ck0001540305-20220831
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NUSI
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NATIONWIDE
NASDAQ-100® RISK-MANAGED INCOME ETF |
NSPI |
NATIONWIDE
S&P 500® RISK-MANAGED INCOME ETF |
NDJI |
NATIONWIDE
DOW JONES® RISK-MANAGED INCOME ETF |
NTKI |
NATIONWIDE
RUSSELL 2000® RISK-MANAGED INCOME ETF |
each
a series of ETF Series Solutions
Listed
on NYSE Arca, Inc.
STATEMENT
OF ADDITIONAL INFORMATION
December 15,
2022
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with the prospectus dated December 15, 2022, as may be
supplemented from time to time (the “Prospectus”), of the Nationwide Nasdaq-100
Risk-Managed Income ETF (the “Nasdaq-100 Risk-Managed Income Fund”), Nationwide
S&P 500 Risk-Managed Income ETF (the “S&P 500 Risk-Managed Income
Fund”), Nationwide Dow Jones Risk-Managed Income ETF (the “Dow Jones
Risk-Managed Income Fund”), and Nationwide Russell 2000 Risk-Managed Income ETF
(the “Russell 2000 Risk-Managed Income Fund”) (each, a “Fund” and, collectively,
the “Funds”), each a series of ETF Series Solutions (the “Trust”). Capitalized
terms used in this SAI that are not defined have the same meaning as in the
Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge, by calling the Funds at 1‑800‑617‑0004, visiting
www.etf.nationwide.com, or writing to the Funds, c/o U.S. Bank Global Fund
Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
The
Funds’ audited financial statements for their fiscal year ended August 31, 2022
are incorporated into this SAI by reference to the Funds’ Annual
Report
to Shareholders (File No. 811-22668). You may obtain a copy of the Funds’ Annual
Report at no charge by contacting the Funds at the address or phone number noted
above.
TABLE
OF CONTENTS
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Additional
Notices |
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Appendix
A |
A-1 |
GENERAL
INFORMATION
ABOUT
THE
TRUST
The
Trust is an open-end management investment company consisting of multiple
investment series. This SAI relates to the Funds. The Trust was organized as a
Delaware statutory trust on February 9, 2012. The Trust is registered with
the U.S. Securities and Exchange Commission (“SEC”) under the Investment Company
Act of 1940, as amended (together with the rules and regulations adopted
thereunder, as amended, the “1940 Act”), as an open-end management investment
company, and the offering of each Fund’s shares (“Shares”) is registered under
the Securities Act of 1933, as amended (the “Securities Act”). The Trust is
governed by its Board of Trustees (the “Board”).
Nationwide
Fund Advisors (the “Adviser”) serves as the Funds’ investment adviser. Harvest
Volatility Management, LLC (“Harvest” or the “Sub-Adviser”) serves as the Funds’
sub-adviser. The investment objective of each Fund is to seek current income
with downside protection.
Each
Fund offers and issues Shares at its net asset value (“NAV”) only in
aggregations of a specified number of Shares (each, a “Creation Unit”). Each
Fund generally offers and issues Shares in exchange for a basket of securities
(“Deposit Securities”) together with the deposit of a specified cash payment
(“Cash Component”). The Trust reserves the right to permit or require the
substitution of a “cash in lieu” amount (“Deposit Cash”) to be added to the Cash
Component to replace any Deposit Security or other instrument in a Fund’s
portfolio. Shares of each Fund are or will be listed on the NYSE Arca, Inc. (the
“Exchange”) and trade on the Exchange at market prices. These prices may differ
from the Shares’ NAVs. Shares are also redeemable only in Creation Unit
aggregations, principally for a basket of Deposit Securities together with a
Cash Component. A Creation Unit of the Funds generally consists of 50,000
Shares, although the size of a Creation Unit of a Fund may change from time to
time. As a practical matter, only institutions or large investors purchase or
redeem Creation Units. Except when aggregated in Creation Units, Shares are not
redeemable securities.
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain on deposit with the Trust cash
at least equal to a specified percentage of the value of the missing Deposit
Securities, as set forth in the Participant Agreement (as defined below). The
Trust may impose a transaction fee for each creation or redemption. In all
cases, such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities. As
in the case of other publicly traded securities, brokers’ commissions on
transactions in the secondary market will be based on negotiated commission
rates at customary levels.
