.
Mr. Carlson is not compensated based directly on the performance of the
Greenspring Fund or the value of the Greenspring Fund’s assets. Mr. Carlson
is also Portfolio Manager of Greenspring Income Opportunities Fund since its
inception on December 15, 2021, an open-end mutual fund, which is currently
offered in a separate prospectus. Michael Goodman is not directly compensated by
the Greenspring Fund. As of December 31, 2023, Mr. Goodman’s
compensation from Corbyn is in the form of a fixed salary and bonuses payable
based on the overall profitability of Corbyn and such other factors as Corbyn
takes into account. Mr. Goodman is not compensated based directly on the
performance of the Greenspring Fund or the value of the Greenspring Fund’s
assets. Mr. Carlson and Mr. Goodman each maintain an equity interest
in Corbyn and may receive additional income proportionate to their respective
equity in Corbyn.
Material
Conflicts of Interest
Corbyn
seeks to treat all clients fairly and equitably and has established policies and
procedures designed to ensure that no client is disadvantaged over another where
more than one client has the ability to invest in similar securities. Corbyn
utilizes a variety of methods when allocating securities among client accounts.
The allocation method will depend upon various factors such as investment
objective, existing portfolio composition and account
characteristics.
Although
Corbyn manages the assets of all of its clients, including the Greenspring Fund,
with a similar overall investment philosophy, the investment goals of Corbyn
clients vary and specific investment strategies designed to achieve individual
clients’ goals may be implemented. Individual clients of Corbyn have different
restrictions on their permitted investments, whether by statute, contract, or
instruction of the client, and have varying tax statuses and different needs for
income. Furthermore, separately managed accounts may be more concentrated in
specific securities than the portfolio of the Greenspring Fund, where
concentrations are limited by statute. As a consequence of employing differing
strategies and taking into account investment restrictions, as well as the
varying levels of cash held in separately managed accounts and the Greenspring
Fund, separately managed
accounts
and the Greenspring Fund may own different securities and/or different position
sizes and performance may materially differ.
Ownership
of Securities
The
following table sets forth the dollar range of equity securities of the Funds
beneficially owned by each portfolio manager as of December 31,
2023.
|
|
|
|
|
| |
|
| Dollar
Range of Fund Shares Beneficially Owned |
|
Greenspring
Fund |
|
| Charles
vK Carlson |
Over
$1,000,000 |
| Michael
Goodman |
$100,001-$500,000 |
Service
Providers
Fund
Administrator, Transfer Agent and Fund Accountant
Pursuant
to a fund administration agreement (the “Administration Agreement”) between the
Trust and Fund Services, 615 East Michigan Street, Milwaukee, Wisconsin, 53202,
Fund Services acts as each Fund’s administrator. Fund Services provides certain
administrative services to the Funds, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, each Fund’s independent contractors and agents;
preparation for signature by an officer of the Trust all of the documents
required to be filed for compliance by the Trust and each Fund with applicable
laws and regulations excluding those of the securities laws of various states;
arranging for the computation of performance data, including NAV and yield;
responding to shareholder inquiries; and arranging for the maintenance of books
and records of each Fund, and providing, at its own expense, office facilities,
equipment and personnel necessary to carry out its duties. In this capacity,
Fund Services does not have any responsibility or authority for the management
of each Fund, the determination of investment policy, or for any matter
pertaining to the distribution of Fund shares.
Pursuant
to the Administration Agreement, as compensation for its services, Fund Services
receives from each Fund a combined fee for fund administration and fund
accounting services based on each Fund’s current average daily net assets. Fund
Services is also entitled to be reimbursed for certain out-of-pocket expenses.
In addition to its role as administrator, Fund Services also acts as fund
accountant, transfer agent (“Transfer Agent”) and dividend disbursing agent
under separate agreements with the Trust.
During
the fiscal years ended December 31 shown below, each Fund paid the following
administration fees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Administration
Fees |
| Fund |
2023 |
2022 |
2021 |
|
| |
|
CenterSquare
Fund1 |
$90,681 |
$93,106 |
See
below |
|
| |
|
Marketfield
Fund2 |
$109,538 |
$123,696 |
$195,066 |
|
| |
|
Tran
Fund3 |
$44,258 |
See
below |
See
below |
|
| |
|
Foresight
Fund4 |
$55,797 |
N/A |
N/A |
|
| |
|
Greenspring
Fund5 |
$92,355 |
$112,222 |
$122,845 |
|
| |
1
The CenterSquare Fund reorganized into the Trust on March 7, 2022. The 2022
information reflects administration fees paid to the Transfer Agent for the
period March 7, 2022 through December 31, 2022. Administration fees
paid by the Predecessor CenterSquare Fund to its fund administrator are noted in
a table below.
2
The Marketfield Fund reorganized into the Trust on March 14, 2022. The
information above shown prior to March 14, 2022, reflects administration
fees paid to the Transfer Agent by the Predecessor Marketfield
Fund.
3
On November 1, 2023, the Tran Fund changed its fiscal year from
April 30 to December 31. Accordingly, the 2023 information above
reflects administration fees paid to the Transfer Agent for the period
May 1, 2023 through December 31, 2023. Administration fees paid prior
to the change in fiscal year end by the Tran Fund and its predecessor fund are
noted in a table below.
4
The Foresight Fund commenced operations on January 31, 2023.
5
The Greenspring Fund reorganized into the Trust on August 14, 2023. The
information above shown prior to August 14, 2023, reflects administration
fees paid to the Transfer Agent by the Predecessor Greenspring
Fund.
With
regard to the CenterSquare Fund, for the fiscal years indicated below, the
Predecessor
CenterSquare Fund paid the following fees to AMG Funds LLC, the Predecessor
CenterSquare Fund’s administrator:
|
|
|
|
|
|
|
| |
Administration
Fees
Paid During Fiscal Years Ended December 31, |
| January 1,
2022 - March 7, 2022 |
| 2021 |
|
| $59,246 |
| $306,032 |
|
With
regard to the Tran Fund, prior to November 1, 2023, the fiscal year end was
April 30. The Tran Fund reorganized into the Trust on August 8, 2022.
As indicated below, for the periods prior to August 8, 2022, the
Predecessor Tran Fund paid the following fees to The Bank of New York Mellon,
the Predecessor Tran Fund’s administrator:
|
|
|
|
|
|
|
|
|
|
|
| |
| Administration
Fees Paid to the Transfer Agent |
Administration
and Accounting Fees
Paid During Fiscal Periods Ended |
|
August
8, 2022 -
April 30,
2023 |
May
1, 2022 -
August
8, 2022 |
April
30, 2022 |
April
30, 2021 |
| $54,104 |
$15,526 |
$59,597 |
$64,859 |
Custodian
U.S.
Bank National Association, an affiliate of Fund Services (the “Custodian”),
serves as the custodian of the assets of each Fund pursuant to a custody
agreement between the Custodian and the Trust, on behalf of each Fund, whereby
the Custodian charges fees on a transactional basis plus out-of-pocket expenses.
The Custodian has custody of all assets and securities of each Fund, delivers
and receives payments for securities sold, receives and pays for securities
purchased, collects income from investments and performs other duties, all as
directed by the officers of the Trust. The Custodian’s address is 1555 North
River Center Drive, Suite 302, Milwaukee, Wisconsin, 53212. The Custodian does
not participate in decisions relating to the purchase and sale of securities by
each Fund. The Custodian and its affiliates may participate in revenue sharing
arrangements with the service providers of mutual funds in which each Fund may
invest.
Legal
Counsel
Stradley
Ronon Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia,
Pennsylvania 19103, serves as each Funds’ legal counsel.
Independent
Registered Public Accounting Firm
Cohen
& Company, Ltd., 1835 Market Street, Suite 310, Philadelphia, Pennsylvania
19103, serves as each Fund’s independent registered public accounting firm.
Distribution
and Servicing of Fund Shares
The
Trust has entered into a distribution agreement (the “Distribution Agreement”)
with the Distributor, Foreside Fund Services, LLC, Three Canal Plaza, Suite 100,
Portland, Maine 04101, pursuant to which the Distributor acts as each Fund’s
principal underwriter, provides certain administration services and promotes and
arranges for the sale of each Fund’s shares. The offering of each Fund’s shares
is continuous, and the Distributor distributes each Fund’s shares on a best
efforts basis. The Distributor is not obligated to sell any certain number of
shares of each Fund. The Distributor is a registered broker-dealer and member of
the Financial Industry Regulatory Authority, Inc. (“FINRA”).
After
an initial two-year period, the Distribution Agreement continues in effect only
if its continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of each Fund’s outstanding voting securities
and, in either case, by a majority of the Trustees who are not parties to the
Distribution Agreement or “interested persons” (as defined in the 1940 Act) of
any such party. The Distribution Agreement is terminable without penalty by the
Trust on behalf of each Fund on 60 days’ written notice when authorized either
by a majority vote of the outstanding voting securities of each Fund or by vote
of a majority of the Trustees who are not “interested persons” (as defined in
the 1940 Act). The Distribution Agreement is terminable without penalty by the
Distributor upon 60 days’ written notice to the Trust. The Distribution
Agreement will automatically terminate in the event of its “assignment” (as
defined in the 1940 Act).
For
the fiscal years indicated below, the Distributor received the following
underwriting commissions for the Marketfield Fund’s Investor Class (formerly
Class A shares) and Institutional
Class (formerly Class C shares) of the Fund and the Predecessor Marketfield
Fund:
|
|
|
|
|
|
|
|
|
| |
|
Underwriting
Commissions Paid
During
Fiscal Years Ended December 31, |
|
| 2022 |
2021 |
|
|
Investor
Class1 |
$3,631 |
$12,349 |
|
| Institutional
Class |
$141 |
$232 |
|
1
Because
the Predecessor Marketfield Fund’s Class A shares were converted into the
Fund’s Investor Class shares, no underwriting commissions have been paid after
March 14, 2022.
For
the fiscal years indicated below, the Distributor retained the following
underwriting commissions for Marketfield Fund’s Investor Class shares (formerly
Class A shares) of the Fund and the Predecessor
Marketfield Fund:
|
|
|
|
|
|
| |
|
Underwriting
Commissions Retained for Investor Class1
During
Fiscal Years Ended December 31, |
| 2022 |
2021 |
|
| $444 |
$1,496 |
|
1
Because
the Predecessor Marketfield Fund’s Class A shares were converted into the
Fund’s Investor Class shares, no underwriting commissions have been paid after
March 14, 2022.
The
Predecessor Tran Fund utilized Foreside Funds Distributor, LLC (an affiliate of
the Fund’s Distributor) as its distributor. For the fiscal period May 1,
2022 through August 8, 2022 and for the fiscal years ended April 30,
2022 and April 30, 2021, Foreside Funds Distributor, LLC received the
following underwriting commissions with respect to the former Class A
shares of the Predecessor Fund:
|
|
|
|
|
|
|
|
| |
|
Underwriting
Commissions Paid1
During
Fiscal Periods Ended |
|
May
1, 2022 through
August
8, 2022 |
April
30, 2022 |
April
30, 2021 |
|
$--(*) |
$77,437 |
$68,676 |
*
This information is unavailable on behalf of the Predecessor Fund.
1
Note: Because the Predecessor Tran Fund’s Class A shares were converted
into the Fund’s Investor Class shares, no underwriting commissions have been
paid after August 8, 2022.
Distribution
and Shareholder Service (Rule 12b-1) Plan
The
Trust has adopted a distribution plan pursuant to Rule 12b‑1 under the 1940 Act
(the “Distribution Plan”) on behalf of the Marketfield Fund, Foresight Fund,
Greenspring Fund and Tran Fund (each, a “12b-1 Fund,” and together, the “12b-1
Funds”). The CenterSquare Fund does not have a Distribution Plan. The fee for
Investor Class shares represents a 0.25% Rule 12b-1 distribution fee. The
Rule 12b-1 distribution fee and shareholder servicing fees are discussed in
greater detail below. The Distribution Plan provides that the Distributor may
use all or any portion of such Distribution Fee to finance any activity that is
principally intended to result in the sale of Fund shares, subject to the terms
of the Distribution Plan, or to provide certain shareholder services.
Institutional Class shares are not subject to a Distribution Fee.
The
Distribution Fee is payable to the Distributor regardless of the
distribution-related expenses actually incurred. Because the Distribution Fee is
not directly tied to expenses, the amount of Distribution Fees paid by the 12b-1
Funds during any year may be more or less than actual expenses incurred pursuant
to the Distribution Plan. For this reason, this type of distribution fee
arrangement is characterized by the staff of the SEC as a “compensation”
plan.
The
Distribution Plan provides that it will continue from year to year upon approval
by the majority vote of the Board of Trustees, including a majority of the
Trustees who are not “interested persons” of each respective 12b-1 Fund, as
defined in the 1940 Act, and who have no direct or indirect financial interest
in the operations of the Distribution Plan or in any agreement related to such
plan (the “Qualified Trustees”), as required by the 1940 Act, cast in person at
a meeting called for that purpose. It is also required that the Trustees who are
not “interested persons” of each respective 12b-1 Fund, select and nominate all
other Trustees who are not “interested persons” of the respective 12b-1 Fund.
The Distribution Plan and any related agreements may not be amended to
materially increase the amounts to be spent for distribution expenses without
approval of shareholders holding a majority of each respective 12b-1 Fund’s
shares outstanding. All material amendments to the Distribution Plan or any
related agreements must be approved by a vote of a majority of the Board of
Trustees and the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on any such amendment.
The
Distribution Plan requires that the Distributor provide to the Board of
Trustees, at least quarterly, a written report on the amounts and purpose of any
payment made under the Distribution Plan. The Distributor is also required to
furnish the Board of Trustees with such other information as may reasonably be
requested in order to enable the Board of Trustees to make an informed
determination of whether the Distribution Plan should be continued. With the
exception of the Adviser and Sub-Adviser, no “interested person” of a 12b-1
Fund, as defined in the 1940 Act, and no Qualified Trustee of a 12b-1 Fund has
or had a direct or indirect financial interest in the Distribution Plan or any
related agreement.
As
noted above, the Distribution Plan provides for the ability to use Fund assets
to pay financial intermediaries (including those that sponsor mutual fund
supermarkets), plan administrators and other service providers to finance any
activity that is principally intended to result in the sale of Fund shares
(distribution services). The payments made by the 12b-1 Funds to these financial
intermediaries are based primarily on the dollar amount of assets invested in
each respective 12b-1 Fund through the financial intermediaries. These financial
intermediaries may pay a portion of the payments that they receive from each
12b-1 Fund to their investment professionals. In addition to the ongoing
asset-based fees paid to these financial intermediaries under the Distribution
Plan, each 12b-1 Fund may, from time to time, make payments under the
Distribution Plan that help defray the expenses incurred by these intermediaries
for conducting training and educational meetings about various aspects of the
respective 12b-1 Fund for their employees. In addition, each 12b-1 Fund may make
payments under the Distribution Plan for exhibition space and otherwise help
defray the expenses these financial intermediaries incur in hosting client
seminars where the respective 12b-1 Fund is discussed.
To
the extent these asset-based fees and other payments made under the Distribution
Plan to these financial intermediaries for the distribution services they
provide to each respective 12b-1 Fund’s shareholders exceed the Distribution
Fees available, these payments are made by each respective 12b-1 Fund’s
Sub-Adviser from its own resources, which may include its profits from the
advisory fee it receives from each Fund. In addition, each respective 12b-1 Fund
may participate in various “fund supermarkets” in which a mutual fund
supermarket sponsor (usually a broker-dealer) offers many mutual funds to the
sponsor’s customers without charging the customers a sales charge. In connection
with its participation in such platforms, each Fund’s Sub-Adviser may use all or
a portion of the Distribution Fee to pay one or more supermarket sponsors a
negotiated fee for distributing each respective 12b-1 Fund’s shares. In
addition, in its discretion, each Fund’s Sub-Adviser may pay additional fees to
such intermediaries from its own assets.
Rule
12b-1 Distribution Fee
The
Distributor may use the Rule 12b-1 Distribution Fee to pay for services covered
by the Distribution Plan including, but not limited to, advertising,
compensating underwriters, dealers and selling personnel engaged in the
distribution of Fund shares, the printing and mailing of prospectuses,
statements of additional information and reports to other than current Fund
shareholders, the printing and mailing of sales literature pertaining to the
12b-1 Funds, and obtaining whatever information, analyses and reports with
respect to marketing and promotional activities that the 12b-1 Funds may, from
time to time, deem advisable. The CenterSquare Fund is not subject to
Rule 12b-1 Distribution Fees because it does not have a Distribution
Plan.
The
table below shows the amount of Rule 12b-1 Distribution Fees incurred and the
allocation of such fees by the Investor Class of the Marketfield Fund, Foresight
Fund, Greenspring Fund and the Tran Fund, for the fiscal year ended December 31,
2023.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Marketfield
Fund |
Tran
Fund* |
Foresight
Fund |
Greenspring
Fund |
| Marketing
and Advertising |
$0 |
$0 |
$0 |
$0 |
| Printing/Postage |
$0 |
$0 |
$0 |
$0 |
| Payment
to Distributor |
$0 |
$0 |
$0 |
$0 |
| Payment
to Dealers |
$196,282 |
$26,885 |
$0 |
$0 |
| Compensation
to Sales Personnel |
$0 |
$0 |
$0 |
$0 |
| Other |
$0 |
$0 |
$0 |
$0 |
| Total |
$196,282 |
$26,885 |
$0 |
$0 |
*
For the fiscal period May 1, 2023 to December 31, 2023.
Shareholder
Servicing Fees
While
the CenterSquare Fund has not adopted a formal Shareholder Servicing Plan, the
Board of Trustees has authorized the Fund to pay up to 0.25% of shareholder
servicing fees for the Investor Class and up to 0.15% of shareholder servicing
fees for the Institutional Class. Accordingly, for the fiscal year ended
December 31, 2023, the CenterSquare Fund paid an aggregate of $215,340 in
shareholder servicing fees.
Sub-Accounting
Service Fees
In
addition to the fees that each Fund may pay to its Transfer Agent, the Board of
Trustees has authorized each Fund to pay service fees to certain intermediaries
such as banks, broker-dealers, financial advisers or other financial
institutions for sub‑administration, sub-transfer agency, recordkeeping
(collectively, “sub-accounting services”) and other shareholder services
associated with shareholders whose shares are held of record in omnibus,
networked, or other group accounts or accounts traded through registered
securities clearing
agents.
Unless
each Fund has adopted a specific shareholder servicing plan which is broken out
as a separate expense, a sub-accounting fee paid by each Fund is included in the
total amount of “Other Expenses” listed in each Fund’s Fees and Expenses table
in the Prospectus.