ADDITIONAL
INFORMATION
ABOUT
INVESTMENT
OBJECTIVES,
POLICIES,
AND RELATED
RISKS
Each
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments, see “Description
of Permitted Investments”
in this SAI.
With
respect to each Fund’s investments, unless otherwise noted, if a percentage
limitation on investment is adhered to at the time of investment or contract, a
subsequent increase or decrease because of market movement or redemption will
not result in a violation of such investment limitation.
Non-Diversification
Each
Fund is classified as a non-diversified investment company under the 1940 Act. A
“non-diversified” classification means that a Fund is not limited by the 1940
Act with regard to the percentage of its total assets that may be invested in
the securities of a single issuer. This means that a Fund may invest a greater
portion of its total assets in the securities of a single issuer or a small
number of issuers than if it was a diversified fund. This may have an adverse
effect on a Fund’s performance or subject Shares to greater price volatility
than more diversified investment companies. Moreover, in pursuing its objective,
a Fund may hold the securities of a single issuer in an amount exceeding 10% of
the value of the outstanding securities of the issuer, subject to restrictions
imposed by the Internal Revenue Code of 1986, as amended (the
“Code”).
Although
a Fund is non-diversified for purposes of the 1940 Act, each Fund intends to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a regulated investment company (“RIC”) for
purposes of the Code. Compliance with the diversification requirements of the
Code may limit the investment flexibility of a Fund and may make it less likely
that a Fund will meet its investment objectives. To qualify as a RIC under the
Code, a Fund must meet the Diversification Requirement described in the section
titled “Federal Income Taxes” in this SAI.
General
Risks
The
value of a Fund’s portfolio securities may fluctuate with changes in the
financial condition of an issuer or counterparty, changes in specific economic
or political conditions that affect a particular security or issuer and changes
in general economic or political conditions. An investor in a Fund could lose
money over short or long periods of time.
There
can be no guarantee that a liquid market for the securities held by a Fund will
be maintained. The existence of a liquid trading market for certain securities
may depend on whether dealers will make a market in such securities. There can
be no assurance that a market will be made or maintained or that any such market
will be or remain liquid. The price at which securities may be sold and the
value of Shares will be adversely affected if trading markets for a Fund’s
portfolio securities are limited or absent, or if bid-ask spreads are wide.
Recent
Events.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers have experienced particularly large losses as a result of these
disruptions, and such disruptions may continue for an extended period of time or
reoccur in the future to a similar or greater extent. In response, the U.S.
government and the Federal Reserve have taken extraordinary actions to support
the domestic economy and financial markets. Many countries, including the U.S.,
are subject to few restrictions related to the spread of COVID-19. It is unknown
how long circumstances related to the pandemic will persist, whether they will
reoccur in the future, whether efforts to support the economy and financial
markets will be successful, and what additional implications may follow from the
pandemic. The impact of these events and other epidemics or pandemics in the
future could adversely affect Fund performance.
Russia’s
military invasion of Ukraine in February 2022, the resulting responses by the
United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely
affect regional and global economies. The United States and other countries have
imposed broad-ranging economic sanctions on Russia, certain Russian individuals,
banking entities and corporations, and Belarus as a response to Russia’s
invasion of Ukraine, and may impose sanctions on other countries that provide
military or economic support to Russia. The extent and duration of Russia’s
military actions and the repercussions of such actions (including any
retaliatory actions or countermeasures that may be taken by those subject to
sanctions, including cyber attacks) are impossible to predict, but could result
in significant market disruptions, including in certain industries or sectors,
such as the oil and natural gas markets, and may negatively affect global supply
chains, inflation and global growth. These and any related events could
significantly impact the Fund’s performance and the value of an investment in
the Fund, even if the Fund does not have direct exposure to Russian issuers or
issuers in other countries affected by the invasion.