Revenue
Sharing
The
Adviser may pay compensation (out of its own resources and not as an expense of
the Funds) to certain broker-dealers, or other financial intermediaries (each a
“financial intermediary”) in connection with the sale, retention and/or
servicing of Fund shares (“revenue sharing payments”). The Adviser may pay for
placing a Fund on a financial intermediary’s trading platform. The level of
revenue sharing payments made to a financial intermediary may be based upon
current assets and/or number of accounts of the Funds attributable to the
financial intermediary or other measures as agreed to by the Adviser and the
financial intermediaries. These payment arrangements, however, will not change
the price that a shareholder pays for Fund shares or the amount that a Fund
receives to invest on behalf of a shareholder and will not increase Fund
expenses. You should review your financial intermediary’s compensation
disclosure and/or talk to your financial intermediary to obtain more information
on how this compensation may have influenced your financial intermediary’s
recommendation of the Funds. In addition to the compensation described above,
the Funds and/or the Adviser may also pay fees to financial intermediaries and
their affiliated individuals for maintaining Fund share balances and/or for
sub-accounting, administrative or transaction processing services related to the
maintenance of accounts.
The
Adviser is motivated to make the payments described above since they promote the
sale of Fund shares and the retention of those investments by clients of
financial intermediaries. To the extent financial intermediaries sell more
shares of the Funds or retain shares of the Funds in their clients’ accounts,
the Adviser benefits from incremental management and other fees paid to the
Adviser by the Funds with respect to those assets.
Portfolio
Transactions and Brokerage
Pursuant
to the Advisory Agreement, the Adviser, together with each Sub-Adviser.
determines which securities are to be purchased and sold by each Fund and which
broker-dealers are eligible to execute each Fund’s portfolio transactions.
Purchases and sales of securities in the OTC market will generally be executed
directly with a “market-maker” unless, in the opinion of the Adviser and each
Sub-Adviser, a better price and execution can otherwise be obtained by using a
broker for the transaction.
Purchases
of portfolio securities for each Fund will be effected through broker-dealers
(including banks) that specialize in the types of securities that each Fund will
be holding, unless the Adviser believes that better executions are available
elsewhere. Dealers usually act as principal for their own accounts. Purchases
from dealers will include a spread between the bid and the asked price. If the
execution and price offered by more than one dealer are comparable, the order
may be allocated to a dealer that has provided research or other services as
discussed below.
In
placing portfolio transactions, the Adviser and each Sub-Adviser will use
reasonable efforts to choose broker-dealers capable of providing the services
necessary to obtain the most favorable price and execution available. The full
range and quality of services available will be considered in making these
determinations, such as the size of the order, the difficulty of execution, the
operational facilities of the firm involved, the firm’s risk in positioning a
block of securities and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers that furnish or supply research and statistical
information to the Adviser and each Sub-Adviser that it may lawfully and
appropriately use in its investment advisory capacities, as well as provide
other brokerage services in addition to execution services. The Adviser
considers such information, which is in addition to and not in lieu of the
services required to be performed by it under its Advisory Agreement with each
Fund, to be useful in varying degrees, but of indeterminable value. Portfolio
transactions may be placed with broker-dealers who sell shares of each Fund
subject to rules adopted by FINRA and the SEC. Portfolio transactions may also
be placed with broker-dealers in which the Adviser has invested on behalf of
each Fund and/or client accounts.
While
it is each Fund’s general policy to first seek to obtain the most favorable
price and execution available in selecting a broker-dealer to execute portfolio
transactions for each Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to each Fund or to the
Adviser and each Sub-Adviser, even if the specific services are not directly
useful to each Fund and may be useful to the Adviser in advising other clients.
In negotiating commissions with a broker or evaluating the spread to be paid to
a dealer, each Fund may therefore pay a higher commission or spread than would
be the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Adviser to be reasonable in relation to the
value of the brokerage and/or research services provided by such broker-dealer.
The standard of reasonableness is to be measured in light of the Adviser’s
overall responsibilities to each Fund.
Investment
decisions for each Fund are made independently from those of other client
accounts. Nevertheless, it is possible that at times identical securities will
be acceptable for each Fund and one or more of such client accounts. In such
event, the position of each Fund and such client account(s) in the same issuer
may vary and the length of time that each may choose to hold its investment in
the same issuer may likewise vary. However, to the extent any of these client
accounts seek to acquire the same security as each Fund at the same time, each
Fund may not be able to acquire as large a portion of such security as it
desires, or it may have to pay a higher price or obtain a lower yield for such
security. Similarly, each Fund may not be able to obtain as high a price for, or
as large an execution of, an order to sell any particular security at the same
time. If one or more of such client accounts simultaneously purchases or sells
the same security that each Fund is purchasing or selling, each day’s
transactions in such security will be allocated between each Fund and all such
client accounts in a manner deemed equitable by the Adviser, taking into account
the respective sizes of the accounts and the amount being purchased or sold. It
is recognized that in some cases this system could have a detrimental effect on
the price or value of the security insofar as each Fund is concerned. In other
cases, however, it is believed that the ability of each Fund to participate in
volume transactions may produce better executions for each Fund. Notwithstanding
the above, the Adviser and each Sub-Adviser may execute buy and sell orders for
accounts and take action in performance of its duties with respect to any of its
accounts that may differ from actions taken with respect to another account, so
long as the Adviser and each Sub-Adviser shall, to the extent practicable,
allocate investment opportunities to accounts, including each Fund, over a
period of time on a fair and equitable basis and in accordance with applicable
law.
Each
Fund is required to identify any securities of its regular broker-dealers that
each Fund has acquired during its most recent fiscal year. During the fiscal
year ended December 31, 2023, the Funds did not acquire any such
securities.
Each
Fund is also required to identify any brokerage transactions during its most
recent fiscal year that were directed to a broker-dealer because of research
services provided, along with the amount of any such transactions and any
related commissions paid by each Fund. During the fiscal year ended
December 31, 2023,
the following amounts of brokerage commissions for each Fund were paid to
brokers for third-party research:
|
|
|
|
|
| |
| Fund |
Related
Commissions for Third-Party Research |
| CenterSquare
Fund |
$32,446 |
| Marketfield
Fund |
$0 |
|
Tran
Fund |
$10,4881 |
|
Foresight
Fund |
$0 |
|
Greenspring
Fund |
$49,530 |
1
On
November 1, 2023, the Tran Fund changed its fiscal year from April 30
to December 31. That said, the amount shown reflects the period
January 1, 2023 through December 31, 2023.
The
broker commissions paid by each Fund and their respective predecessor Funds for
the fiscal years ended December 31, are set forth in the table
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2023 |
2022 |
2021 |
|
|
|
|
|
| |
|
CenterSquare
Fund |
$86,129 |
$163,132 |
$178,694 |
|
|
|
|
|
| |
|
Marketfield
Fund |
$43,758 |
$41,918 |
$35,599 |
|
|
|
|
|
| |
|
Tran
Fund1 |
$19,0301 |
–1 |
–1 |
|
|
|
|
|
| |
| Foresight
Fund |
$19,319 |
–2 |
–2 |
|
|
|
|
|
| |
|
Greenspring
Fund |
$82,830 |
$60,676 |
$90,643 |
|
|
|
|
|
| |
1
For the fiscal period May 1, 2023 to December 31, 2023. On
November 1, 2023, the Tran Fund changed its fiscal year from April 30
to December 31. See below table for brokerage commissions paid during its
then fiscal years ended April 30.
2
The Foresight Fund commenced operations on January 31, 2023.
On
November 1, 2023, the Tran Fund changed its fiscal year end from
April 30 to December 31. The following table reflects the amounts paid
by the Tran Fund and the Predecessor Tran Fund in brokerage commissions for the
Tran Fund’s previous fiscal years ended April 30:
|
|
|
|
|
|
|
|
| |
Brokerage
Commissions Paid During
Fiscal Years Ended April 30, |
| 2023 |
2022 |
2021 |
| $28,277 |
$22,024 |
$36,530 |
Brokerage
Recapture Arrangements
The
Funds have entered or may enter into arrangements with various brokers pursuant
to which a portion of the commissions paid by each Fund may be directed by the
Fund to pay expenses of the Fund. Consistent with policies and principal
objectives of seeking best price and execution, the Sub-Advisers may consider
these brokerage recapture arrangements in selecting brokers to execute
transactions for each Fund. There is no specific amount of brokerage that is
required to be placed through such brokers. In all cases, brokerage recapture
arrangements relate solely to expenses of each Fund and not to expenses of the
Adviser or the Sub-Adviser.
Portfolio
Turnover
Although
each Fund generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Adviser and each Sub-Adviser, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in each Fund’s portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to above-average transaction and
brokerage commission costs and may generate capital gains, including short-term
capital gains taxable to shareholders at ordinary income rates. To the extent
that each Fund experiences an increase in brokerage commissions due to a higher
portfolio turnover rate, the performance of each Fund could be negatively
impacted by the increased expenses incurred by each Fund. Furthermore, a high
portfolio turnover rate may result in a greater number of taxable
transactions.
The
following table shows the portfolio turnover rates for the Funds and the
respective predecessor Funds for the past two fiscal years:
|
|
|
|
|
|
|
|
|
| |
|
| Portfolio
Turnover During
Fiscal Year Ended December 31, |
|
| 2023 |
2022 |
|
| CenterSquare
Fund |
47% |
57% |
|
| Marketfield
Fund |
30% |
40% |
|
|
Tran
Fund |
42%1 |
49%2 |
|
|
Foresight
Fund |
20% |
–3 |
|
|
Greenspring
Fund |
18% |
11% |
|
1
For the period May 1, 2023 through December 31, 2023. On November 1, 2023
the Tran Sustainable Focus Fund changed its fiscal year end from April 30 to
December 31.
2
For
the 12-month period ended April 30, 2023, the Tran Fund’s previous fiscal year
end.
3
The Foresight Fund commenced operations on January 31, 2023.
Code
of Ethics
The
Trust, the Adviser and each Sub-Adviser have each adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act. The Adviser and Sub-Advisers’ Codes of Ethics
permit, subject to certain conditions, personnel of the respective Adviser and
Sub-Adviser to invest in securities that may be purchased or held by each Fund.
The Distributor relies on the principal underwriters exception under
Rule 17j-1(c)(3) from the requirement to adopt a code of ethics pursuant to
Rule 17j-1 because the Distributor is not affiliated with the Trust or the
Adviser, and no officer, director, or general partner of the Distributor serves
as an officer or director of the Trust or the Adviser.
Proxy-Voting
Procedures
The
Board of Trustees has adopted Proxy Voting Policies and Procedures (the “Proxy
Policies”) on behalf of the Trust which has delegated to each Sub-Adviser,
subject to the Board of Trustee’s continuing oversight the responsibility for
voting proxies. The Proxy Policies require that each Sub-Adviser vote proxies
received in a manner consistent with the best interests of each Fund and its
shareholders. The Proxy Policies also require each Sub-Adviser to present to the
Board of Trustees, at least annually, each Sub-Adviser’s Proxy Policies and a
record of each proxy voted by each Sub-Adviser on behalf of each Fund, including
a report on the resolution of all proxies identified by each Sub-Adviser as
involving a conflict of interest.
In
the event of a conflict between the interests of each Sub-Adviser and each Fund,
the Proxy Policies provide that the conflict may be disclosed to the Board of
Trustees or its delegate, who shall provide direction on how to vote the proxy.
The Board of Trustees has delegated this authority to the Independent Trustees,
and the proxy voting direction in such a case shall be determined by a majority
of the Independent Trustees. The Proxy Policies for each Sub-Adviser is located
in Appendix A.
Each
Fund’s actual voting records relating to portfolio securities during the most
recent 12-month period ended June 30 will be available without charge, upon
request, by calling toll-free, 1-855-625-7333 or by accessing the SEC’s website
at www.sec.gov.
Anti-Money
Laundering Compliance Program
The
Trust has established an Anti-Money Laundering Compliance Program (the
“Program”) as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
“USA PATRIOT Act”) and related anti-money laundering laws and regulations. To
ensure compliance with these laws, the Program provides for the development of
internal practices, procedures and controls, designation of anti-money
laundering compliance officers, an ongoing training program and an independent
audit function to determine the effectiveness of the Program. Michael L. Ceccato
has been designated as the Trust’s Anti-Money Laundering Compliance
Officer.
Procedures
to implement the Program include, but are not limited to: determining that the
Distributor and the Transfer Agent have established proper anti-money laundering
procedures; reporting suspicious and/or fraudulent activity; and a complete and
thorough review of all new account applications. Each Fund will not transact
business with any person or legal entity whose identity and beneficial owners,
if applicable, cannot be adequately verified under the provisions of the USA
PATRIOT Act.
As
a result of the Program, each Fund may be required to “freeze” the account of a
shareholder if the shareholder appears to be involved in suspicious activity or
if certain account information matches information on government lists of known
terrorists or other suspicious persons, or each Fund may be required to transfer
the account or proceeds of the account to a governmental agency.
Portfolio
Holdings Information
The
Trust, on behalf of each Fund, has adopted portfolio holdings disclosure
policies (the “Disclosure Policies”) that govern the timing and circumstances of
disclosure of portfolio holdings of each Fund. Information about each Fund’s
portfolio holdings will not be distributed to any third party except in
accordance with these Disclosure Policies. The Board of Trustees considered the
circumstances under which each Fund’s portfolio holdings may be disclosed under
the Disclosure Policies, considering actual and potential material conflicts
that could arise in such circumstances between the interests of each Fund’s
shareholders and the interests of the Adviser, Sub-Advisers, Distributor or any
other affiliated person of each Fund. After due consideration, the Board
determined that each Fund has a legitimate business purpose for disclosing
portfolio holdings to persons described in these Disclosure
Policies.
Information
about each Fund’s portfolio holdings will not be distributed to any third party
except as described below:
•the
disclosure is required to respond to a regulatory request, court order or other
legal proceeding;
•the
disclosure is to a mutual fund rating or evaluation services organization (such
as Morningstar, Bloomberg and Thomson Reuters), or statistical agency or person
performing similar functions, or due diligence department of a broker-dealer or
wirehouse, who has, if necessary, signed a confidentiality agreement, or is
bound by applicable duties of confidentiality imposed by law, with each
Fund;
•the
disclosure is made to each Fund’s service providers who generally need access to
such information in the performance of their contractual duties and
responsibilities, and who are subject to duties of confidentiality imposed by
law and/or contract, such as the Adviser, Sub-Advisers, the Board of Trustees,
each Fund’s independent registered public accountants, regulatory authorities,
counsel to each Fund or the Board of Trustees, proxy voting service
providers,
financial printers involved in the reporting process, each Fund administrator,
fund accountant, transfer agent, or custodian of each Fund;
•the
disclosure is made by each Sub-Advisers’ trading desk to broker-dealers in
connection with the purchase or sale of securities or requests for price
quotations or bids on one or more securities or so that such brokers can provide
each Sub-Adviser with natural order flow;
•the
disclosure is made to institutional consultants evaluating each Fund on behalf
of potential investors;
•the
disclosure is (a) in connection with a quarterly, semi-annual or annual report
that is available to the public or (b) relates to information that is otherwise
available to the public; or
•the
disclosure is made pursuant to prior written approval of the Trust’s CCO, or
other person so authorized, is for a legitimate business purpose and is in the
best interests of each Fund’s shareholders.
For
purposes of the Disclosure Policies, portfolio holdings information does not
include descriptive information if that information does not present material
risks of dilution, arbitrage, market timing, insider trading or other
inappropriate trading for each Fund. Information excluded from the definition of
portfolio holdings information generally includes, without limitation:
(i) descriptions of allocations among asset classes, regions, countries or
industries/sectors; (ii) aggregated data such as average or median ratios,
or market capitalization, performance attributions by industry, sector or
country; or (iii) aggregated risk statistics. It is the policy of the Trust
to prohibit any person or entity from receiving any direct or indirect
compensation or consideration of any kind in connection with the disclosure of
information about each Fund’s portfolio holdings.
The
Trust’s CCO must document any decisions regarding non-public disclosure of
portfolio holdings and the rationale therefor. In connection with the oversight
responsibilities by the Board of Trustees, any documentation regarding decisions
involving the non-public disclosure of portfolio holdings of each Fund to third
parties must be provided to the full Board of Trustees or its authorized
committee.
By
the 15th calendar day following a calendar quarter end for each Fund, except the
Greenspring Fund and Foresight Fund, the Fund’s portfolio holdings are delivered
by the Fund Administrator to the following ranking and rating organizations:
Lipper, Morningstar, S&P, Bloomberg, Thomson Financial, Vickers Stock and
CapitalBridge, Inc. Portfolio holdings disclosure may be approved under the
Disclosure Policies by the Trust’s CCO. By the 15th calendar day following a
month end, the Greenspring Fund’s portfolio holdings are delivered to the
ranking and rating organizations. The Foresight Fund may disclose its portfolio
holdings on a fiscal quarterly basis on or about the 60th day following the
quarter end by posting this information on the Foresight Fund’s website. The
Trust’s CCO may designate an earlier or later date for public disclosure of the
Foresight Fund’s portfolio holdings. In addition, the Foresight Fund (i) may
disclose the top 10 portfolio holdings at any time following the disclosure of
portfolio holdings and (ii) may disclose statistical information regarding the
Foresight Fund’s portfolio allocation characteristics on or about 10 business
days after each month-end, or may disclose such information if it is derived
from publicly available portfolio holdings, in each case, by posting the
information on the Foresight Fund’s website. Disclosure of each Fund’s complete
holdings is required to be made quarterly within 60 days of the end of each
fiscal quarter, in the annual and semi-annual reports to Fund shareholders, and
in the quarterly holdings report on Part F of Form N-PORT. These reports will be
made available, free of charge, on the EDGAR database on the SEC’s website at
www.sec.gov.
Any
suspected breach of this policy must be reported immediately to the Trust’s CCO,
or to the chief compliance officer of the Adviser who is to report it to the
Trust’s CCO. The Board of Trustees reserves the right to amend the Disclosure
Policies at any time without prior notice in its sole discretion.
Determination
of Net Asset Value
The
NAV of each Fund’s shares will fluctuate and is determined as of the close of
trading on the NYSE (generally 4:00 p.m., Eastern time) each business day.
The NYSE annually announces the days on which it will not be open for trading.
The most recent announcement indicates that the NYSE will not be open on the
following days: 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. However, the NYSE may close
on days not included in that announcement. If the NYSE closes early, each Fund
will calculate the NAV as of the close of trading on the NYSE on that day. If an
emergency exists as permitted by the SEC, the NAV may be calculated at a
different time.
The
NAV per share is computed by dividing the value of the securities held by each
Fund plus any cash or other assets (including interest and dividends accrued but
not yet received) minus all liabilities (including accrued expenses) by the
total number of shares in each Fund outstanding at such time.
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Generally,
each Fund’s investments are valued at market value or, in the absence of a
market value, at fair value as determined in good faith by each Sub-Adviser and
the valuation designee, under Rule 2a-5 of the 1940 Act, pursuant to
procedures approved by or under the direction of the Board of
Trustees.
Each
equity security owned by each Fund, including depositary receipts, that is
traded on a national securities exchange, except for securities listed on the
NASDAQ Stock Market LLC (“NASDAQ”), is valued at its last sale price on the
exchange on which such security is traded, as of the close of business on the
day the security is being valued or, lacking any reported sales, at the mean
between the most recent bid and asked price. All equity securities that are not
traded on a listed exchange are valued at the last sales price at the close of
the OTC market. If a non-exchange listed security does not trade on a particular
day, then the mean between the last quoted bid and the asked prices will be used
as long as it continues to reflect the value of the security.
Securities
that are traded on more than one exchange are valued using the price of the
exchange that each Fund generally considers to be the principal exchange on
which the security is traded. Fund securities listed on NASDAQ will be valued
using the NASDAQ Official Closing Price, which may not necessarily represent the
last sales price. If there has been no sale on such exchange or on NASDAQ on
such day, the security will be valued at the mean between the most recent quoted
bid and asked prices at the close of the exchange on such day, or the security
shall be valued at the latest sales price on the “composite market” for the day
such security is being valued. The composite market is defined as a
consolidation of the trade information provided by a national securities and
foreign exchange and OTC markets as published by an approved pricing service
(“Pricing Service”).
Money
market funds, demand notes and repurchase agreements are valued at cost. If cost
does not represent current market value the securities will be priced at fair
value.
Debt
securities, including short-term instruments having a maturity of 60 days or
less, are valued at the mean in accordance with prices provided by a Pricing
Service. Pricing Services may use various valuation methodologies such as the
mean between the bid and ask prices, matrix pricing method or other analytical
pricing models as well as market transactions and dealer quotations. If a price
is not available from a Pricing Service, the most recent quotation obtained from
one or more broker-dealers known to follow the issue will be obtained. Fixed
income securities purchased on a delayed-delivery basis are typically marked to
market daily until settlement at the forward settlement date. Quotations will be
valued at the mean between the bid and the offer. Fixed income securities
purchased on a delayed-delivery basis are typically marked to market daily until
settlement at the forward settlement date. Any discount or premium is accrued or
amortized using the constant yield method until maturity.
Exchange
traded options are valued at the composite price, using the National Best Bid
and Offer quotes (“NBBO”). NBBO consists of the highest bid price and lowest ask
price across any of the exchanges on which an option is quoted, thus providing a
view across the entire U.S. options marketplace. Specifically, composite pricing
looks at the last trades on the exchanges where the options are traded. If there
are no trades for the option on a given business day composite option pricing
calculates the mean of the highest bid price and lowest ask price across the
exchanges where the option is traded.
All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
Additional
Purchase and Redemption Information
The
information provided below supplements the information contained in the
Prospectus regarding the purchase and redemption of Fund shares.
How
to Purchase Shares
You
may purchase shares of each Fund directly from each Fund, or from securities
brokers, dealers or other financial intermediaries (collectively, “Financial
Intermediaries”). Investors should contact their Financial Intermediary directly
for appropriate instructions, as well as information pertaining to accounts and
any service or transaction fees that may be charged. Each Fund may enter into
arrangements with certain Financial Intermediaries whereby such Financial
Intermediaries (and their authorized designees) are authorized to accept your
order on behalf of each Fund (each an “Authorized Intermediary”). If you
transmit your purchase request to an Authorized Intermediary before the close of
regular trading (generally 4:00 p.m., Eastern time) on a day that the NYSE is
open for business, shares will be purchased at the next calculated NAV, after
the Financial Intermediary receives the request. Investors should check with
their Financial Intermediary to determine if it is an Authorized
Intermediary.
Investors
wishing to purchase Fund shares should contact each Fund toll free at
1-855-625-7333. If you are purchasing shares through a Financial Intermediary,
you must follow the procedures established by your Financial Intermediary. Your
Financial Intermediary is responsible for sending your purchase order and wiring
payment to the Transfer Agent. Your Financial Intermediary holds the shares in
your name and receives all confirmations of purchases and sales.
Shares
are purchased at the next calculated NAV, after the Transfer Agent or Authorized
Intermediary receives your purchase request in good order. In most cases, in
order to receive that
day’s
NAV, the Transfer Agent must receive your order in good order before the close
of regular trading on the NYSE (generally 4:00 p.m., Eastern
time).
The
Trust reserves the right in its sole discretion: (i) to suspend the
continued offering of each Fund’s shares; (ii) to reject purchase orders in
whole or in part when in the judgment of the Adviser or the Distributor such
rejection is in the best interest of each Fund; and (iii) to reduce or
waive the minimum for initial and subsequent investments for certain fiduciary
accounts or under circumstances where certain economies can be achieved in sales
of each Fund’s shares.
The
Adviser reserves the right to reject any initial or additional
investments.
How
to Redeem Shares and Delivery of Redemption Proceeds
You
may redeem your Fund shares any day the NYSE is open for regular trading, either
directly with each Fund or through your Financial Intermediary.
Payments
to shareholders for shares of each Fund redeemed directly from each Fund will be
made as promptly as possible, but no later than seven days after receipt by the
Transfer Agent of the written request in proper form, with the appropriate
documentation as stated in the Prospectus, except that each Fund may suspend the
right of redemption or postpone the date of payment during any period when:
(a) trading on the NYSE is restricted as determined by the SEC or the NYSE
is closed for other than weekends and holidays; (b) an emergency exists as
determined by the SEC making disposal of portfolio securities or valuation of
net assets of each Fund not reasonably practicable; or (c) for such other
period as the SEC may permit for the protection of each Fund’s shareholders.
The
value of shares on redemption or repurchase may be more or less than the
investor’s cost, depending upon the market value of each Fund’s portfolio
securities at the time of redemption or repurchase.
Telephone
Redemptions
Shareholders
with telephone transaction privileges established on their account may redeem
Fund shares by telephone. Upon receipt of any instructions or inquiries by
telephone from the shareholder, each Fund or its authorized agents may carry out
the instructions and/or respond to the inquiry consistent with the shareholder’s
previously established account service options. For joint accounts, instructions
or inquiries from either party will be carried out without prior notice to the
other account owners. In acting upon telephone instructions, each Fund and its
agents use procedures that are reasonably designed to ensure that such
instructions are genuine. These include recording all telephone calls, requiring
pertinent information about the account and sending written confirmation of each
transaction to the registered owner.
The
Transfer Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. If the Transfer Agent fails to employ
reasonable procedures, each Fund and the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. If these procedures are
followed, however, to the extent permitted by applicable law, neither the Funds
nor their agents will be liable for any loss, liability, cost or expense arising
out of any redemption request, including any fraudulent or unauthorized request.
For additional information, contact the Transfer Agent.
Redemption
in Kind
Each
Fund does not intend to redeem shares in any form except cash. The Trust,
however, has filed a notice of election under Rule 18f-1 of the 1940 Act
that allows each Fund to redeem in-kind redemption requests of a certain amount.
Specifically, if the amount you are redeeming during any 90-day period is in
excess of the lesser of $250,000 or 1% of the net assets of each Fund, valued at
the beginning of such period, each Fund has the right to redeem your shares by
giving you the amount that exceeds $250,000 or 1% of the net assets of each Fund
in securities instead of cash. If each Fund pays your redemption proceeds by a
distribution of securities, you could incur brokerage or other charges in
converting the securities to cash, and you will bear any market risks associated
with such securities until they are converted into cash. For federal income tax
purposes, redemptions made in-kind are taxed in the same manner to a redeeming
shareholder as redemptions made in cash. In addition, sales of securities
received in kind may generate taxable gains.
Federal
Income Tax Matters
This
section is not intended to be a full discussion of federal income tax laws and
the effect of such laws on you.
This
section is based on the Code, Treasury Regulations, judicial decisions, and IRS
guidance on the date hereof, all of which are subject to change, and possibly
with retroactive effect. These changes could impact each Fund’s investments or
the tax consequences to you of investing in each Fund. Some of the changes could
affect the timing, amount and tax treatment of Fund distributions made to
shareholders. There may be other federal, state, foreign or local tax
considerations to a particular shareholder. No assurance can be given that
legislative, judicial, or administrative changes will not be forthcoming which
could affect the accuracy of any statements made in this section. Please consult
your tax advisor before investing.
Each
series of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund, as a series of the Trust, intends to qualify and elect to
be treated as a RIC under Subchapter M of the Code, provided it complies
with all applicable requirements regarding the source of its income,
diversification of its assets and timing and amount of its distributions. Each
Fund’s policy is to distribute to its shareholders all of its investment company
taxable income and any net capital gain for each taxable year in a manner that
complies with the distribution requirements of the Code, so that each Fund will
not be subject to any federal income or excise taxes on amounts distributed.
However, each Fund can give no assurances that its anticipated distributions
will be sufficient to eliminate all Fund level taxes. If each Fund does not
qualify as a RIC and is unable to obtain relief from such failure, it would be
taxed as a regular corporation and, in such case, it would be more beneficial
for a shareholder to directly own each Fund’s underlying investments rather than
indirectly owning them through each Fund.
To
qualify as a RIC, each Fund must derive at least 90% of its gross income from
“good income,” which includes: (1) dividends, interest, certain payments
with respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies; (2) other income (including but
not limited to gains from options, futures or forward contracts) derived with
respect to each Fund’s business of investing in such stock, securities or
foreign currencies; and (3) net income derived from an interest in a
qualified publicly traded partnership. Although Code Section 851(b)
authorizes the U.S. Treasury Department to issue Treasury Regulations excluding
“foreign currency gains” that are not directly related to a RIC’s principal
business of investing in stock or securities from qualifying income, Treasury
Regulations currently provide that gains from the sale or other disposition of
foreign currencies is qualifying income. Nevertheless, there can be no assurance
that
future
Treasury Regulations will not come to a different conclusion or that each Fund
will satisfy all requirements to be taxed as a RIC.
Furthermore,
each Fund must diversify its holdings such that at the end of each fiscal
quarter, (i) at least 50% of the value of each Fund’s assets consists of cash,
cash equivalents, U.S. government securities, securities of other RICs, and
other acceptable securities, with such other securities limited, in respect to
any one issuer, to an amount not greater in value than 5% of the value of each
Fund’s total assets and to not more than 10% of the outstanding voting
securities of such issuer; and (ii) no more than 25% of the value of each Fund’s
assets may be invested in the securities of any one issuer (other than U.S.
government securities or securities of other RICs), or of any two or more
issuers that are controlled, as determined under applicable Code rules, by each
Fund and that are engaged in the same, similar or related trades or businesses,
or of certain qualified publicly traded partnerships.
Each
Fund will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year an amount at least equal to 98% of its ordinary income for the
calendar year plus 98.2% of its capital gain net income for either the one-year
period ending on October 31 of that year, or, if each Fund makes an
election under Section 4982(e)(4) of the Code, each Fund’s fiscal year end,
subject to an increase for any shortfall in the prior year’s distribution. Each
Fund has a Section 4982(e)(4) election currently in effect. Each Fund
intends to declare and distribute dividends and distributions in the amounts and
at the times necessary to avoid the application of the excise tax, but can make
no assurances that all such tax liability will be eliminated.
Investment
company taxable income generally consists of interest, dividends, net short-term
capital gain, and net gain from foreign currency transactions, less expenses.
Net capital gain is the excess of the net long-term gain from each Fund’s sales
or exchanges of capital assets over the net short-term loss from such sales or
exchanges, taking into account any capital loss carryforward of each Fund. Net
capital losses not used during any year may be carried forward indefinitely
until used, and will retain their character as short-term or long-term. Each
Fund may also elect to defer certain losses for tax purposes.
Capital
Loss Carryforwards. For
the fiscal year ended December 31, 2023, the CenterSquare Fund had
long-term capital losses of $4,478,557 and short term capital losses of
$914,649, which both amounts will be carried forward indefinitely to offset
future realized capital gains; the Marketfield Fund had short-term capital
losses of $359,737,206, which will be carried forward indefinitely to offset
future realized capital gains; the Foresight Fund had short term capital losses
of $1,776,139, which will be carried over indefinitely to offset future realized
capital gains. To the extent each Fund realizes future net capital gains,
taxable distributions to its shareholders will be first offset by any unused
capital loss carryovers from the year ended December 31, 2023. Both the
Greenspring Fund and the Tran Fund did not have any capital losses for the
fiscal period ended December 31, 2023.
Distributions
of investment company taxable income are taxable to shareholders as ordinary
income. For a non-corporate shareholder, a portion of each Fund’s distributions
of investment company taxable income may consist of “qualified dividend income”
eligible for taxation at the reduced federal income tax rates applicable to
long-term capital gains to the extent that the amount distributed is
attributable to and reported as “qualified dividend income” and the shareholder
meets certain holding period requirements with respect to its Fund shares. For a
corporate shareholder, a portion of each Fund’s distributions of investment
company taxable income may qualify for the intercorporate dividends received
deduction to the extent each Fund receives dividends directly or indirectly from
U.S.
corporations, reports the amount distributed as eligible for deduction and the
shareholder meets certain holding period requirements with respect to its
shares. The aggregate amount so reported to either non-corporate or corporate
shareholders as applicable, cannot, however, exceed the aggregate amount of such
dividends received by each Fund for its taxable year.
Distributions
of net capital gain are taxable to shareholders as long-term capital gain
regardless of the length of time that a shareholder has owned Fund shares.
Distributions of net capital gain are not eligible for “qualified dividend
income” treatment or the dividends-received deduction referred to in the
previous paragraph.
Distributions
of investment company taxable income and net capital gain will be taxable as
described above whether received in additional Fund shares or in cash.
Shareholders who choose to receive distributions in the form of additional Fund
shares will have a cost basis for federal income tax purposes in each share so
received equal to the NAV of a share on the reinvestment date. Distributions are
generally taxable when received. However, distributions declared in October,
November or December to shareholders of record and paid the following January
are taxable as if received on December 31. Distributions are generally
includable in alternative minimum taxable income in computing a non-corporate
shareholder’s liability for the alternative minimum tax.
Certain
individuals, trusts and estates may be subject to a Net Investment Income
(“NII”) tax of 3.8% (in addition to the regular income tax). The NII tax is
imposed on the lesser of: (i) a taxpayer’s investment income, net of
deductions properly allocable to such income; or (ii) the amount by which
such taxpayer’s modified adjusted gross income exceeds certain thresholds
($250,000 for married individuals filing jointly, $200,000 for unmarried
individuals and $125,000 for married individuals filing separately). Each Fund’s
distributions are includable in a shareholder’s investment income for purposes
of this NII tax. In addition, any capital gain realized by a shareholder upon
the sale or redemption of Fund shares is includable in such shareholder’s
investment income for purposes of this NII tax.
A
sale or redemption of Fund shares, whether for cash or in kind proceeds, may
result in recognition of a taxable capital gain or loss. Gain or loss realized
upon a sale or redemption of Fund shares will generally be treated as a
long-term capital gain or loss if the shares have been held for more than one
year, and, if held for one year or less, as a short-term capital gain or loss.
However, any loss realized upon a sale or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain received or deemed to be received with respect
to such shares. In determining the holding period of such shares for this
purpose, any period during which your risk of loss is offset by means of
options, short sales, or similar transactions is not counted. Any loss realized
upon a sale or redemption of Fund shares may be disallowed under certain wash
sale rules to the extent shares of each Fund are purchased (through reinvestment
of distributions or otherwise) within 30 days before or after the sale or
redemption. If a shareholder’s loss is disallowed under the wash sale rules, the
basis of the new shares will be increased to preserve the loss until a future
sale or redemption of the shares.
Each
Fund may invest in MLPs that are treated as qualified publicly traded
partnerships for federal income tax purposes. The income derived from such
investments constitutes “good income” for purposes of satisfying the source of
income requirement for each Fund to maintain its status as a RIC. However, no
more than 25% of the value of a RIC’s total assets at the end of each fiscal
quarter may be invested in securities of qualified publicly traded partnerships.
If an MLP in which each Fund invests does not qualify as a qualified publicly
traded partnership (and the MLP is not otherwise taxed
as
a corporation for federal income tax purposes), each Fund must look through to
the character of the income generated by the MLP. Such income may not qualify as
“good income” and could adversely affect each Fund’s status as a
RIC.
If
an MLP in which each Fund invests is taxed as a partnership for federal income
tax purposes, the cash distributions received by each Fund from the MLP may not
correspond to the amount of income allocated to each Fund by the MLP in any
given taxable year. If the amount of income allocated to each Fund by an MLP
exceeds the amount of cash received by each Fund from such MLP, each Fund may
have difficulty making distributions to its shareholders in the amounts
necessary to satisfy the distribution requirements for maintaining each Fund’s
status as a RIC and avoiding any federal income and excise taxes at each Fund
level. Accordingly, each Fund may have to dispose of its portfolio investments
under disadvantageous circumstances in order to generate sufficient cash to
satisfy the distribution requirements. Distributions to each Fund from an MLP
that is taxed as a partnership for federal income tax purposes will constitute a
return of capital to the extent of each Fund’s basis in its interest in the MLP.
If each Fund’s basis is reduced to zero, distributions in excess of basis will
generally constitute capital gain for federal income tax purposes.
If
more than 50% of the value of each Fund’s total assets at the close of its
taxable year consists of stock and securities in foreign corporations, each Fund
will be eligible to, and may, file an election with the IRS that would enable
each Fund’s shareholders, in effect, to receive the benefit of the foreign tax
credit with respect to any income taxes paid by each Fund to foreign countries
and U.S. possessions. Pursuant to the election, each Fund would treat those
foreign taxes as distributions paid to its shareholders, and each shareholder
would be required to (i) include in gross income, and treat as paid by him,
his proportionate share of those taxes, (ii) treat his share of those taxes
and of any distribution paid by each Fund that represents income from foreign
countries or U.S. possessions as his own income from those sources, and
(iii) either deduct the taxes deemed paid by him in computing his taxable
income or, alternatively, claim the foreign tax credit against his federal
income tax. If each Fund makes this election, it will report to its shareholders
shortly after each taxable year their respective share of income from sources
within, and taxes paid to, foreign countries and U.S. possessions. The Code may
limit a shareholder’s ability to claim a foreign tax credit. Shareholders who
elect to deduct their portion of each Fund’s foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax
returns.