Cyber
Security Risk. Investment
companies, such as the Funds, and their service providers may be subject to
operational and information security risks resulting from cyber attacks. Cyber
attacks include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized
release of confidential information or various other forms of cyber security
breaches. Cyber attacks affecting a Fund or the Adviser, Sub-Adviser, custodian,
transfer agent, intermediaries and other third-party service providers may
adversely impact a Fund. For instance, cyber attacks may interfere with the
processing of shareholder transactions, impact a Fund’s ability to calculate its
NAV, cause the release of private shareholder information or confidential
company information, impede trading, subject a Fund to regulatory fines or
financial losses, and cause reputational damage. A Fund may also incur
additional costs for cyber security risk management purposes. Similar types of
cyber security risks are also present for issuers of securities in which a Fund
invests, which could result in material adverse consequences for such issuers,
and may cause a Fund’s investments in such portfolio companies to lose value.
Description
of Permitted Investments
The
following are descriptions of the Funds’ permitted investments and investment
practices and the associated risk factors. A Fund will only invest in any of the
following instruments or engage in any of the following investment practices if
such investment or activity is consistent with a Fund’s investment objective and
permitted by the Fund’s stated investment policies. Each of the permitted
investments described below applies to each Fund unless otherwise
noted.
Borrowing
Although
the Funds do not intend to borrow money, a Fund may do so to the extent
permitted by the 1940 Act. Under the 1940 Act, a Fund may borrow up to one-third
(1/3) of its total assets. A Fund will borrow money only for short-term or
emergency purposes. Such borrowing is not for investment purposes and will be
repaid by the borrowing Fund promptly. Borrowing will tend to exaggerate the
effect on NAV of any increase or decrease in the market value of the borrowing
Fund’s portfolio. Money borrowed will be subject to interest costs that may or
may not be recovered by earnings on the securities purchased. A 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.
Depositary
Receipts
To
the extent a Fund invests in stocks of foreign corporations, a Fund’s investment
in securities of foreign companies may be in the form of depositary receipts or
other securities convertible into securities of foreign issuers. American
Depositary Receipts (“ADRs”) are dollar-denominated receipts representing
interests in the securities of a foreign issuer, which securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by U.S. banks and
trust companies which evidence ownership of underlying securities issued by a
foreign corporation. Generally, ADRs in registered form are designed for use in
domestic securities markets and are traded on exchanges or over-the-counter in
the United States. Global Depositary Receipts (“GDRs”), European Depositary
Receipts (“EDRs”), and International Depositary Receipts (“IDRs”) are similar to
ADRs in that they are certificates evidencing ownership of shares of a foreign
issuer; however, GDRs, EDRs, and IDRs may be issued in bearer form and
denominated in other currencies and are generally designed for use in specific
or multiple securities markets outside the U.S. EDRs, for example, are designed
for use in European securities markets, while GDRs are designed for use
throughout the world. Depositary receipts will not necessarily be denominated in
the same currency as their underlying securities.
The
Funds will not invest in any unlisted Depositary Receipts or any Depositary
Receipt that the applicable Sub-Adviser deems to be illiquid or for which
pricing information is not readily available. In addition, all Depositary
Receipts generally must be sponsored. However, a Fund may invest in unsponsored
Depositary Receipts under certain limited circumstances. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the value of the Depositary Receipts.
Emerging
Markets Investments (Nasdaq-100
Risk-Managed Income Fund only)
The
Fund may invest in emerging markets investments, which have exposure to the
risks discussed below relating to foreign instruments more generally, as well as
certain additional risks. A high proportion of the shares of many issuers in
emerging market countries may be held by a limited number of persons and
financial institutions, which may limit the number of shares available for
investment. The prices at which investments may be acquired may be affected by
trading by persons with material non-public information and by securities
transactions by brokers in anticipation of transactions by the Fund in
particular securities. In addition, emerging market investments are susceptible
to being influenced by large investors trading significant blocks of securities.
Emerging
market stock markets are undergoing a period of growth and change which may
result in trading volatility and difficulties in the settlement and recording of
transactions, and in interpreting and applying the relevant law and regulations.
The securities industries in these countries are comparatively underdeveloped.
Emerging securities markets are substantially smaller, less liquid and more
volatile than the major securities markets in the United States and other more
developed securities markets. Stockbrokers and other intermediaries in the
emerging markets may not perform as well as their counterparts in the United
States and other more developed securities markets.