Under
the Foreign Account Tax Compliance Act (“FATCA”), each Fund may be required to
withhold a generally nonrefundable 30% tax on (i) distributions of
investment company taxable income, and (ii) distributions of net capital
gain and the gross proceeds of a sale or redemption of Fund shares paid to
(A) certain “foreign financial institutions” unless such foreign financial
institution agrees to verify, monitor, and report to the IRS the identity of
certain of its accountholders, among other items (unless such entity is
otherwise deemed compliant under the terms of an intergovernmental agreement
with the United States), and (B) certain “non-financial foreign entities”
unless such entity certifies to each Fund that it does not have any substantial
U.S. owners or provides the name, address, and taxpayer identification number of
each substantial U.S. owner, among other items. In December 2018, the IRS
and Treasury Department released proposed Treasury Regulations that would
eliminate FATCA withholding on Fund distributions of net capital gain and the
gross proceeds from a sale or redemption of Fund shares. Although taxpayers are
entitled to rely on these proposed Treasury Regulations until final Treasury
Regulations are issued, these proposed Treasury Regulations have not been
finalized, may not be finalized in their proposed form, and are potentially
subject to change. This FATCA withholding tax could also affect each Fund’s
return on its investments in foreign securities or affect a shareholder’s return
if the shareholder holds its Fund shares through a foreign
intermediary.
You are urged to consult your tax adviser regarding the application of this
FATCA withholding tax to your investment in each Fund and the potential
certification, compliance, due diligence, reporting, and withholding obligations
to which you may become subject in order to avoid this withholding
tax.
Each
Fund’s transactions, if any, in forward contracts, options, futures contracts,
swaps and other investments may be subject to special provisions of the Code
that, among other things, may accelerate recognition of income to each Fund,
defer each Fund’s losses, and affect whether capital gain and loss is
characterized as long-term or short-term. These provisions could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require each Fund to “mark-to-market” certain positions
(i.e., treat
them as if they were closed out). This “mark-to-market” requirement may cause
each Fund to recognize income without receiving cash, and each Fund may have
difficulty making distributions to its shareholders in the amounts necessary to
satisfy the distribution requirements for maintaining each Fund’s status as a
RIC and avoiding any income and excise taxes at each Fund level. Accordingly,
each Fund may have to dispose of its investments under disadvantageous
circumstances in order to generate sufficient cash to satisfy the distribution
requirements of the Code.
Except
in the case of certain exempt shareholders, if a shareholder does not furnish
each Fund with its correct Social Security Number or other taxpayer
identification number and certain certifications or each Fund receives
notification from the IRS requiring backup withholding, each Fund is required by
federal law to withhold federal income tax from the shareholder’s distributions
and redemption proceeds at a rate set under Section 3406 of the Code for
U.S. residents.
Foreign
taxpayers (including nonresident aliens) are generally subject to a tax
withholding at a flat rate of 30% on U.S.-source income that is not effectively
connected with the conduct of a trade or business in the United
States.
This withholding rate may be lower under the terms of a tax treaty or
convention.
Taxation
of the Fund’s Investments
Certain
Debt Obligations; Original Issue Discount; Market Discount.
For U.S. federal income tax purposes, some debt obligations with a fixed
maturity date of more than one year from the date of issuance (and zero-coupon
debt obligations with a fixed maturity date of more than one year from the date
of issuance) will be treated as having original issue discount (“OID”). OID is,
very generally, the excess of the stated redemption price at maturity of a debt
obligation over the issue price. OID is treated for U.S. federal income tax
purposes as interest income earned by the Fund, which will comprise a part of
the Fund’s investment company taxable income or net tax-exempt income, if any,
required to be distributed to shareholders as described above, whether or not
cash on the debt obligation is actually received. Generally, the amount of OID
accrued each year is determined on the basis of a constant yield to maturity
which takes into account the compounding of interest (as potentially reduced by
any amortizable bond premium—see below).
Some
debt obligations with a fixed maturity date of more than one year from the date
of issuance that are acquired by the Fund in the secondary market may be treated
as having “market discount.” Very generally, market discount is the excess of
the stated redemption price of a debt obligation (or in the case of an
obligation issued with OID, its “revised issue price”) over the purchase price
of such obligation. Generally, any gain recognized on the disposition of, and
any partial payment of principal on, a debt obligation having market discount is
treated as ordinary income to the extent the gain, or principal payment, does
not exceed the “accrued market discount” on such debt obligation.
Alternatively,
the Fund may elect to accrue market discount currently, in which case the Fund
will be required to include the accrued market discount in the Fund’s income (as
ordinary income) and thus distribute it over the term of the debt obligation,
even though payment of that amount is not received until a later time, upon
partial or full repayment or disposition of the debt obligation. The rate at
which the market discount accrues, and thus is included in the Fund’s income,
will depend upon which of the permitted accrual methods the Fund
elects.
Some
debt obligations with a fixed maturity date of one year or less from the date of
issuance may be treated as having OID or, in certain cases, “acquisition
discount” (very generally, the excess of the stated redemption price over the
purchase price). Generally, the Fund will be required to include the acquisition
discount or OID in income (as ordinary income) and thus distribute it over the
term of the debt obligation, even though payment of that amount is not received
until a later time, upon partial or full repayment or disposition of the debt
obligation. The Fund may make one or more of the elections applicable to debt
obligations having acquisition discount or OID, which could affect the character
and timing of recognition of income.
Pay-in-kind
bonds also will give rise to income which is required to be distributed and is
taxable even though the Fund holding the obligation receives no interest payment
in cash on the obligation during the year.
If
the Fund holds the foregoing kinds of obligations, or other obligations subject
to special rules under the Code, it may be required to pay out as an income
distribution each year an amount which is greater than the total amount of cash
interest the Fund actually received. Such distributions may be made from the
cash assets of the Fund or, if necessary, by selling of portfolio obligations
including at a time when it may not be advantageous to do so. These dispositions
may cause the Fund to realize higher amounts of short-term capital gains
(generally taxed to shareholders at ordinary income tax rates) and, in the event
the Fund realizes net capital gains from such transactions, its shareholders may
receive a larger Capital Gain Dividend (see “Federal Income Taxation of
Shareholders,” below) than if the Fund had not held such
obligations.
Securities
Issued or Purchased at a Premium.
Very generally, where the Fund purchases a bond at a price that exceeds the
stated principal amount (or revised issue price)—that is, at a premium—the
premium is amortizable over the remaining term of the bond. In the case of a
taxable bond, if the Fund makes an election applicable to all such bonds it
purchases, which election is irrevocable without the consent of the IRS, the
Fund reduces the current taxable income from the bond by the amortizable premium
and reduces its tax basis in the bond (or the upward basis adjustment
attributable to any OID) by the amount of such offset; upon the disposition or
maturity of such bonds acquired on or after January 4, 2013, the Fund is
permitted to deduct, against stated interest from other bonds, any remaining
premium allocable to a prior period. In the case of a tax-exempt bond, tax rules
require the Fund to reduce its tax basis by the amount of amortizable
premium.
Junk
Bonds.
To the extent such investments are permissible, the Fund may invest in debt
obligations that are in the lowest rating categories or are unrated, including
debt obligations of issuers not currently paying interest or who are in default.
If the Fund invests in high-yield OID obligations issued by corporations
(including tax-exempt obligations), a portion of the OID accruing on the
obligation may be treated as taxable dividend income. In such cases, if the
issuer of the high-yield discount obligation is a domestic corporation, dividend
payments by the Fund attributable to such portion of accrued OID may be eligible
for the dividends-received deduction for corporate shareholders.
Investments
in debt obligations that are at risk of or in default present special tax issues
for the Fund. Tax rules are not entirely clear about issues such as whether or
to what extent the Fund should recognize market discount on a debt obligation,
when the Fund may cease to accrue interest, OID or market discount, when and to
what extent the Fund may take deductions for bad debts or worthless securities
and how the Fund should allocate payments received on obligations in default
between principal and income. These and other related issues will be addressed
by the Fund when, as and if it invests in such securities, in order to seek to
ensure that it distributes sufficient income to preserve its eligibility for
treatment as a regulated investment company and does not become subject to U.S.
federal income or excise tax.
REITs.
Any investment by the Fund in equity securities of REITs qualifying as real
estate investment trusts under Subchapter M of the Code may result in the Fund’s
receipt of cash in excess of the REIT’s earnings; if the Fund distributes these
amounts, these distributions could constitute a return of capital to Fund
shareholders for U.S. federal income tax purposes. Dividends received by the
Fund from a REIT will not qualify for the corporate dividends-received deduction
and generally will not constitute qualified dividend income (see “Federal Income
Taxation of Shareholders,” below).
Distributions
by the Fund to its shareholders that the Fund properly reports as “section 199A
dividends,” as defined and subject to certain conditions described below, are
treated as qualified REIT dividends in the hands of non-corporate shareholders.
Non-corporate shareholders are permitted a federal income tax deduction equal to
20% of qualified REIT dividends received by them, subject to certain
limitations. Very generally, a “section 199A dividend” is any dividend or
portion thereof that is attributable to certain dividends received by a
regulated investment company from REITs, to the extent such dividends are
properly reported as such by the regulated investment company in a written
notice to its shareholders. A section 199A dividend is treated as a qualified
REIT dividend only if the shareholder receiving such dividend holds the
dividend-paying regulated investment company shares for at least 46 days of the
91-day period beginning 45 days before the shares become ex-dividend, and is not
under an obligation to make related payments with respect to a position in
substantially similar or related property. The Fund is permitted to report such
part of its dividends as section 199A dividends as are eligible, but is not
required to do so.
Issuer
Deductibility of Interest.
A portion of the interest paid or accrued on certain high-yield discount
obligations owned by the Fund may not be deductible to (and thus, may affect the
cash flow of) the issuer and will instead be treated as a dividend paid by the
issuer for purposes of the dividends-received deduction (described below). In
such cases, if the issuer of the high-yield discount obligations is a domestic
corporation, dividend payments by the Fund may be eligible for the corporate
dividends-received deduction (described below) to the extent attributable to the
deemed dividend portion of such accrued interest.
Mortgage-Related
Securities.
The Fund may invest directly or indirectly (e.g., through REITs) in residual
interests in real estate mortgage investment conduits (“REMICs”), including by
investing in residual interests in CMOs with respect to which an election to be
treated as a REMIC is in effect or equity interests in taxable mortgage pools
(“TMPs”). Under a notice issued by the IRS in October 2006 and Treasury
regulations that have yet to be issued but may apply retroactively, a portion of
the Fund’s income (including income allocated to the Fund from a REIT or other
pass-through entity) that is attributable to a residual interest in a REMIC or
an equity interest in a TMP (referred to in the Code as an “excess inclusion”)
will be subject to U.S. federal income tax in all events. This notice also
provides, and the regulations are expected to provide, that excess inclusion
income of a regulated
investment
company, such as the Fund, will be allocated to shareholders of the regulated
investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related interest
directly. As a result, the Fund, if investing in such interests, may not be a
suitable investment for charitable remainder trusts (see “Tax-Exempt
Shareholders” below).
In
general, excess inclusion income allocated to shareholders (i) cannot be offset
by net operating losses (subject to a limited exception for certain thrift
institutions), (ii) will constitute unrelated business taxable income (“UBTI”)
to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on UBTI, thereby potentially requiring such an entity that is allocated excess
inclusion income, and otherwise might not be required to file a tax return, to
file a tax return and pay tax on such income and (iii) in the case of a non-U.S.
shareholder, will not qualify for any reduction in U.S. federal withholding tax.
A shareholder will be subject to U.S. federal income tax on such inclusions
notwithstanding any exemption from such income tax otherwise available under the
Code.
Repurchase
Agreements and Securities Loans.
Any distribution of income that is attributable to (i) income received by the
Fund in lieu of dividends with respect to securities on loan pursuant to a
securities lending transaction or (ii) dividend income received by the Fund on
securities it temporarily purchased from a counterparty pursuant to a repurchase
agreement that is treated for U.S. federal income tax purposes as a loan by the
Fund, will not constitute qualified dividend income to individual shareholders
and will not be eligible for the dividends-received deduction for corporate
shareholders, in each case as described below. In addition, withholding taxes
accrued on dividends during the period that such security was not directly held
by the Fund will not qualify as a foreign tax paid by the Fund and therefore
cannot be passed through to shareholders even if the Fund were otherwise to meet
the requirements described in “Foreign Taxes,” below.
Passive
Foreign Investment Companies.
Under the Code, investments in certain foreign investment companies that qualify
as “passive foreign investment companies” (“PFICs”) are subject to special tax
rules. A PFIC is any foreign corporation in which (i) 75% or more of the gross
income for the taxable year is passive income, or (ii) the average percentage of
the assets (generally by value, but by adjusted tax basis in certain cases) that
produce or are held for the production of passive income is at least 50%.
Generally, “passive income” for this purpose means dividends, interest
(including income equivalent to interest), royalties, rents, annuities, the
excess of gains over losses from certain property transactions and commodities
transactions, and foreign currency gains. Passive income for this purpose does
not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons.
Equity
investments by the Fund in certain PFICs could subject the Fund to a U.S.
federal income tax or other charge (including interest charges) on distributions
received from the PFIC or on proceeds received from the disposition of shares in
the PFIC, which tax cannot be eliminated by making distributions to the Fund’s
shareholders. However, in certain circumstances, the Fund may avoid this tax
treatment by electing to treat the PFIC as a “qualified electing fund” (i.e.,
make a “QEF” election), in which case the Fund will be required to include its
share of the PFIC’s income and net capital gains annually, regardless of whether
it receives any distribution from the PFIC. Alternatively, the Fund may elect to
mark the gains (and to a limited extent losses) in its PFIC holdings “to the
market” as though it had sold (and repurchased) its holdings in those PFICs on
the last day of the Fund’s taxable year. Such gains and losses are treated as
ordinary income and loss. The QEF and mark-to-market elections may have the
effect of accelerating the recognition of income (without the
receipt
of cash) and increasing the amount required to be distributed for the Fund to
avoid taxation. Making either of these elections therefore may require the Fund
to sell other investments (including when it is not advantageous to do so) to
meet its distribution requirement, which also may accelerate the recognition of
gain and affect the Fund’s total return. If the Fund indirectly invests in PFICs
by virtue of the Fund’s investment in underlying U.S. funds, it may not make
such elections; rather, the underlying U.S. funds directly investing in PFICs
would decide whether to make such elections.
Because
it is not always possible to identify a foreign corporation as a PFIC, the Fund
may incur the tax and interest charges described above in some instances.
Dividends paid by PFICs will not be eligible to be treated as “qualified
dividend income.” See “Federal Income Taxation of Shareholders,”
below.
Investments
in Other RICs.
The Fund’s investments in shares of other mutual funds, ETFs or other companies
that are treated as regulated investment companies (each, an “underlying RIC”),
can cause the Fund to be required to distribute greater amounts of net
investment income or net capital gain than the Fund would have distributed had
it invested directly in the securities held by the underlying RIC, rather than
in shares of the underlying RIC. Further, the amount or timing of distributions
from the Fund qualifying for treatment as a particular character (e.g.,
long-term capital gain, exempt interest, eligibility for dividends-received
deduction, etc.) will not necessarily be the same as it would have been had the
Fund invested directly in the securities held by the underlying RIC. If the Fund
receives dividends from an underlying RIC, and the underlying RIC reports such
dividends as “qualified dividend income,” then the Fund is permitted in turn to
report a portion of its distributions as qualified dividend income, provided the
Fund meets holding period and other requirements with respect to shares of the
underlying RIC.
If
the Fund receives dividends from an underlying RIC and the underlying RIC
reports such dividends as eligible for the “dividends-received deduction,” then
the Fund is permitted in turn to report its distributions derived from those
dividends as eligible for the dividends-received deduction as well, provided the
Fund meets holding period and other requirements with respect to shares of the
underlying RIC. (Qualified dividend income and the dividends-received deduction
are described below.)
Taxation
of Certain Investments.
Including as described above, certain of the Fund’s investments will create
taxable income in excess of the cash they generate. In such cases, the Fund may
be required to sell assets (including when it is not advantageous to do so) to
generate the cash necessary to distribute to its shareholders all of its income
and gains and therefore to eliminate any tax liability at the Fund level. These
dispositions may cause the Fund to realize higher amounts of short-term capital
gains (generally taxed to shareholders at ordinary income tax rates) and, in the
event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger Capital Gain Dividend (as defined below) than
if the Fund had not held such investments. The character of the Fund’s taxable
income will, in many cases, be determined on the basis of reports made to the
Fund by the issuers of the securities in which they invest. The tax treatment of
certain securities in which the Fund may invest is not free from doubt and it is
possible that an IRS examination of the issuers of such securities could result
in adjustments to the income of the Fund.
Foreign
Income Tax.
Investment income received, and gains realized, by each Fund from sources within
foreign countries may be subject to foreign income tax withholding at the
source, and the amount of tax withheld generally will be treated as an expense
of each Fund. The United States has entered into tax treaties with many foreign
countries that entitle each Fund to a reduced rate of, or
exemption
from, tax on such income. Some countries require the filing of a tax reclaim or
other form(s) to receive the benefit of the reduced tax rate; whether or when
each Fund will receive a tax reclaim is within the control of the individual
country. Information required on those forms may not be available, such as
certain shareholder information; therefore, each Fund may not receive one or
more reduced treaty rates or potential reclaims. Other countries have
conflicting and changing instructions and restrictive timing requirements that
also may cause each Fund to not receive one or more reduced treaty rates or
potential reclaims. Other countries may subject capital gains realized by each
Fund on the sale or other disposition of securities of that country to taxation.
It is impossible to determine the effective rate of foreign tax in advance,
since the amount of each Fund’s assets to be invested in various countries is
not known.
Each
Fund may elect to pass through to you your pro rata share of foreign income
taxes paid by each Fund if more than 50% of the value of each Fund’s total
assets at the close of its taxable year consists of foreign stocks and
securities. Each Fund will notify you if it is eligible to and makes such an
election.
Distributions
Each
Fund will receive income primarily in the form of dividends and interest earned
on each Fund’s investments in securities. This income, less the expenses
incurred in its operations, is each Fund’s net investment income, substantially
all of which will be distributed to each Fund’s shareholders.
The
amount of each Fund’s distributions is dependent upon the amount of net
investment income received by each Fund from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board of Trustees. Each Fund
does not pay “interest” or guarantee any fixed rate of return on an investment
in its shares.
Each
Fund may realize capital gains or losses in connection with sales or other
dispositions of its portfolio securities. Any net gain that each Fund may
realize from transactions involving investments held less than the period
required for long‑term capital gain or loss recognition or otherwise producing
short‑term capital gains and losses (taking into account any capital loss
carryforward), will comprise part of net investment income. If during any year
each Fund realizes a net gain on transactions involving investments held for the
period required for long‑term capital gain or loss recognition or otherwise
producing long-term capital gains and losses, each Fund will generally have a
net long‑term capital gain. After deduction of the amount of any net short-term
capital loss, the balance (to the extent not offset by any capital loss
carryforward) will be distributed and treated as long-term capital gains in the
hands of the shareholders regardless of the length of time that each Fund shares
may have been held by the shareholder. Net capital losses realized by each Fund
may be carried forward indefinitely, and will generally retain their character
as short-term or long-term capital losses. For more information concerning
applicable capital gains tax rates, please consult your tax
adviser.
Any
distribution paid by each Fund reduces each Fund’s NAV per share on the date
paid by the amount of the distribution per share. Accordingly, a distribution
paid shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to federal income
taxes.
Distributions
will be reinvested in additional Fund shares unless the shareholder has
otherwise indicated. Shareholders have the right to change their elections with
respect to the reinvestment of distributions by notifying the Transfer Agent in
writing, by telephone at 1-855-625-7333 (toll-free) or
by
contacting an Authorized Intermediary. However, any such change will be
effective only as to distributions for which the record date is five or more
calendar days after the Transfer Agent has received the written
request.
Cost
Basis Reporting
Each
Fund is required to report to certain shareholders and the IRS the cost basis of
Fund shares acquired on or after January 1, 2012, by such shareholders
(“covered shares”) when the shareholder sells or redeems such shares. This
reporting requirement does not apply to shares acquired prior to January 1,
2012 or to shares held through a tax-deferred arrangement, such as a 401(k) plan
or an IRA, or to shares held by tax-exempt organizations, financial
institutions, corporations (other than S corporations), banks, credit unions and
certain other entities and governmental bodies (“non-covered shares”). Each Fund
is not required to determine or report a shareholder’s cost basis in non-covered
shares and is not responsible for the accuracy or reliability of any information
provided for non-covered shares.
The
cost basis of a share is generally its purchase price adjusted for
distributions, returns of capital, and other corporate actions. Cost basis is
used to determine whether the sale or redemption of a share results in a capital
gain or loss. If you sell or redeem covered shares during any year, then each
Fund will report the gain or loss, cost basis, and holding period of such
covered shares to the IRS and you on Form 1099.
A
cost basis method is the method by which each Fund determines which specific
covered shares are deemed to be sold or redeemed when a shareholder sells or
redeems less than its entire holding of covered shares and has made multiple
purchases of covered shares on different dates at differing NAVs. If a
shareholder does not affirmatively elect a cost basis method, each Fund will use
the average cost method, which averages the basis of all Fund shares in an
account regardless of holding period, and shares sold or redeemed are deemed to
be those with the longest holding period first. Each shareholder may elect in
writing (and not over the telephone) any alternate IRS-approved cost basis
method to calculate the cost basis in its covered shares. The default cost basis
method applied by each Fund or the alternate method elected by a shareholder may
not be changed after the settlement date of a sale or redemption of Fund
shares.
If
you hold Fund shares through a broker (or another nominee), please contact that
broker or nominee with respect to the reporting of cost basis and available
elections for your account.
You
are encouraged to consult your tax adviser regarding the application of these
cost basis reporting rules and, in particular, which cost basis calculation
method you should elect.
Financial
Statements
The
financial statements of the Funds’ independent registered public accounting
firm’s report appearing in the Funds’ Annual
Report
for the fiscal year ended December 31, 2023 are hereby incorporated by
reference.
Appendix
A
CenterSquare
Investment Management LLC
Introduction
Pursuant
to the adoption by the Securities and Exchange Commission of Rule 206(4)-6 under
the Investment Advisers Act of 1940 (the “Advisers Act”), it is a fraudulent,
deceptive, or manipulative act, practice or course of business, within the
meaning of Section 206(4) of the Advisers Act, for a registered investment
adviser to exercise voting authority with respect to client securities, unless:
(1) the adviser has adopted and implemented written policies and procedures that
are reasonably designed to ensure that the adviser votes proxies in the best
interest of its clients; (2) the adviser describes its proxy voting procedures
to its clients and provides
copies
of
the
procedures
on
request;
and
(3)
the
adviser
discloses
to
the
clients
how
they
may obtain information on how the adviser voted their proxies. This Proxy Voting
Policy documents CenterSquare Investment Management LLC’s (“CenterSquare”) proxy
voting
policies
and procedures.
1.Statement
of
Policy
Proxy
voting is an important right of shareholders and duties of care and loyalty must
be undertaken by CenterSquare to ensure that such rights are properly and timely
exercised in accordance with the Firm’s fiduciary duty to its clients. To
satisfy its fiduciary duty in making any voting determination, CenterSquare must
make the determination in the best interest of the client and must not place its
own interests ahead of the interests of the client. Therefore, all proxies
received by CenterSquare should be voted in accordance with these procedures
which
are
intended
to
comply
with
Rule
206(4)-6
of
the
Advisers
Act.
This
Proxy
Voting
Policy
applies
only to those CenterSquare clients who, in their investment management agreement
(“IMA”), have chosen to give us discretion to vote their proxies. At account
start-up, upon amendment of the IMA, or upon a letter of instruction, the
applicable documentation is reviewed to determine whether CenterSquare has
discretionary authority to vote client proxies.
As
a UNPRI Signatory, CenterSquare has chosen to use the Institutional Shareholder
Services (“ISS”) Sustainability Proxy Voting Guidelines as the default proxy
policy for its clients. A client of CenterSquare may elect to use other general
or customized proxy voting guidelines through ISS. However, CenterSquare does
not attempt to reconcile individual client proxy policies to the ISS
Sustainability Proxy Voting Guidelines. A client may change their decision with
regards to proxy voting authority or guidelines at any time. Clients who have
delegated proxy voting responsibilities to CenterSquare with respect to their
account may direct CenterSquare to vote in a particular manner for a specific
ballot. CenterSquare will use reasonable
efforts
to
vote
in
accordance
with
the
client’s
request
in
these
circumstances,
however
our ability to implement such voting instructions will be dependent on
operational matters such as the timing of the request.
2.Retention
and
Oversight
of
Proxy
Service
Provider
CenterSquare’s
proxy voting policies and procedures are intended to meet the objective to act
in its clients’ best interests. The sheer number of proxy votes related to
client holdings makes it impossible for CenterSquare to research each and every
proxy issue. Recognizing the importance
of
informed
and
responsible
proxy
voting,
CenterSquare
has
retained
an
independent
third party service provider, ISS, to analyze proxy issues, provide proxy
research and recommendations
on
how
to
vote
those
issues,
and
provide
assistance
in
the
administration
of
the
proxy process, including maintaining complete proxy voting records.
CenterSquare
monitors the capacity, competency, and conflicts of interest of ISS to
ensure
that
CenterSquare
continues
to
vote
proxies
in
the
best
interest
of
its
clients.
On
an
annual
basis,
CenterSquare
conducts
a
due
diligence
review
of
ISS
regarding
their
proxy
voting
services
as part of its duty to perform oversight over the proxy voting firm. This review
includes updates and discussion about the following areas of ISS:
•The
adequacy
and
quality
of
staffing,
personnel
and/or
technology;
•Whether
ISS has an effective process for seeking timely input from issuers and ISS
clients
with
respect
to,
among
other
things,
its
proxy
voting
policies,
methodologies,
and peer group constructions;
•Whether
ISS has adequately disclosed to CenterSquare its methodologies in
formulating
voting
recommendations,
such
that
CenterSquare
understands
the
factors
underlying ISS’ recommendations;
•The
nature
of
any
third-party
information
sources
that
ISS
uses
as
a
basis
for
its
voting recommendations; and
•ISS
policies
and
procedures
regarding
how
it
identifies
and
addresses
conflicts
of
interest.
Conflicts
of
Interest
of
ISS
1.CenterSquare
Compliance will examine information provided by ISS that describes conflicts to
which it is subject or otherwise obtained by CenterSquare. CenterSquare
will
seek
to
require
that
ISS
promptly
provide
updates
of
business
changes
that
might
affect or create conflicts and of changes to ISS’ conflict policies and
procedures.
2.If,
as
a
result
of
CenterSquare
Compliance’s
examination
of
ISS’
conflicts
of
interest,
a determination is made that a material conflict of interest exists,
CenterSquare will determine whether to follow the ISS’ recommendation with
respect to the proxy or take other action with respect to the
proxy.
3.CenterSquare
Compliance
will
periodically
review
ISS’
policies
and
procedures
for:
a.Adequacy
in
identifying,
disclosing
and
addressing
actual
and
potential
conflicts
of interest, including conflicts relating to the provision of proxy voting
recommendations and proxy voting services generally, conflicts
relating
to activities other than providing proxy voting recommendations and proxy voting
services, and conflicts presented by certain affiliations;
b.Adequate
disclosure
of
ISS’
actual
and
potential
conflicts
of
interest
with
respect
to the services ISS provides to CenterSquare; and
c.Adequacy
in
utilizing
technology
in
delivering
conflicts
disclosures
that
are
readily accessible.
Periodic
Review
of
ISS’
Policies
and
Procedures
and
Continued
Retention
of
ISS
CenterSquare
will periodically review the proxy voting policies, procedures and
methodologies, conflicts of interest and competency of ISS. CenterSquare will
also review the continued retention of ISS, including whether any relevant
credible potential factual errors, incompleteness or methodological weaknesses
in ISS’ analysis that CenterSquare is aware
of
materially
affected
the
research
and
recommendations
used
by
the
Firm.
In
addition,
CenterSquare will also consider the effectiveness of ISS’ policies and
procedures for obtaining current and accurate information relevant to matters
included in its research and on which it makes voting recommendations. This will
include the ISS’:
•engagement
with
issuers,
including
the
ISS
process
for
ensuring
that
it
has
complete
and accurate information about the issuer and each particular
matter;
•process,
if
any,
for
CenterSquare
to
access
the
issuer's
views
about
ISS’
voting
recommendations in a timely and efficient manner;
•efforts
to
correct
any
identified
material
deficiencies
in
its
analysis;
•disclosure
to
CenterSquare
regarding
sources
of
information
and
methodologies
used
in formulating voting recommendations or executing voting
instructions;
•consideration
of
factors
unique
to
a
specific
issuer
or
proposal
when
evaluating
a
matter subject to a shareholder vote; and
•updates
to
its
methodologies,
guidelines
and
voting
recommendations
on
an
ongoing
basis, including in response to feedback from issuers and their
shareholders.
CenterSquare
will
seek
to
require
ISS
to
update
the
Firm
regarding
business
changes
that
are
material to the services provided by ISS to CenterSquare. CenterSquare will
consider whether the bases on which it made its initial decision to retain ISS
has materially changed and will document such review.
3.Decision
Methods
ISS
Global Voting Principles provide for four key tenets on accountability,
stewardship, independence, and transparency, which underlie their approach to
developing recommendations on management and shareholder proposals at publicly
traded companies.1
ISS uses a bottom-up policy formulation process which collects feedback
from
a diverse range of market participants through multiple channels including an
annual Policy Survey. The ISS Policy Board uses the input
to
develop
its
draft
policy
updates
each
year.
Before
finalizing
these
updates,
ISS
publishes
draft updates for an open review and comment period. All comments received are
posted verbatim to the Policy Gateway, in order to provide additional
transparency into the feedback ISS has received. Final updates are published in
November, to apply to meetings held after February of the following year. ISS
research analysts apply more than 400 policies to shareholder meetings. As part
of the research process, ISS analysts interact with company representatives,
institutional shareholders, shareholder proponents and other parties to gain
deeper insight into key issues.2
ISS reviews and updates their proxy polices on an annual basis. The ISS Policy
Information is located under Policy Gateway at https://www.issgovernance.com.
When
determining
whether
to
invest
in
a
company,
one
of
the
many
factors
CenterSquare
may consider is the quality and depth of the company’s management. As a result,
CenterSquare believes that recommendations of management on any issue
(particularly routine issues) should be given a fair amount of weight in
determining how proxy issues should be voted. Thus, on many issues, votes are
cast in accordance with the recommendations of the company’s management.
CenterSquare reviews all ballot items where ISS recommends voting against the
management
of
the
issuer.
Generally,
CenterSquare
will
not
override
the
ISS
specific
policy
vote
recommendations but reserves the right to change that vote when a CenterSquare
Portfolio Manager
disagrees
with
an
ISS
recommendation
and
feels
it
is
in
the
best
interest
of
all
clients
to
change the proxy vote. CenterSquare Compliance is notified when an override of
the ISS vote is proposed by a CenterSquare Portfolio Manager. CenterSquare
Compliance will ascertain that appropriate justification for the override is
reasonable and appropriately documented in the ISS voting records
contemporaneous to the actual proxy vote. A rationale of our decision is noted
within the ISS system when we override ISS’ specific policy recommendation and
is included in the
ballot
summary
reports.
Proxy
voting
reports
are
available
to
clients
upon
request.
For
clients
that have provided CenterSquare authority to vote proxies and have not otherwise
selected other ISS general or customized proxy voting guidelines, proxy voting
will be made on behalf of all client accounts in accordance with ISS
Sustainability Proxy Voting Guidelines.
4.CenterSquare
Conflicts
of
Interest
In
certain instances, a conflict of interest may arise when CenterSquare votes a
proxy. CenterSquare
will
deem
to
have
a
potential
conflict
of
interest
when
voting
proxies
including,
but not limited to, one or more of the following:
•CenterSquare
or
one
of
its
affiliates
manages
assets
for
that
issuer
or
an
affiliate
of
that issuer and also recommends that its other client’s investment in such
issuer’s securities.
•A
director, trustee or officer of the issuer or affiliate of the issuer is an
employee of CenterSquare
or
a
director
of
CenterSquare
or
its
affiliates,
or
a
fund
sub-advised
by
CenterSquare.
•CenterSquare
is
actively
soliciting
that
issuer
or
an
affiliate
of
the
issuer
as
a
client
•A
director
or
executive
officer
of
the
issuer
has
a
personal
relationship
with
a
member
of the relevant investment team or other employee of CenterSquare that may
affect the outcome of the proxy vote.
Each
person
who
is
a
member
of
the
Proxy
Administrator,
as
further
defined
below,
is
a
member of the investment team, or serves on the Proxy Voting Committee shall, on
at least an annual basis, certify:
•a
list of any portfolio companies, including entities raising capital as part of a
PIPE (“Private
Investments
in
Public
Equity”)
transaction,
with
or
in
which
he
or
she
has
a
relationship or could otherwise be deemed to have a conflict and;
•They
have
not
been
unduly
influenced
by
an
issuer
or
other
third
party
to
vote
in
a
particular manner.
In
situations
where
CenterSquare
perceives
a
material
conflict
of
the
interest,
the
conflict
is reported to the Chief Compliance Officer. It is expected that CenterSquare
will abstain from making a vote decision and allow ISS to vote to mitigate the
material conflict of interest.
5.Securities
Lending
Some
clients
have,
at
their
discretion,
elected
to
participate
in
security
lending
programs.
CenterSquare
is
unable
to
vote
securities
that
are
on loan
under
this
type
of
arrangement.
6.Decisions
to
not
Vote
Proxies
CenterSquare
fully recognizes its responsibility to vote proxies and maintain proxy
records
pursuant
to
applicable
rules
and
regulations.
CenterSquare
will
therefore
attempt
to
vote
every
proxy
it
receives
for
all
domestic
and
foreign
securities.
There
may
be
situations
in
which
CenterSquare cannot vote proxies. For example, the client or custodian does not
forward the ballots in a timely manner.
Proxy
voting in certain countries requires shareblocking. Shareblocking in general
refers to restrictions on the sale or transfer of securities between the
execution of the vote instruction and the tabulation of votes at the shareholder
meeting. During the blocking period, shares that will be voted at the meeting
cannot be sold until the meeting has taken place and the shares are
returned
to
the
client’s
custodian
bank.
The
blocking
period
may
last
from
several
days
to
several
weeks depending upon the market, the security and the custodian. CenterSquare
believes that in these situations, the benefit of maintaining
liquidity
during the share blocking period outweighs the benefit of exercising our right
to vote. In order to preserve the account’s liquidity, CenterSquare will
generally instruct ISS to “DO NOT VOTE” these shares.
Proxies
relating to foreign securities may also be subject to additional documentation.
Such documentation may be difficult to obtain or produce as a condition of
voting or requires additional
costs
that
generally
outweigh
the
benefit
to
be
gained
by
voting.
Therefore,
in
some
cases, those shares will not be voted.
7.Reporting
ISS
provides CenterSquare on-line access to client proxy voting records. A summary
of the proxy votes cast by CenterSquare is available to clients upon request for
their specific portfolio.
Due
to
confidentially
and
conflict
of
interest
concerns,
CenterSquare
does
not
disclose
to third parties how it votes individual client proxies.
CenterSquare’s
proxy voting policies are
disclosed
in the
Form
ADV
Part
2A. A
copy
of this
Proxy
Voting
Policy
and
the
ISS
Sustainability
Proxy
Voting
Guidelines
are
available
to
our
clients, without charge, upon request. All requests may be sent to the
Operations Group, CenterSquare Investment Management LLC, 630 West Germantown
Pike, Suite 300, Plymouth Meeting, PA
19462
or to [email protected].
8.Proxy
Committee
CenterSquare’s
Proxy
Committee
(“Proxy
Committee”)
is
responsible
for
overseeing
the
proxy voting process and for establishing and maintaining the Proxy Voting
Policy, which is reviewed and updated annually. The Proxy Committee is comprised
of the Director, Head of Securities Operations, and designated members of
CenterSquare’s investment teams. The Chief Compliance Officer will participate
as a non-voting member of the Committee. At a minimum, the Proxy Committee will
meet no less than annually to review and update the Proxy Voting Policy, if
necessary, and to review other proxy voting topics as needed.
9.Proxy
Administration
and
Recordkeeping
The
administration of the proxy voting process is the responsibility of
CenterSquare’s securities
operations
department
(“Proxy
Administrator”).
Both
ISS
and
each
client’s
custodian
monitor corporate events for CenterSquare. CenterSquare gives an authorization
and letter of instruction to the client’s custodian who then forwards the proxy
material it receives to ISS so that ISS may vote the proxies. On a regular
basis, CenterSquare sends ISS an updated list of client accounts and the
security holdings in those accounts so that ISS can update its database and is
aware of which proxies it will need to vote.