Political
and economic structures in many emerging market countries are undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristic of the United States and
other more developed nations. Certain of such countries may have, in the past,
failed to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result, the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the values of investments in those countries and the availability of
additional investments in those countries. The laws of countries in emerging
markets relating to limited liability of corporate shareholders, fiduciary
duties of officers and directors, and the bankruptcy of state enterprises are
generally less well developed than or different from such laws in the United
States. It may be more difficult to obtain or enforce a judgment in the courts
of these countries than it is in the United States. Although some governments in
emerging markets have instituted economic reform policies, there can be no
assurances that such policies will continue or succeed.
Sanctions
and other intergovernmental actions may be undertaken against an emerging market
country, which may result in the devaluation of the country’s currency, a
downgrade in the country’s credit rating, and a decline in the value and
liquidity of the country’s securities. Sanctions could result in the immediate
freeze of securities issued by an emerging market company or government,
impairing the ability of the Fund to buy, sell, receive or deliver these
securities.
Equity
Securities
Equity
securities, such as the common stocks of an issuer, are subject to stock market
fluctuations and therefore may experience volatile changes in value as market
conditions, consumer sentiment or the financial condition of the issuers change.
A decrease in value of the equity securities in a Fund’s portfolio may also
cause the value of the Fund’s Shares to decline.
An
investment in the Funds should be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the
value of a Fund’s portfolio securities and therefore a decrease in the value of
Shares). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence and
perceptions change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies; inflation and interest rates; economic expansion
or contraction; and global or regional political, economic, public health, or
banking crises.
Holders
of common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, generally have
inferior rights to receive payments from the issuer in comparison with the
rights of creditors or holders of debt obligations or preferred stocks. Further,
unlike debt securities, which typically have a stated principal amount payable
at maturity (whose value, however, is subject to market fluctuations prior
thereto), or preferred stocks, which typically have a liquidation preference and
which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are
subject to market fluctuations as long as the common stock remains outstanding.
When-Issued
Securities:
A
when-issued security is one whose terms are available and for which a market
exists, but which has not been issued. When a Fund engages in when-issued
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, a Fund may miss the opportunity to obtain the
security at a favorable price or yield.
When
purchasing a security on a when-issued basis, a Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
changes. At the time of settlement, the value of the security may be more than
or less than the purchase price. The yield available in the market when the
delivery takes place also may be higher than those obtained in the transaction
itself. Because a Fund does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other investments.
Decisions
to enter into “when-issued” transactions will be considered on a case-by-case
basis when necessary to maintain continuity in a company’s index membership. A
Fund will segregate cash or liquid securities equal in value to commitments for
the when-issued transactions. A Fund will segregate additional liquid assets
daily so that the value of such assets is equal to the amount of the
commitments.
Types
of Equity Securities:
Common
Stocks
— Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company’s board of directors.
Preferred
Stocks
— Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated to the liabilities of the issuer. Unlike common stocks, preferred
stocks are generally not entitled to vote on corporate matters. Types of
preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred stock.
Generally,
the market values of preferred stock with a fixed dividend rate and no
conversion element vary inversely with interest rates and perceived credit risk.
Rights
and Warrants
— A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitles the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Real
Estate Investment Trusts
(“REITs”)
—
A U.S. REIT is a corporation or business trust (that would otherwise be taxed as
a corporation) which meets the definitional requirements of the Code. The Code
permits a qualifying REIT to deduct from taxable income the dividends paid,
thereby effectively eliminating corporate level federal income tax. To meet the
definitional requirements of the Code, a REIT must, among other things: invest
substantially all of its assets in interests in real estate (including mortgages
and other REITs), cash and government securities; derive most of its income from
rents from real property or interest on loans secured by mortgages on real
property; and, in general, distribute annually 90% or more of its taxable income
(other than net capital gains) to shareholders.
REITs
are sometimes informally characterized as Equity REITs and Mortgage REITs. An
Equity REIT invests primarily in the fee ownership or leasehold ownership of
land and buildings (e.g.,
commercial equity REITs and residential equity REITs); a Mortgage REIT invests
primarily in mortgages on real property, which may secure construction,
development or long-term loans.
REITs
may be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent that REITs in which a Fund invests may
concentrate investments in particular geographic regions or property types.