The
Proxy
Administrator
is
responsible
for:
•monitoring
reports
identifying
pending
meetings
and
due
dates
for
ballots
•monitoring
reports
to
ensure
that
clients
are
coded
to
the
appropriate
ISS
policy
•ensuring
ballots
are
voted
according
to
the
ISS
policy
assigned
to
the
client
•monitoring
for
shareblocking
ballots
•monitoring
reports
for
votes
against
management
•reviewing
user
access
and
new
/
close
account
setups
•performing
vote
overrides
as
required
by
Portfolio
Managers
and
document
changes
and
rationale for each vote override
CenterSquare
or
ISS
also
maintains
the
following
records:
•ballot
summary
reports
for
each
client
indicating
which
ballots
were
votes,
number
of
shares voted, description of the proposal, how the shares were voted and the
date on which the proxy was returned, and the policy applied
•ballot
summary
reports
for
vote
overrides
with
the
Portfolio
Managers
rationale
•meeting-level
statistical
reports
•copy
of
each
proxy
statement
received,
provided
that
no
copy
needs
to
be
retained
of
a
proxy statement found on the SEC’s EDGAR website
10.CenterSquare
Compliance
Annual
Review
CenterSquare
Compliance
will
review
and
document
no
less
frequently
than
annually,
the
adequacy of the proxy voting policies and procedures to make sure they have been
implemented effectively, including whether the policies and procedures continue
to be reasonably designed to ensure
that
proxies
are
voted
in
the
best
interests
of
CenterSquare’s
clients.
As
part
of
this
review, CenterSquare Compliance will review:
•the
Proxy
Voting
Policy
•CenterSquare’s
client
disclosures
regarding
its
proxy
voting
policies
and
procedures
in
the ADV Form Part 2A, due diligence questionnaires, and other relevant
materials
•a
sampling
of
proxy
voting
records
to
ensure
voting
was
completed
in
the
best
interests
of
clients and in accordance with the ISS Sustainability Proxy Voting
Guidelines
•a
sampling
of
proxy
vote
overrides
and
the
documentation
supporting
such
overrides
•the
Firm’s
annual
due
diligence
over
the
third-party
proxy
voting
firm,
ISS
1 https://www.issgovernance.com/policy-gateway/iss-global-voting-principles/
2 https://www.issgovernance.com/policy-gateway/policy-formulation-application/
Marketfield
Asset Management LLC
PROXY
VOTING GUIDELINES
Each
Sub-Adviser has adopted written proxy voting policies and procedures that are
available upon request by any Fund investor or prospective investor. Also
available upon request by any investor or prospective investor is a record of
how each Sub-Adviser has voted client proxies since it became registered as an
investment adviser with the SEC.
The
procedures described here apply to all proxy voting matters that relate to
clients over which each Sub-Adviser has voting authority, including changes in
corporate governance structures, the adoption or amendment of compensation plans
(including stock options), and matters involving social issues. Each
Sub-Adviser’s chief compliance officer monitors all proxy voting.
Client
Instructions and Requests
The
decision of any client to retain proxy voting authority or any specific
instructions with respect to proxy voting would be documented in the investment
management agreement between each Sub-Adviser and their clients. To date, all
clients have granted each Sub-Adviser the exclusive right to vote proxies on
their behalf. Upon request by a client or investor, each Sub-Adviser promptly
provides a copy of our proxy voting policies and procedures and a list of
securities voted and votes taken with respect to the securities in a client
account since this policy was adopted or during some relevant subsequent
period.
Conflicts
of Interest
A
conflict of interest may arise in the context of proxy voting (1) if each
Sub-Advisers were to manage a portfolio for a proxy issuer or its senior
officers or directors and also were to own the securities of that company in our
client portfolios, (2) if any supervised person of each Sub-Adviser (a
“Supervised Person”) had a familial or personal relationship with a senior
executive or board member of a proxy issuer or with persons or entities making a
shareholder proposal requiring a vote of a company whose securities are held in
a client portfolio, or (3) if each Sub-Adviser had a representative on the
board of directors of a proxy issuer. Supervised Persons will be aware of the
potential for conflicts when considering proxy voting. If a potential for
conflict is perceived, each Sub-Adviser’s chief compliance officer will be
consulted.
Procedures
for Conflicts of Interest
In
the event that a conflict arises among the interests of each Sub-Adviser, its
Supervised Persons, and its clients, each Sub-Adviser uses the following
procedures:
•If
the perceived conflict of interest involves a member of senior management, each
Sub-Adviser’s chief compliance officer consults with other members of senior
management to determine whether the conflict is material to the particular proxy
issues being considered. If it is determined that the conflict is material, the
conflicted person will not communicate with any other Supervised Person about
the proxy issue. The remaining members of senior management will decide how to
vote the proxy and will relay the decision to each Sub-Adviser’s chief
compliance officer. Each Sub-Adviser will process the vote in the customary
manner and will retain a written record of the perceived conflict of interest,
the recusal of the conflicted person, and the resulting vote.
•If
the perceived conflict of interest involves each Sub-Adviser, each Sub-Adviser’s
chief compliance officer determines whether the conflict is material. If he
determines that the
conflict
is material, each Sub-Adviser will have no further input on the particular proxy
vote. In this case, each Sub-Adviser will cause the proxies to be voted in the
same proportion as the votes of other holders.
Commonly
Raised Proxy Issues
Each
Sub-Adviser is diligent regarding the voting process and the rights of
shareholders to influence the management of companies, when appropriate. In
evaluating proxy issues, each Sub-Adviser may consider information from many
sources, including the research analysts covering the particular securities, the
management of the issuer presenting a proposal, shareholder groups, and
independent proxy-research services. The following general guidelines apply with
respect to common issues raised in proxy statements.
Election
of Board of Directors
Each
Sub-Adviser generally supports the election of directors that result in a board
with a majority of independent directors. Each Sub-Adviser generally withholds
votes for non-independent directors who serve on the audit, compensation, or
nominating committees of the board of directors. Each Sub-Adviser holds
directors accountable for the actions of the committees on which they serve. For
example, each Sub-Adviser generally withholds votes for nominees who approve or
propose arrangements that each Sub-Adviser believes would diminish shareholder
value. Each Sub-Adviser generally votes in favor of efforts to ensure that
shareholders elect a full slate of directors at each annual shareholder
meeting.
Approval
of Independent Auditors
Each
Sub-Adviser generally votes against proposed auditors whose non-audit work
consists of what each Sub-Adviser perceive to be a material amount of the total
fees paid by the issuer to the audit firm. Each Sub-Adviser evaluates on a
case-by-case basis instances in which the audit firm has a substantial non-audit
relationship with an issuer, regardless of the amount of the audit fee, to
determine whether each Sub-Adviser believe that independence has been
compromised. If each Sub-Adviser believes that auditor independence has been
compromised, each Sub-Adviser votes against approval of the
auditor.
Executive
Compensation
Each
Sub-Adviser generally supports measures intended to increase long-term
securities ownership by executives, including features that require corporate
officers to hold securities of the issuer or that require securities acquired as
the result of option exercises to be held for a period of time. Each Sub-Adviser
generally supports expensing the fair value of option grants. Each Sub-Adviser
generally votes against option plans that, in light of all other existing
compensation plans of the issuer, each Sub-Adviser believes would directly or
indirectly result in material dilution of shareholder interests, such as the
ability to re-price options that are worth less than the current market price of
the security into which they are exercisable, the issuance of options with an
exercise price below the current market price of the securities, the issuance of
reload options, the ability to reward management for thwarting a takeover
attempt, golden parachutes, and automatic share replenishment
features.
Corporate
Structure and Shareholder Rights
Each
Sub-Adviser generally supports proposals to remove super-majority voting
requirements and generally vote against proposals to impose super-majority
requirements. Each Sub-Adviser generally votes for proposals to lower barriers
to shareholder action and against proposals that limit rights to call special
meetings, to limit rights to act by written consent, or to stagger boards of
directors. Each Sub-Adviser generally votes against proposals for a separate
class of securities with disparate voting rights. Due to longstanding custom and
practice, these features are more common in foreign markets.
Although
each Sub-Adviser may make investments in companies that have disparate voting
rights, each Sub-Adviser generally votes to eliminate them when the issue is
presented. Each Sub-Adviser generally votes for proposals to subject shareholder
rights plans, such as poison pills, to a shareholder vote. Each Sub-Adviser
generally votes against these plans unless each Sub-Adviser is convinced that
the long-term interests of shareholders would benefit from instituting the plan.
Each Sub-Adviser generally votes against proposals that make it more difficult
for an issuer to be acquired by outsiders and in favor of proposals that do the
opposite. Each Sub-Adviser believes that corporate management should be at all
times subject to, and not insulated from, the incentives and punishments of the
market.
Increase
in Authorized Capital
There
are many business reasons for an issuer to increase its authorized capital,
including general corporate purposes and to raise new investment capital for
acquisitions, stock splits, recapitalizations, or debt restructurings. New
issues may provide flexibility to issuers because the securities may be issued
quickly without further shareholder approval in connection with financings or
acquisitions. Each Sub-Adviser generally votes for proposals to increase
authorized capital, absent unusual circumstances. Generally, each Sub-Adviser
does not oppose proposals to authorize the issuance of preferred stock but
scrutinize any proposal that gives the board of directors the authority to
assign disproportionate voting rights when the preferred stock is
issued.
Jurisdiction
of Incorporation
Each
Sub-Adviser generally votes against proposals to move the jurisdiction of
incorporation of an issuer to a jurisdiction that is less favorable to
shareholder interests.
Social
Policy
Each
Sub-Adviser believes that ordinary business matters are primarily the
responsibility of management. Proposals that present social policy issues
typically request that a company disclose or amend its business practices. Each
Sub-Adviser generally votes against social policy proposals, although each
Sub-Adviser may make exceptions if each Sub-Adviser believes that the proposal
has important beneficial economic implications for the issuer.
Tran
Capital Management, L.P.
PROXY
VOTING GUIDELINES
I.PROXY
VOTING
A.General
Policy.
Tran
Capital Management, L.P. (“Tran or “TCM”), typically
does not vote proxies as part of its discretionary authority to manage accounts,
unless the client has requested TCM to do so in writing. When
voting
proxies,
TCM
primary
objective
is
to
make
voting
decisions
solely
in
the
best
economic
interests
of
its
clients.
TCM
will
act
in
a
manner
that
it
deems
prudent
and
diligent
and
which
is
intended
to
enhance
the
economic
value
of
the
underlying
securities
held
in
its
clients’ accounts. As applicable, the best economic interests of clients factors
in TCM's view
that
sustainable investing better positions its clients to perform over the long term
and through
market
cycles.
1.TCM
has
adopted
written
Proxy
Policy Guidelines and
Procedures
(the
“Proxy
Guidelines”)
that are reasonably
designed
to
ensure
that
TCM
is
voting
in
the
best
interest
of
its
clients.
The
Proxy
Guidelines
reflect TCM’s general voting positions on specific corporate governance issues
and
corporate
actions. In determining how to vote positions, TCM will vote consistent with
their
sustainability
framework as detailed in the Proxy Guidelines. Some issues may require a
case-by-
case
analysis
prior
to
voting
and
may
result
in
a
vote
being
cast
that
will
deviate
from
the
Proxy
Guidelines. Upon receipt of a client’s written request, TCM may also
vote
proxies
for
that
client’s
account
in
a
particular
manner
that
may
differ
from
the
Proxy
Guidelines.
Deviation
from
the
Proxy
Guidelines
will
be
documented
and
maintained
in
accordance
with Rule 204-2 under the
Investment
Advisers
Act
of
1940.
2.In
accordance
with
the
Proxy
Guidelines,
TCM
may
review
additional
criteria
associated
with
voting
proxies
and
evaluate
the
expected
benefit
to
its
clients
when
making
an
overall
determination
on
how
or
whether
to
vote
the
proxy.
TCM
may
vote
proxies
individually
for
an
account
or aggregate and record votes across a group of accounts,
strategy
or product. In addition,
TCM
may
refrain
from
voting
a
proxy
on
behalf
of
its
clients’
accounts
due
to
de-minimis
holdings,
impact
on the portfolio, items related to
foreign
issuers,
timing
issues
related
to
the
opening/
closing
of
accounts
and
contractual
arrangements
with
clients
and/or
their
authorized
delegate.
3.To
assist in the proxy voting process, TCM may retain an independent third-party
services provider to assist in providing research, analysis and voting
recommendations on corporate governance issues and corporate actions, as well as
assist in the administrative process. TCM currently uses ISS as a third-party
service provider for proxy voting.
4.TCM
may have conflicts of interest that can affect how it votes its clients’
proxies. For example, TCM may manage a pension plan whose management is
sponsoring a proxy proposal. The Proxy Guidelines are designed to prevent
material conflicts of interest from affecting the manner in which TCM votes its
clients’ proxies. In order to ensure that all material conflicts of interest are
addressed appropriately while carrying out its obligation to vote proxies, TCM
has designated a Managing Partner, who is not on
the
investment
team,
to
be
responsible
for
addressing
how
TCM
resolves
such
material
conflicts
of
interest
with
its
clients.
Resolutions
of
all
material
conflicts
of
interest
will
be
documented.
B.Records
to
be
maintained.
In
accordance
with
Rule
206(4)-6,
TCM's
recordkeeping
requirements
are
as
follows:
1.Copies
of TCM’s Proxy Voting Policy and Procedures;
2.Copies
or records of each proxy statement received with respect to clients’ securities
for whom TCM exercises voting authority;
3.Records
of each vote cast on behalf of clients, as well as certain records pertaining to
TCM’s decision on the vote;
4.Records
of written client request for proxy voting information; and
5.Records
of written responses from TCM to either written or oral client
requests;
6.Records
are kept for at least five (5) years following the date that the last vote was
cast. TCM may maintain the records electronically. Third party service providers
may be used to maintain proxy statements and proxy votes.
C.Client
Communications
and
Disclosure.
Generally,
TCM’s
clients
have
the
right,
and
shall
be
afforded
the
opportunity
to
have
access
to
records
of
voting
actions
taken
with
respect
to
securities
held
in
their
respective
account
or
strategy.
TCM
shall
provide
clients
with
a
summary
of
this
policy
in
the
form
of
a
general
Proxy
Voting
Policy
Statement.
The
delivery
of
this
statement
can
be
made
in
Part
2
of
Form
ADV
or
under
separate
cover.
Voting
actions
are
confidential
and
may
not
be
disclosed
to any third
party,
except as may be
required
by
law
or
explicitly
authorized by
client.
D.Testing.
The
Vice
President
of
Operations
shall
conduct
periodic
testing
to
confirm
proxies
are
voted
in
accordance
with TCM’s guidelines, all proxies TCM is responsible for voting are
being
voted,
and
the
third-party
service
provider
is
able
to
provide
voting
records
for
clients
in
a
timely
manner
if
requested.
The
Vice
President
of
Operations
shall
document
these
tests.
GREENSPRING
FUND, INCORPORATED
Proxy
Voting Policies and Procedures
Greenspring
Fund, Incorporated (the “Fund”) has adopted the following policies and
procedures to determine how to vote proxies relating to portfolio securities
held by the Fund.
1. Delegation.
The Board of Directors of the Fund (the “Board”) has delegated to the Fund’s
investment adviser, Corbyn Investment Management Inc. (“Corbyn”), the
responsibility for voting proxies relating to portfolio securities held by the
Fund as a part of the investment advisory services provided by the Corbyn. All
such proxy voting responsibilities shall be subject to the Board’s continuing
oversight. Notwithstanding this delegation of responsibilities, the Fund retains
the right to vote proxies relating to its portfolio securities as it may deem
appropriate.
2. Fiduciary
Duty.
Corbyn is a fiduciary to the Fund and must vote proxies in a manner consistent
with the best interests of the Fund and its shareholders. Every reasonable
effort should be made to vote proxies. However, Corbyn is not required to vote a
proxy if it is not practicable to do so or it determines that the potential
costs involved with voting a proxy outweigh the potential benefits to the Fund
and its shareholders.
3. Proxy
Voting Services.
Corbyn may engage an independent proxy voting service to assist in the voting of
proxies. Such service would be responsible for coordinating with the Fund’s
custodian to ensure that all applicable proxy materials received by the
custodian are processed in a timely fashion.
4. Conflicts
of Interest.
The proxy voting guidelines of Corbyn shall address the procedures it would
follow with respect to conflicts of interest.
5. Reports.
Corbyn shall provide a semi-annual report to the Board regarding its records of
each proxy voted, including any conflicts of interest information required by
Section 4. Such report shall include the information required by Form N-PX for
each proxy voted. In addition, Corbyn shall provide a semi-annual report to the
Board detailing the proxies, if any, that were not voted during the period and
the reasons for such non-votes.
6. Role
of the Board.
The Board shall oversee the proxy voting process and review and approve any
material changes to Corbyn’s proxy voting policies and procedures. The Board
shall be assisted in this process by Corbyn and, if necessary, the Fund’s legal
counsel.
Dated:
December 9, 2019
Corbyn
Investment Management, Inc.
PROXY
VOTING POLICIES AND PROCEDURES
1.Background
Corbyn
Investment Management, Inc. (“Corbyn”) views seriously its responsibility to
exercise voting authority over securities that form a part of the portfolios of
its investment advisory clients and its investment company (“Clients”). The act
of managing assets of Clients may include the voting of proxies related to such
managed assets. Where the power to vote in person or by proxy has been
delegated, directly or indirectly, to the investment adviser, the investment
adviser has the fiduciary responsibility for (a) voting in a manner that is in
the best interests of the Client, and (b) properly dealing with potential
conflicts of interest arising from proxy proposals being voted upon.
These
proxy voting policies and procedures are designed to ensure that proxies are
voted in an appropriate manner and reflect Corbyn’s general responsibility to
monitor the performance and/or corporate events of companies that are issuers of
securities held in managed accounts. The investment advisory agreement entered
into with the Client expressly provides that the Adviser shall be responsible to
vote proxies received in connection with the Client’s account. Any questions
about these policies and procedures should be directed to Elizabeth Swam (the
“Responsible Party”).
2.Proxy
Voting Policies
Corbyn
will vote proxies related to securities in a manner that is in the best interest
of the Client. Corbyn will consider only those factors that relate to the
Client's investment, including how its vote will economically impact and affect
the value of the Client's investment. Proxy voting policies are summarized as
follows:
Board
of Directors
We
will generally support the election of directors that result in a board made up
of a majority of independent directors.
We
will endeavor to hold directors accountable for the actions of the committees on
which they serve. For example, we may withhold votes for nominees who serve on
the compensation committee if they approve excessive compensation arrangements
or propose equity-based compensation plans that unduly dilute the ownership
interests of stockholders.
We
will generally support efforts to declassify existing boards, and to block
efforts by companies to adopt classified board structures.
Independent
Auditors
We
will generally vote against proposed auditors where non-audit fees make up more
than 50% of the total fees paid by the company to the audit firm.
We
will evaluate on a case-by-case basis instances in which the audit firm has a
substantial non-audit relationship with the company to determine whether we
believe independence has been compromised.
Equity–Based
Compensation Plans
We
will generally vote against plans where total potential dilution (including all
equity-based plans) exceeds 15% of shares outstanding.
We
will generally vote against plans if annual option grants have exceeded 2% of
shares outstanding. When assessing a plan’s impact on shareholders, other
factors such as the nature of the industry and size of the company may be taken
into consideration.
We
will generally support measures intended to increase long-term ownership by
executives. These may include:
-Requiring
senior executives to hold a minimum amount of stock in the company. (Often
expressed as a certain multiple of the executives’ salary)
-Requiring
stock acquired through option exercise to be held for a certain period of
time.
We
will generally support the use of employee stock purchase plans to increase
company stock ownership by employees, provided that the shares purchased under
the plan are for no less than 85% of their market value.
Executive
Compensation and Frequency of Vote
We
will review the components of compensation for the named executive officers on a
case by case basis and determine if the compensation is reasonable based on many
underlying factors.
The
frequency of voting on executive compensation is required at the minimum of
every three years. We will review the underlying factors on a case by case
basis, but generally vote for a frequency of vote no less than
annually.
Corporate
Structure and Shareholder Rights
We
will generally support proposals to remove super-majority (typically from 66.7%
to 80%) voting requirements for certain types of proposals. We will vote against
proposals to impose super-majority requirements.
We
will generally vote for proposals to lower barriers to shareholder action (e.g.,
limited rights to call special meetings, limited rights to act by written
consent)
We
will generally vote against proposals for a separate class of stock with
disparate voting rights.
Corporate
and Social Policy Issues
We
believe that “ordinary business matters” are primarily the responsibility of
management and should be approved solely by the corporation’s board of
directors. Proposals in this category, initiated primarily by shareholders,
typically request that the company disclose or amend certain business practices.
We generally will vote against these types of proposals, though we may make
exceptions in certain instances where we believe a proposal has substantial
economic implications.
In
voting on each and every issue, Corbyn will vote in a prudent and timely fashion
and only after a careful evaluation of the issue(s) presented on the ballot.
Corbyn may also take into consideration information from other sources,
including the portfolio manager, investment professionals, management of the
company presenting a proposal, shareholder groups and independent proxy research
services.
If
the analyst believes that it is in the best interest of the Client, he or she
may vote in a manner contrary to established policy. The final decision rests
with the Investment Committee consisting of the Portfolio Manager, the analysts
and the trader.
In
exercising its voting discretion, Corbyn will avoid any direct or indirect
conflict of interest raised by such voting decision. Corbyn will provide
adequate disclosure to the Client if any substantive aspect or foreseeable
result of the subject matter to be voted upon raises an actual or potential
conflict of interest to Corbyn or:
•any
affiliate of Corbyn. For purposes of these Proxy Voting Policies and Procedures,
an affiliate means: (i) any person directly, or indirectly through one or more
intermediaries, controlling, controlled by or under common control with Corbyn;
(ii) any officer, director, principal, partner, employer, or direct or indirect
beneficial owner of any 10% or greater equity or voting interest of Corbyn; or
(iii) any other person for which a person described in clause (ii) acts in any
such capacity;
•any
issuer of a security for which Corbyn (or any affiliate of the Adviser) acts as
a sponsor, adviser, manager, custodian, distributor, underwriter, broker, or
other similar capacity; or
•any
person with whom Corbyn (or any affiliate of Corbyn) has an existing, material
contract or business relationship that was not entered into in the ordinary
course business.
(Each
of the above persons being an “Interested Person.”)
Corbyn
shall keep certain records required by applicable law in connection with its
proxy voting activities for Clients and shall provide proxy voting information
to Clients upon their written request.
3.Proxy
Voting Procedures
a.All
proxies and ballots received by Corbyn will be logged in upon receipt by the
Responsible Party.
b.Proxies
are then forwarded to the investment analyst responsible for monitoring the
security being voted. That person will cast his or her votes in accordance with
the Proxy Voting Policy and Procedures. If a matter is not specifically covered
by the Proxy Voting Policies the investment analyst covering the subject
security, in consultation with the Portfolio Manager, shall vote the proxy
consistent with the general principles of the voting policies and in the
clients’ best interest. Any non-routine matters are referred to the Portfolio
Manager.
c.Prior
to executing the vote, the Responsible Party will verify whether an actual or
potential conflict of interest with Corbyn or any Interested Person exists in
connection with the subject proposal(s) to be voted upon. The determination
regarding the presence or absence of any actual or potential conflict of
interest shall be adequately documented by the Responsible Party (i.e.,
comparing the apparent parties affected by the proxy proposal being voted upon
against Corbyn’s internal list of Interested Persons and, for any matches found,
describing the process taken to determine the anticipated magnitude and possible
probability of any conflict of interest being present), which shall be reviewed
and signed off on by the Responsible Party’s direct supervisor who is the
Portfolio Manager.
If
an actual or potential conflict is found to exist, written documentation shall
include:
•the
proposal to be voted upon;
•the
actual or potential conflict of interest involved;
•Corbyn’s
vote recommendation (with a summary of material factors supporting the
recommended vote); and
•if
applicable, the relationship between Corbyn and any Interested
Person.
Corbyn
may then:
•engage
a Non-Interested Party to independently review Corbyn’s vote recommendation if
the vote recommendation would fall in favor of Corbyn’s interest (or the
interest of an Interested Person) to confirm that Corbyn’s vote recommendation
is in the best interest of the Client under the circumstances;
•cast
its vote as recommended if the vote recommendation would fall against Corbyn’s
interest (or the interest of an Interested Person) and such vote recommendation
is in the best interest of the Client under the circumstances; or
•abstain
from voting if such action is determined by Corbyn to be in the best interest of
the Client under the circumstances.
d.The
Responsible Party will promptly vote proxies received in a manner consistent
with the Proxy Voting Policies and Procedures stated above.
Record
Keeping and Reporting
Corbyn
is required to maintain records of proxies pursuant to Section 204(2) of the
Investment Advisers Act and Rule 204-2(c) thereunder. Corbyn will maintain a
copy of its Proxy Voting Policies and Procedures, proxy statements received
regarding client securities, a record of votes cast and each written request for
proxy voting records as well as Corbyn’s response to any written request for
such records.
In
addition, Corbyn will maintain appropriate proxy voting records for investment
companies in compliance with applicable regulations under the Investment Company
Act of 1940, as amended. Corbyn shall provide semi-annual reports to its Board
of Directors reflecting proxy votes for the period covered in the
report.
Procedures
The
Fund shall receive its proxy voting record from its adviser and file an annual
report on Form N-PX not later than August 31 of each year, containing its proxy
voting record for the most recent twelve-month period ended June
30.
The
Fund also discloses on its shareholder reports and website that the Fund’s proxy
voting policies and procedures are available upon request by contacting the Fund
and that its proxy voting record is available by accessing the SEC’s web
site.
The
Fund’s CCO will periodically review the Fund’s policies and procedures as well
as those of its adviser to determine their effectiveness. The CCO will also
review minutes from meetings held by the Board of Directors regarding the
semi-annual discussion of how proxies were voted and the annual review of the
Fund’s adviser’s policies and procedures.
APPENDIX
A
Glass
Lewis Proxy Voting Guidelines
The
Foresight Sub-Adviser upholds its stewardship and fiduciary responsibilities by
seeking to vote in line with the Foresight Fund’s sustainability criteria and
the best interests of the underlying shareholders of the Foresight Fund. The
Foresight Sub-Adviser’s primary aim with all voting decisions is the long-term
interests of underlying investors which includes ensuring high standards of
corporate governance and the adoption of sustainable investment practices which
should limit negative externalities. The Foresight Sub-Adviser will vote
procedurally using proprietary analysis derived from its company and sector due
diligence and supported by third party research where appropriate. Third party
research is also provided by a proxy advisor, and the Foresight Sub-Adviser
considers the proxy advisor’s ESG policy to be the most appropriately aligned
with the investment policies of the Foresight Fund. The proxy advisor’s ESG
guidelines include an additional level of analysis for shareholders seeking to
vote in a manner that is consistent with widely accepted environmental, social
and governance practices. Use of a proxy advisor serves purely to inform the
Foresight Sub-Adviser’s voting decisions rather than dictate them.
United
States
2023
Policy Guidelines
www.glasslewis.com
Table
of Contents
Cyber
Risk Oversight 30
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Board
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Officer
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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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Guidelines
Introduction
Summary
of Changes for 2023
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:
Update:
15 December 2022. We have clarified on pages 8 and 42 that we will generally
recommend against a nominating and governance committee chair at companies in
the Russell 1000 index if the company has not provided any disclosure of
director diversity and skills in any of our tracked categories, rather than any
disclosure in each category.
Board
Diversity
Gender
Diversity
We
are transitioning from a fixed numerical approach to a percentage-based approach
for board gender diversity, as announced in 2022.
Beginning
with shareholder meetings held after January 1, 2023, we 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.
For companies outside the Russell 3000 index, our existing policy requiring a
minimum of one gender diverse director will remain in place.
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, including a
timeline to appoint additional gender diverse directors (generally by the next
annual meeting).
Underrepresented
Community Diversity
We
have expanded our policy on measures of diversity beyond gender. Beginning in
2023, we will generally recommend against the chair of the nominating committee
of a board with fewer than one director from an underrepresented community on
the board at companies within the Russell 1000 index.
We
define “underrepresented community” as an individual who self-identifies as
Black, African American, North African, Middle Eastern, Hispanic, Latino, Asian,
Pacific Islander, Native American, Native Hawaiian, or Alaskan Native, or who
self-identifies as gay, lesbian, bisexual, or transgender. For the purposes of
this evaluation, we will rely solely on self-identified demographic information
as disclosed in company proxy statements.
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, including a
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timeline
to appoint additional directors from an underrepresented community (generally by
the next annual meeting).
State
Laws on Diversity
We
have revised our discussion regarding state laws on diversity following recent
changes to the status of certain state laws. Over the past several years, some
U.S. states have encouraged board diversity through legislation. Most notably,
companies headquartered in California were subject to mandatory board
composition requirements during early 2022.
Subsequently,
California’s Senate Bill 826 and Assembly Bill 979 regarding board gender and
“underrepresented community” diversity, respectively, were both deemed to
violate the equal protection clause of the California state constitution. These
laws are currently in the appeals process.
Accordingly,
where we previously recommended in accordance with mandatory board composition
requirements set forth in California’s SB 826 and AB 979, we will refrain from
providing recommendations pursuant to these state board composition requirements
until further notice while we continue to monitor the appeals process. However,
we will continue to monitor compliance with these requirements.
Disclosure
of Director Diversity and Skills
We
have revised our discussion on disclosure of director diversity and skills in
company proxy statements. At companies in the Russell 1000 index that have not
provided any disclosure in any of our tracked categories, we will generally
recommend voting against the chair of the nominating and/or governance
committee.
Additionally,
beginning in 2023, when companies in the Russell 1000 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.
Board
Oversight of Environmental and Social Issues
We
have updated our guidelines with respect to board-level oversight of
environmental and social (E&S) issues. For shareholder meetings held after
January 1, 2023, we will generally recommend voting against the governance
committee chair of a company in the Russell 1000 index that fails to provide
explicit disclosure concerning the board’s role in overseeing environmental and
social 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.
Furthermore, beginning in 2023 we will expand our tracking of board-level
oversight of environmental and social issues to all companies within the Russell
3000 index.
When
evaluating a board’s role in overseeing environmental and 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 and
accountability for a company’s material environmental and social risks.
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Director
Commitments
We
have revised our discussion of director commitments. We have clarified that we
will generally recommend that shareholders vote against a director who serves as
an executive officer (other than executive chair) of any public company while
serving on more than one external public company board, a director who serves as
an executive chair of any public company while serving on more than two external
public company boards, and any other director who serves on more than five
public company boards.
Cyber
Risk Oversight
We
have included a new discussion on our approach to cyber risk oversight. Given
current regulatory focus on and the potential adverse outcomes from
cyber-related issues, it is our view that cyber risk is material for all
companies. We, therefore, believe that it is critical that companies evaluate
and mitigate these risks to the greatest extent possible. With that view, we
encourage all issuers to provide clear disclosure concerning the role of the
board in overseeing issues related to cybersecurity. We also believe that
disclosure concerning how companies are ensuring directors are fully versed on
this rapidly evolving and dynamic issue can help shareholders understand the
seriousness with which companies take this issue.
We
will generally not make recommendations on the basis of a company’s oversight or
disclosure concerning cyber-related issues. However, we will closely evaluate a
company’s disclosure in this regard in instances where cyber-attacks have caused
significant harm to shareholders and may recommend against appropriate directors
should we find such disclosure or oversight to be insufficient.
Board
Accountability for Climate-related Issues
We
have included a new discussion on director accountability for climate-related
issues. In particular, we believe that clear and comprehensive disclosure
regarding climate risks, including how they are being mitigated and overseen,
should be provided by those companies whose own GHG emissions represent a
financially material risk, such as those companies identified by groups
including Climate Action 100+.
Accordingly,
for companies with material exposure to climate risk stemming from their own
operations, we believe they should provide thorough climate-related disclosures
in line with the recommendations of the Task Force on Climate-related Financial
Disclosures (“TCFD”). We also believe the boards of these companies should have
explicit and clearly defined oversight responsibilities for climate-related
issues. As such, in instances where we find either of these disclosures to be
absent or significantly lacking, we may recommend voting against responsible
directors.
Officer
Exculpation
We
have included a new section regarding officer exculpation. In August 2022, the
Delaware General Assembly amended Section 102(b)(7) of the Delaware General
Corporation Law (“DGCL”) to authorize corporations to adopt a provision in their
certificate of incorporation to eliminate or limit monetary liability of certain
corporate officers for breach of fiduciary duty of care. The amendment
authorizes corporations to provide for exculpation of the following officers:
(i) the corporation’s president, chief executive officer, chief operating
officer, chief financial officer, chief legal officer, controller, treasurer or
chief accounting officer, (ii) “named executive
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officers”
identified in the corporation’s SEC filings, and (iii) individuals who have
agreed to be identified as officers of the corporation.
Corporate
exculpation provisions under the DGCL apply only to claims for breach of the
duty of care, and not to breaches of the duty of loyalty. Exculpation provisions
also do not apply to acts or omissions not in good faith or that involve
intentional misconduct, knowing violations of the law, or transactions involving
the receipt of any improper personal benefits. Furthermore, officers may not be
exculpated from claims brought against them by, or in the right of, the
corporation (i.e., derivative actions).
Under
Section 102(b)(7), a corporation must affirmatively elect to include an
exculpation provision in its certificate of incorporation. We will closely
evaluate proposals to adopt officer exculpation provisions on a case-by-case
basis. We will generally recommend voting against such proposals eliminating
monetary liability for breaches of the duty of care for certain corporate
officers, unless compelling rationale for the adoption is provided by the board,
and the provisions are reasonable.
Long-Term
Incentives
We
revised our threshold for the minimum percentage of the long-term incentive
grant that should be performance-based from 33% to 50%, in line with market
trends. Beginning in 2023, Glass Lewis will raise concerns in our analysis with
executive pay programs that provide less than half of an executive’s long-term
incentive awards that are subject to performance-based vesting conditions. As
with past year, we may refrain from a negative recommendation in the absence of
other significant issues with the program’s design or operation, but a negative
trajectory in the allocation amount may lead to an unfavorable recommendation.
Clarifying
Amendments
The
following clarifications of our existing policies are included this year:
Board
Responsiveness
We
have clarified our discussion of board responsiveness. Specifically, we have
clarified that when 20% or more of shareholders vote contrary to management, we
believe that boards should engage with shareholders and demonstrate some initial
level of responsiveness. When a majority or more of shareholders vote contrary
to management, we believe that boards should engage with shareholders and
provide a more robust response to fully address shareholder concerns.
Furthermore, we have clarified our approach at controlled companies and
companies that have multi-class share structures with unequal voting rights,
where we will carefully examine the level of disapproval attributable to
unaffiliated shareholders and will generally evaluate vote results on a “one
share, one vote” basis.
Compensation
Committee Performance
We
have clarified our approach when certain outsized awards (so called
“mega-grants”) have been granted and the awards present concerns such as
excessive quantum, lack of sufficient performance conditions, and/or
are
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excessively
dilutive, among others. We will generally recommend against the chair of the
compensation committee when such outsized awards have been granted and include
any of the aforementioned concerns.
Company
Responsiveness (for Say-on-Pay Analysis)
With
regard to our discussion of company responsiveness, we have clarified that we
will also scrutinize high levels of disapproval from disinterested shareholders
when assessing the support levels for previous years' say-on-pay votes. When
evaluating a company's response to low support levels, we also expanded our
discussion of what we consider robust disclosure, including discussion of
rationale for not implementing change to pay decisions that drove low support
and intentions going forward.
One-Time
Awards
We
have expanded our discussion regarding what we consider reasonable disclosure in
terms of one-time awards. Specifically, we have included that we expect
discussion surrounding the determination of quantum and structure for such
awards.
Grants
of Front-Loaded Awards
Adding
to our discussion relating to front-loaded awards, we have included language
touching on the topic of the rise in the use of "mega-grants". Furthermore, we
expanded on our concerns regarding the increased restraint placed upon the board
to respond to unforeseen factors when front-loaded awards are used. Finally, we
provided clarification surrounding situations where front-loaded awards are
intended to cover only the time-based or performance-based portion of an
executive's long-term incentive awards.
Pay
for Performance
We
included mention of the new pay versus performance disclosure requirements
announced by the U.S. Securities and Exchange Commission (SEC) in August of
2022. In our revised discussion of our Pay-for-Performance methodology, we have
made clear that the methodology is not impacted by new rules. There is no change
to the methodology for the 2023 Proxy Season. However, we note that the
disclosure requirements from the new rule may be reviewed in our evaluation of
executive pay programs on a qualitative basis.