Additionally, rising interest rates may cause investors in REITs to demand a
higher annual yield from future distributions, which may in turn decrease market
prices for equity securities issued by REITs. Rising interest rates also
generally increase the costs of obtaining financing, which could cause the value
of a Fund’s investments to decline. During periods of declining interest rates,
certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay,
which prepayment may diminish the yield on securities issued by such Mortgage
REITs. In addition, Mortgage REITs may be affected by the ability of borrowers
to repay when due the debt extended by the REIT and Equity REITs may be affected
by the ability of tenants to pay rent.
Certain
REITs have relatively small market capitalization, which may tend to increase
the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through a Fund, a shareholder will bear not only his or her
proportionate share of the expenses of such Fund, but also, indirectly, similar
expenses of the REITs. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
In
addition to these risks, Equity REITs may be affected by changes in the value of
the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon
management
skills and generally may not be diversified. Equity and Mortgage REITs are also
subject to heavy cash flow dependency defaults by borrowers and
self-liquidation. In addition, Equity and Mortgage REITs could possibly fail to
qualify for the favorable U.S. federal income tax treatment generally available
to REITs under the Code or fail 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 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.
Smaller
Companies
— The securities of small- and mid-capitalization companies may be more
vulnerable to adverse issuer, market, political, or economic developments than
securities of larger-capitalization companies. The securities of small- and
mid-capitalization companies generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger capitalization stocks
or the stock market as a whole. Some small- or mid-capitalization companies have
limited product lines, markets, and financial and managerial resources and tend
to concentrate on fewer geographical markets relative to larger capitalization
companies. There is typically less publicly available information concerning
small- and mid-capitalization companies than for larger, more established
companies. Small- and mid-capitalization companies also may be particularly
sensitive to changes in interest rates, government regulation, borrowing costs,
and earnings.
Tracking
Stocks —
The
Funds may invest in tracking stocks. A tracking stock is a separate class of
common stock whose value is linked to a specific business unit or operating
division within a larger company and which is designed to “track” the
performance of such business unit or division. The tracking stock may pay
dividends to shareholders independent of the parent company. The parent company,
rather than the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same rights as
holders of the company’s common stock.
Exchange-Traded
Funds
The
Fund may invest in shares of other investment companies (including
exchange-traded funds (“ETFs”)). As the shareholder of another ETF, the Fund
would bear, along with other shareholders, its pro rata portion of the other
ETF’s expenses, including advisory fees. Such expenses are in addition to the
expenses the Fund pays in connection with its own operations. The Fund’s
investments in other ETFs may be limited by applicable law.
Disruptions
in the markets for the securities underlying ETFs purchased or sold by the Fund
could result in losses on investments in ETFs. ETFs also carry the risk that the
price the Fund pays or receives may be higher or lower than the ETF’s NAV. ETFs
are also subject to certain additional risks, including the risks of illiquidity
and of possible trading halts due to market conditions or other reasons, based
on the policies of the relevant exchange. ETFs and other investment companies in
which the Fund may invest may be leveraged, which would increase the volatility
of the Fund’s NAV.
Hedging
Transactions
The
Adviser and/or Harvest, from time to time, employ various hedging techniques.
The success of a Fund’s hedging strategy will be subject to the Adviser’s or
Sub-Adviser’s ability to correctly assess the degree of correlation between the
performance of the instruments used in the hedging strategy and the performance
of the investments in the portfolio being hedged. Since the characteristics of
many securities change as markets change or time passes, the success of a Fund’s
hedging strategy will also be subject to the Adviser’s and/or Sub-Adviser’s
ability to continually recalculate, readjust, and execute hedges in an efficient
and timely manner. Hedging against a decline in the value of a portfolio
position does not eliminate fluctuations in the values of those portfolio
positions or prevent losses if the values of those positions decline. Rather, it
establishes other positions designed to gain from those same declines, thus
seeking to moderate the decline in the portfolio position’s value. Such hedging
transactions also limit the opportunity for gain if the value of the portfolio
position should increase. For a variety of reasons, the Adviser or Sub-Adviser
may not seek to establish a perfect correlation between such hedging instruments
and the portfolio holdings being hedged. Such imperfect correlation may prevent
a Fund from achieving the intended hedge or expose the Fund to risk of loss. In
addition, it is not possible to hedge fully or perfectly against any risk, and
hedging entails its own costs. The Adviser or Sub-Adviser may determine, in its
sole discretion, not to hedge against certain risks and certain risks may exist
that cannot be hedged. Furthermore, the Adviser or Sub-Adviser may not
anticipate a particular risk so as to hedge against it effectively. Hedging
transactions also limit the opportunity for gain if the value of a hedged
portfolio position should increase.
Illiquid
Investments
Each
Fund may invest up to an aggregate amount of 15% of its net assets in illiquid
investments, as such term is defined by Rule 22e-4 of the 1940 Act. A Fund may
not invest in illiquid investments if, because of such investment, more than 15%
of the Fund’s net assets would be invested in illiquid investments. Illiquid
investments include securities subject to contractual or other restrictions on
resale and other instruments that lack readily available markets. The inability
of a Fund to dispose of illiquid investments readily or at a reasonable price
could impair a Fund’s ability to raise cash for redemptions or other purposes.
The liquidity of securities purchased by a Fund, which are eligible for resale
pursuant to Rule 144A, except for certain 144A bonds, will be monitored by a
Fund on an ongoing basis. If more than 15% of a Fund’s net assets are invested
in illiquid investments, the Fund, in accordance with Rule 22e-4(b)(1)(iv), will
report the occurrence to both the Board and the SEC and seek to reduce its
holdings of illiquid investments within a reasonable period.
Investment
Company
Securities
The
Funds may invest in the securities of other investment companies, including ETFs
and money market funds, subject to applicable limitations under
Section 12(d)(1) of the 1940 Act. Investing in another pooled vehicle
exposes a Fund to all the risks of that pooled vehicle. Pursuant to
Section 12(d)(1), a Fund may invest in the securities of another investment
company (the “acquired company”) provided that such Fund, immediately after such
purchase or acquisition, does not own in the aggregate: (i) more than 3% of the
total outstanding voting stock of the acquired company; (ii) securities issued
by the acquired company having an aggregate value in excess of 5% of the value
of the total assets of such Fund; or (iii) securities issued by the acquired
company and all other investment companies (other than treasury stock of such
Fund) having an aggregate value in excess of 10% of the value of the total
assets of the applicable Fund. To the extent allowed by law or regulation, the
Funds may invest its assets in securities of investment companies that are money
market funds in excess of the limits discussed above.
If
a Fund invests in and, thus, is a shareholder of, another investment company,
the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund’s own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund’s own operations.
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies in securities of other registered investment companies, including the
Funds. The acquisition of a Fund’s Shares by registered investment companies is
subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as may
be permitted by exemptive rules under the 1940 Act that allow registered
investment companies to invest in the Fund beyond the limits of
Section 12(d)(1), subject to certain terms and conditions, including that
the registered investment company enter into an agreement with the Fund
regarding the terms of the investment.
The
Funds may rely on Section 12(d)(1)(F) and Rule 12d1-3 under the 1940 Act, which
provide an exemption from Section 12(d)(1) that allows a Fund to invest all
of its assets in other registered funds, including ETFs, if, among other
conditions: (a) the Fund, together with its affiliates, acquires no more than
three percent of the outstanding voting stock of any acquired fund, and (b) the
sales load charged on the Fund’s Shares is no greater than the limits set forth
in Rule 2341 of the Rules of the Financial Industry Regulatory Authority, Inc.
(“FINRA”). Additionally, the Funds may rely on Rule 12d1-4 under the 1940 Act to
invest in such other funds in excess of the limits of Section 12(d)(1) if the
Funds comply with the terms and conditions of such rule.
Money
Market Instruments
Each
Fund may invest a portion of its assets in high-quality money market instruments
on an ongoing basis to provide liquidity or for other reasons. The instruments
in which the Fund may invest include: (i) short-term obligations issued by
the U.S. Government; (ii) negotiable certificates of deposit (“CDs”), fixed
time deposits and bankers’ acceptances of U.S. and foreign banks and similar
institutions; (iii) commercial paper rated at the date of purchase
“Prime-1” by Moody’s or “A-1+” or “A-1” by S&P or, if unrated, of comparable
quality as determined by the Fund; and (iv) repurchase agreements. CDs are
short-term negotiable obligations of commercial banks. Time deposits are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Banker’s acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Non-U.S.