Short-
and Long-Term Incentives
We
have added new discussion to codify our views on certain exercise of
compensation committee discretion on incentive payouts. Glass Lewis recognizes
the importance of the compensation committee’s judicious and responsible
exercise of discretion over incentive pay outcomes to account for significant
events that would otherwise be excluded from performance results of selected
metrics of incentive programs. We believe that companies should provide thorough
discussion of how such events were considered in the committee’s decisions to
exercise discretion or refrain from applying discretion over incentive pay
outcomes.
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Recoupment
Provisions
We
have revised our discussion on clawback policies to reflect new regulatory
developments for exchange-listed companies. On October 26, 2022, the U.S.
Securities and Exchange Commission (SEC) approved final rules regarding clawback
policies based on which the national exchanges are to create new listing
requirements. During period between the announcement of the final rules and the
effective date of listing requirements, Glass Lewis will continue to raise
concerns for companies that maintain clawback policies that only meet the
requirements set forth by Section 304 of the Sarbanes-Oxley Act. However,
disclosure from such companies of early effort to meet the standards of the
final rules may help to mitigate concerns.
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:
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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.
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
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.
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.
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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
•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.
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.
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
Pursuant to SEC rule Item 404 of Regulation S-K under the Securities Exchange
Act, compensation exceeding $120,000 is the minimum threshold deemed material
for disclosure of transactions involving family members of directors.
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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.
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.
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.
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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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 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
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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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.
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.
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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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.
Board
Responsiveness
Glass
Lewis believes that boards should be responsive to shareholders when a
significant percentage of shareholders vote contrary to the recommendation of
management, depending on the issue.
When
20% of more of shareholders vote contrary to management, we believe that boards
should engage with shareholders on the issue and demonstrate some initial level
of responsiveness. 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 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.
When
a majority of shareholders vote contrary to management, we believe that boards
should engage with shareholders on the issue and provide a more robust response
to fully address shareholder concerns. These include instances when a majority
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
the case of 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). In our view, this may include fully
implementing the request of the shareholder proposal and/or engaging with
shareholders on the issue and providing sufficient disclosures to address
shareholder concerns.
At
controlled companies and companies that have multi-class share structures with
unequal voting rights, we will carefully examine the level of approval or
disapproval attributed to unaffiliated shareholders when determining whether
board responsiveness is warranted. In the case of companies that have
multi-class share structures with unequal voting rights, we will generally
examine the level of approval or disapproval attributed
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to
unaffiliated shareholders on a “one share, one vote” basis. At controlled and
multi-class companies, when at least 20% or more of unaffiliated shareholders
vote contrary to management, we believe that boards should engage with
shareholders and demonstrate some initial level of responsiveness, and when a
majority or more of unaffiliated shareholders vote contrary to management, we
believe that boards should engage with shareholders and provide a more robust
response to address shareholder concerns.
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.
•Proxy
statement disclosure discussing the board’s efforts to engage with shareholders
and the actions taken to address shareholder concerns.
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.
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.
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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.
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
13
Commission on Public Trust and Private Enterprise. The Conference Board.
2003.
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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.
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.
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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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.
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
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.
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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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
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.,
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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 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
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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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.
18.The
chair of the compensation committee when” mega-grants” have been granted and the
awards present concerns such as excessive quantum, lack of sufficient
performance conditions, and/or are excessively dilutive, among
others.
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 enact the
proposal’s subject
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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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
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.
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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.
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.
13.The
governance committee chair when a company does not clearly disclose the identity
of a shareholder proponent (or lead proponent when there are multiple filers) in
their proxy statement. For a detailed explanation of this policy, please refer
to our comprehensive Proxy Paper Guidelines for Environmental, Social &
Governance Initiatives, available at
www.glasslewis.com/voting-policies-current/.
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.
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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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
6.The
chair of the nominating committee of a board that is not at least 30 percent
gender diverse,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, we will recommend voting against the chair of the
nominating committee if there are no gender diverse directors.
7.The
chair of the nominating committee of a board with fewer than one director from
an underrepresented community on the board, at companies within the Russell 1000
index.
8.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
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.
27
Women
and directors that identify with a gender other than male or
female.
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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 (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 3000 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 Russell 3000 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
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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maintain
a meaningful level of oversight of and accountability for a company’s material
environmental and social impacts.
Cyber
Risk Oversight
Companies
and consumers are exposed to a growing risk of cyber-attacks. These attacks can
result in customer or employee data breaches, harm to a company’s reputation,
significant fines or penalties, and interruption to a company’s operations.
Further, in some instances, cyber breaches can result in national security
concerns, such as those impacting companies operating as utilities, defense
contractors, and energy companies.
In
response to these issues, regulators have increasingly been focused on ensuring
companies are providing appropriate and timely disclosures and protections to
stakeholders that could have been adversely impacted by a breach in a company’s
cyber infrastructure.
Given
the regulatory focus on, and the potential adverse outcomes from, cyber-related
issues, it is our view that cyber risk is material for all companies. We
therefore believe that it is critical that companies evaluate and mitigate these
risks to the greatest extent possible. With that view, we encourage all issuers
to provide clear disclosure concerning the role of the board in overseeing
issues related to cybersecurity.
We
also believe that disclosure concerning how companies are ensuring directors are
fully versed on this rapidly evolving and dynamic issue can help shareholders
understand the seriousness with which companies take this issue.
We
will generally not make voting recommendations on the basis of a company’s
oversight or disclosure concerning cyber-related issues. However, we will
closely evaluate a company’s disclosure in this regard in instances where
cyber-attacks have caused significant harm to shareholders and may recommend
against appropriate directors should we find such disclosure or oversight to be
insufficient.
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/.
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Board
Accountability for Climate-related Issues
Given
the exceptionally broad impacts of a changing climate on companies, the economy,
and society in general, we view climate risk as a material risk for all
companies. We therefore believe that boards should be considering and evaluating
their operational resilience under lower-carbon scenarios. While all companies
maintain exposure to climate-related risks, we believe that additional
consideration should be given to, and that disclosure should be provided by
those companies whose GHG emissions represent a financially material risk.
We
believe that companies with this increased risk exposure, such as those
companies identified by groups including Climate Action 100+, should provide
clear and comprehensive disclosure regarding these risks, including how they are
being mitigated and overseen. We believe such information is crucial to allow
investors to understand the company’s management of this issue, as well as the
impact of a lower carbon future on the company’s operations.
Accordingly,
for such companies with material exposure to climate risk stemming from their
own operations, we believe thorough climate-related disclosures in line with the
recommendations of the Task Force on Climate-related Financial Disclosures
(“TCFD”) should be provided to shareholders. We also believe the boards of these
companies should have explicit and clearly defined oversight responsibilities
for climate-related issues. As such, in instances where we find either (or both)
of these disclosures to be absent or significantly lacking, we may recommend
voting against the chair of the committee (or board) charged with oversight of
climate-related issues, or if no committee has been charged with such oversight,
the chair of the governance committee. Further, we may extend our recommendation
on this basis to additional members of the responsible 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 and its
overall governance profile.
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 (other than executive chair) of any public
company30
while
serving on more than one external public company board, a director who serves as
an executive chair of any public company while serving on more than two external
public company boards, and any other director who serves on more than five
public company boards.
29
For example, the 2015-2016 NACD Public Company Governance Survey states that, on
average, directors spent a total of 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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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.
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
in related industries, 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
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.
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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
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
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.
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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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 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
At
controlled companies and companies that have multi-class share structures with
unequal voting rights, we will carefully examine the level of approval or
disapproval attributed to unaffiliated shareholders when determining whether
board responsiveness is warranted. In the case of companies that have
multi-class share
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structures
with unequal voting rights, we will generally examine the level of approval or
disapproval attributed to unaffiliated shareholders on a “one share, one vote”
basis. At controlled and multi-class companies, when at least 20% or more of
unaffiliated shareholders vote contrary to management, we believe that boards
should engage with shareholders and demonstrate some initial level of
responsiveness, and when a majority or more of unaffiliated shareholders vote
contrary to management we believe that boards should engage with shareholders
and provide a more robust response to fully address shareholder concerns.
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, we refrain 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.
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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 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
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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.
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.
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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.
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
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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, 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
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.
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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 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
38
Lucian
Bebchuk, John Coates IV and Guhan Subramanian, “The Powerful Antitakeover Force
of Staggered Boards: Theory, Evidence, and Policy”.
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rationale
is provided for why the board is proposing to waive this rule, such as
consummation of a corporate transaction.
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.
Board
Gender Diversity
Beginning
in 2023, we will generally recommend voting against the chair of the nominating
committee of a board that is not as least 30 percent gender diverse, 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 the Russell
3000 index, our existing policy requiring a minimum of one gender diverse
director will remain in place.
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, including a
timeline of when the board intends to appoint additional gender diverse
directors (generally by the next annual meeting).
Board
Underrepresented Community Diversity
Beginning
in 2023, we will generally recommend against the chair of the nominating
committee of a board with fewer than one director from an underrepresented
community on the board at companies within the Russell 1000 index.
We
define “underrepresented community director” as an individual who
self-identifies as Black, African American, North African, Middle Eastern,
Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, or
Alaskan Native, or who self-identifies as gay, lesbian, bisexual, or
transgender. For the purposes of this evaluation, we will rely solely on
self-identified demographic information as disclosed in company proxy
statements.
We
may extend our underrepresented community 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.
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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, including a
timeline to appoint additional directors from an underrepresented community
(generally by the next annual meeting).
State
Laws on Diversity
Several
states have begun to encourage board diversity through legislation. Some state
laws imposed mandatory board composition requirements, while 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 enacting 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.
We
note that during 2022, California’s Senate Bill 826 and Assembly Bill 979
regarding board gender and “underrepresented community” diversity, respectively,
were both deemed to violate the equal protection clause of the California state
constitution. These laws are currently in the appeals process.
Accordingly,
where we previously recommended in accordance with mandatory board composition
requirements set forth in California’s SB 826 and AB 979, we will refrain from
providing recommendations pursuant to these state board composition requirements
until further notice while we continue to monitor the appeals process. However,
we will continue to monitor compliance with these requirements.
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.
At
companies in the Russell 1000 index that have not provided any disclosure in any
of the above categories, we will generally recommend voting against the chair of
the nominating and/or governance committee. Further beginning in 2023, when
companies in the Russell 1000 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.
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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 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
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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.
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,
39
Spencer
Stuart Board Index, 2019, p. 15.
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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;
•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:
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•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 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,
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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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, 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
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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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 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. Additional company disclosure provided as a result of the
recent final rules on pay versus performance from the SEC in August 2022 may be
considered if they provide further insight into a company's executive pay
program.
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.
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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 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;
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•Egregious
or excessive bonuses, equity awards or severance payments, including golden
handshakes and golden parachutes;
•Insufficient
response to low shareholder support;
•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;
•High
executive pay relative to peers that is 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
When
companies receive a significant level of shareholder opposition to a say-on-pay
proposal, which occurs when there is more than 20% opposition to the proposal,
we believe the board should demonstrate a commensurate level of engagement and
responsiveness to the concerns behind the disapproval, with a particular focus
on responding to shareholder feedback. When assessing the level of opposition to
say-on-pay proposals, we may further examine the level of opposition among
disinterested shareholders as an independent group. 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
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through
the magnitude of opposition in a single year, and through the persistence of
shareholder disapproval over time.
Responses
we consider appropriate include engaging with large shareholders, especially
dissenting shareholders, to identify their concerns, and, where reasonable,
implementing changes and/or making commitments that directly address those
concerns within the company’s compensation program. In cases where particularly
egregious pay decisions caused the say on pay proposal to fail, Glass Lewis will
closely consider whether any changes were made directly relating to the pay
decision that may address structural concerns that shareholders have. In the
absence of any evidence in the disclosure 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 practices.
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. Finally, Glass Lewis' pay-for-performance analysis is currently
unaffected by any additional disclosure concerning pay versus performance as
mandated by an August 2022 SEC rule.
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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, supplemental quantitative factors like realized pay levels may be
considered, and 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.
In
determining the peer groups used in our A-F pay-for-performance letter grades,
Glass Lewis utilizes a proprietary methodology that considers both market and
industry 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, qualitative or non-formulaic 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.
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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.
Glass
Lewis recognizes the importance of the compensation committee’s judicious and
responsible exercise of discretion over incentive pay outcomes to account for
significant, material events that would otherwise be excluded from performance
results of selected metrics of incentive programs. For instance, major
litigation settlement charges may be removed from non-GAAP results before the
determination of formulaic incentive payouts, or health and safety failures may
not be reflected in performance results where companies do not expressly include
health and safety metrics in incentive plans; such events may nevertheless be
consequential to corporate performance results, impact the shareholder
experience, and, in some cases, may present material risks. Conversely, certain
events may adversely impact formulaic payout results despite being outside
executives' control. We believe that companies should provide thorough
discussion of how such events were considered in the committee’s decisions to
exercise discretion or refrain from applying discretion over incentive pay
outcomes. The inclusion of this disclosure may be helpful when we consider
concerns around the exercise or absence of committee discretion.
We
do not generally recommend against a pay program due to the use of a
non-formulaic plan. 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;
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•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 at
least half of the grant should consist of performance-based awards, putting a
material 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.
As
with the short-term incentive, Glass Lewis recognizes the importance of the
compensation committee’s judicious and responsible exercise of discretion over
incentive pay outcomes to account for significant events that would otherwise be
excluded from performance results of selected metrics of incentive programs. We
believe that companies should provide thorough discussion of how such events
were considered in the committee’s decisions to exercise discretion or refrain
from applying discretion over incentive pay outcomes.
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.
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
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in
the regular course of business or as a response to specific business conditions
and with a predetermined objective. The so-called "mega-grant", an outsized
award to one individual sometimes valued at over $100 million is sometimes but
not always provided as a front-loaded award. 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 or to respond to other
unforeseen factors. Additionally, if structured poorly, early vesting of such
awards may reduce or eliminate the retentive power at great cost to
shareholders. 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. In situations
where the front-loaded award was meant to cover a certain portion of the regular
long-term incentive grant for each year during the covered period, our analysis
of the value of the remaining portion of the regular long-term incentives
granted during the period covered by the award will account for the annualized
value of the front-loaded portion, and we expect no supplemental grant be
awarded during the vesting period of the front-loaded portion.
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.
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.
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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 and a discussion of how
the quantum of the award and its structure were determined. Further, such awards
should be tied to future service and performance whenever possible.
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.
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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)
On
October 26, 2022, the SEC adopted Rule 10D-1 under the Securities Exchange Act
of 1934. The rule mandates national securities exchanges and associations to
promulgate new listing standards requiring companies to maintain recoupment
policies (“clawback provisions”). While the final rules will be effective 60
days after the date of publication in the federal register, listing standards
may be effective as late as one year following such publication. Affected
companies are provided with another 60 days following the listing standards’
effective date to comply.
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Despite
the above timeline, Glass Lewis believes in the importance of such
risk-mitigating provisions and their alignment with shareholder interests.
Whether or not a company is affected by Rule 10D-1, during the intervening time
between the final rule’s announcement and the effective date of listing
standards, we believe it is prudent for boards to adopt detailed variable
compensation recoupment policies that, at a minimum, provide companies the
ability to recover compensation from former and current named executive officers
in the event of overpayment due to erroneous data that triggered an accounting
restatement. For companies that will be subject to the new listing requirements
and are yet to adopt clawback policies that exceed the standards set forth by
Section 304 of the Sarbanes-Oxley Act, providing detailed disclosure in the
proxy statement evidencing the board’s proactive effort to ensure that the
company will be in compliance may serve to mitigate concerns.
Notwithstanding
the new rules, 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 incentive awards were
based. Such policies allow the board to review all performance-related bonuses
and awards made to senior executives during a specified period and, to the
extent feasible, allow the company to recoup such incentive pay where
appropriate. However, some recoupment policies empower companies to recover
compensation without regard to a restatement, such as those triggered by actions
causing reputational harm. These may inform our overall view of the compensation
program in future especially as market practice continues to evolve around
expanded clawback authority.
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
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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;
•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 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
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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 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.
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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 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 or share reserves should be conservative in size so that companies
must 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
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•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.
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.
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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.
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.
42
Lucian
Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY CEOs.” November,
2006.
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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.
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.
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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.
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
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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 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
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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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, 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.
Officer
Exculpation
In
August 2022, the Delaware General Assembly amended Section 102(b)(7) of the
Delaware General Corporation Law (“DGCL”) to authorize corporations to adopt a
provision in their certificate of incorporation to eliminate or limit monetary
liability of certain corporate officers for breach of fiduciary duty of care.
Previously,
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the
DGCL allowed only exculpation of corporate directors from breach of fiduciary
duty of care claims if the corporation’s certificate of incorporation includes
an exculpation provision.
The
amendment authorizes corporations to provide for exculpation of the following
officers: (i) the corporation’s president, chief executive officer, chief
operating officer, chief financial officer, chief legal officer, controller,
treasurer or chief accounting officer, (ii) “named executive officers”
identified in the corporation’s SEC filings, and (iii) individuals who have
agreed to be identified as officers of the corporation.
Corporate
exculpation provisions under the DGCL only apply to claims for breach of the
duty of care, and not to breaches of the duty of loyalty. Exculpation provisions
also do not apply to acts or omissions not in good faith or that involve
intentional misconduct, knowing violations of the law, or transactions involving
the receipt of any improper personal benefits. Furthermore, officers may not be
exculpated from claims brought against them by, or in the right of, the
corporation (i.e., derivative actions).
Under
Section 102(b)(7), a corporation must affirmatively elect to include an
exculpation provision in its certificate of incorporation. We will closely
evaluate proposals to adopt officer exculpation provisions on a case-by-case
basis. We will generally recommend voting against such proposals eliminating
monetary liability for breaches of the duty of care for certain corporate
officers, unless compelling rationale for the adoption is provided by the board,
and the provisions 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, 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?
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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).
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:
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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 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.
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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 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.
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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. We will generally 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.
At
companies that have multi-class share structures with unequal voting rights, we
will carefully examine the level of approval or disapproval attributed to
unaffiliated shareholders when determining whether board responsiveness is
warranted. In the case of companies that have multi-class share structures with
unequal voting rights, we will generally examine the level of approval or
disapproval attributed to unaffiliated shareholders on a “one share, one vote”
basis. At controlled and multi-class companies, when at least 20% or more of
unaffiliated shareholders vote contrary to management, we believe that boards
should engage with shareholders and demonstrate some initial level of
responsiveness, and when a majority or more of unaffiliated shareholders vote
contrary to management we believe that boards should engage with shareholders
and provide a more robust response to fully address shareholder
concerns.
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
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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.
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.
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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.
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
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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.
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.
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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 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.
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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 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 Issues
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
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adversely
affect the company’s stakeholders. Further, 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
©
2022 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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