Securities
The
Funds may invest in non-U.S. equity securities. Investments in non-U.S. equity
securities involve certain risks that may not be present in investments in U.S.
securities. For example, non-U.S. securities may be subject to currency risks or
to foreign government taxes. There may be less information publicly available
about a non-U.S. issuer than about a U.S. issuer, and a foreign issuer may or
may not be subject to uniform accounting, auditing and financial reporting
standards and practices comparable to those in the U.S. Other risks of investing
in such securities include political or economic instability in the country
involved, the difficulty of predicting international trade patterns and the
possibility of imposition of exchange controls. The prices of such securities
may be more volatile than those of domestic securities. With respect to certain
foreign countries, there is a possibility of expropriation of assets or
nationalization, imposition of withholding taxes on dividend or interest
payments, difficulty in obtaining and enforcing judgments against foreign
entities or diplomatic developments which could affect investment in these
countries. Losses and other expenses may be incurred in converting between
various currencies in connection with purchases and sales of foreign securities.
Since foreign exchanges may be open on days when the Funds do not price their
Shares, the value of the securities in a Fund’s portfolio may change on days
when shareholders will not be able to purchase or sell the Fund’s Shares.
Conversely, Shares may trade on days when foreign exchanges are closed. Each of
these factors can make investments in the Funds more volatile and potentially
less liquid than other types of investments.
Non-U.S.
stock markets may not be as developed or efficient as, and may be more volatile
than, those in the U.S. While the volume of shares traded on non-U.S. stock
markets generally has been growing, such markets usually have substantially less
volume than U.S. markets. Therefore, a Fund’s investment in non-U.S. equity
securities may be less liquid and subject to more rapid and erratic price
movements than comparable securities listed for trading on U.S. exchanges.
Non-U.S. equity securities may trade at price/earnings multiples higher than
comparable U.S. securities and such levels may not be sustainable. There may be
less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the U.S. Moreover, settlement
practices for transactions in foreign markets may differ from those in U.S.
markets. Such differences may include delays beyond periods customary in the
U.S. and practices, such as delivery of securities prior to receipt of payment,
that increase the likelihood of a failed settlement, which can result in losses
to a Fund. The value of non-U.S. investments and the investment income derived
from them may also be affected
unfavorably
by changes in currency exchange control regulations. Foreign brokerage
commissions, custodial expenses and other fees are also generally higher than
for securities traded in the U.S. This may cause a Fund to incur higher
portfolio transaction costs than domestic equity funds. Fluctuations in exchange
rates may also affect the earning power and asset value of the foreign entity
issuing a security, even one denominated in U.S. dollars. Dividend and interest
payments may be repatriated based on the exchange rate at the time of
disbursement, and restrictions on capital flows may be imposed.
Set
forth below for certain markets in which a Fund may invest are brief
descriptions of some of the conditions and risks in each such market.
Investments
in Australia. The
Australian economy is reliant on the sale of commodities, which can pose risks
such as the fluctuation of prices and the variability of demand for exportation
of such products. Changes in spending on Australian products by the
economies of other countries or changes in any of these economies may cause a
significant impact on the Australian economy.
Investments
in China and Hong Kong. Investing
in ADRs with underlying shares organized, listed or domiciled in China involves
special considerations not typically associated with investing in countries with
more democratic governments or more established economies or securities markets.
Such risks may include: (i) the risk of nationalization or expropriation of
assets or confiscatory taxation; (ii) greater social, economic and
political uncertainty (including the risk of war); (iii) dependency on
exports and the corresponding importance of international trade;
(iv) increasing competition from Asia’s other low-cost emerging economies;
(v) higher rates of inflation; (vi) controls on foreign investment and
limitations on repatriation of invested capital; (vii) greater governmental
involvement in and control over the economy; (viii) the risk that the
Chinese government may decide not to continue to support the economic reform
programs implemented since 1978 and could return to the prior, completely
centrally planned, economy; (ix) the fact that Chinese companies,
particularly those located in China, may be smaller, less seasoned and newly
organized; (x) the differences in, or lack of, auditing and financial
reporting standards which may result in unavailability of material information
about issuers, particularly in China where, for example, the Public Company
Accounting Oversight Board (“PCAOB”) lacks access to inspect PCAOB-registered
accounting firms; (xi) the fact that statistical information regarding the
economy of China may be inaccurate or not comparable to statistical information
regarding the U.S. or other economies; (xii) the less extensive, and still
developing, regulation of the securities markets, business entities and
commercial transactions; (xiii) the fact that the settlement period of
securities transactions in foreign markets may be longer; (xiv) the fact
that the willingness and ability of the Chinese government to support the
Chinese and Hong Kong economies and markets is uncertain; (xv) the risk
that it may be more difficult, or impossible, to obtain and/or enforce a
judgment than in other countries; (xvi) the rapid and erratic nature of
growth, particularly in China, resulting in inefficiencies and dislocations;
(xvii) the risk that, because of the degree of interconnectivity between
the economies and financial markets of China and Hong Kong, any sizable
reduction in the demand for goods from China, or an economic downturn in China,
could negatively affect the economy and financial market of Hong Kong as well;
and (xviii) the risk that certain companies in a Fund’s Index may have
dealings with countries subject to sanctions or embargoes imposed by the U.S.
Government or identified as state sponsors of terrorism.
After
many years of steady growth, the growth rate of China’s economy has recently
slowed. Although this slowdown was to some degree intentional, the slowdown has
also slowed the once rapidly growing Chinese real estate market and left local
governments with high debts with few viable means to raise revenue, especially
with the fall in demand for housing. Despite its attempts to restructure its
economy towards consumption, China remains heavily dependent on exports.
Accordingly, China is susceptible to economic downturns abroad, including any
weakness in demand from its major trading partners, including the United States,
Japan, and Europe. In addition, China’s aging infrastructure, worsening
environmental conditions, rapid and inequitable urbanization, quickly widening
urban and rural income gap, domestic unrest and provincial separatism all
present major challenges to the country. Further, China’s territorial claims,
including its land reclamation projects and the establishment of an Air Defense
Identification Zone over islands claimed and occupied by Japan, are another
source of tension and present risks to diplomatic and trade relations with
certain of China’s regional trade partners.
Investments
in Hong Kong are also subject to certain political risks not associated with
other investments. Following the establishment of the People’s Republic of China
by the Communist Party in 1949, the Chinese government renounced various debt
obligations incurred by China’s predecessor governments, which obligations
remain in default, and expropriated assets without compensation. There can be no
assurance that the Chinese government will not take similar action in the
future. Investments in China and Hong Kong involve risk of a total loss due to
government action or inaction. China has committed by treaty to preserve Hong
Kong’s autonomy and its economic, political and social freedoms for 50 years
from the July 1, 1997 transfer of sovereignty from Great Britain to China.
However, if China would exert its authority to alter the economic, political or
legal structures or the existing social policy of Hong Kong, investor and
business confidence in Hong Kong could be negatively affected, which in turn
could negatively affect markets and business performance. In addition, the Hong
Kong dollar trades at a fixed exchange rate in relation to (or, is “pegged” to)
the U.S. dollar, which has contributed to the growth and stability of the Hong
Kong economy. However, it is uncertain how long the currency peg will continue
or what effect the establishment of an alternative exchange rate system would
have on the Hong Kong economy. Because each Fund’s NAV is denominated in U.S.
dollars, the establishment of an alternative exchange rate system could result
in a decline in a Fund’s NAV. These and other factors could have a negative
impact on each Fund’s performance.
Investments
in Developed Markets Securities. Investments
in developed country issuers may subject the Fund to regulatory, political,
currency, security, economic, and other risks associated with developed
countries. Developed countries tend to represent a significant portion of the
global economy and have generally experienced slower economic growth than some
less developed countries. Certain developed countries have experienced security
concerns, such as terrorism and strained international relations. Incidents
involving a country’s or region’s security may cause uncertainty in its markets
and may adversely affect its economy and the Fund’s investments. In addition,
developed countries may be adversely impacted by changes to the economic
conditions of certain key trading partners, regulatory burdens, debt burdens,
and the price or availability of certain commodities.
Investments
in Emerging Markets.
Investments in securities listed and traded in emerging markets are subject to
additional risks that may not be present for U.S. investments or investments in
more developed non-U.S. markets. Such risks may include: (i) greater market
volatility; (ii) lower trading volume; (iii) greater social, political
and economic uncertainty; (iv) governmental controls on foreign investments
and limitations on repatriation of invested capital; (v) the risk that
companies may be held to lower disclosure, corporate governance, auditing and
financial reporting standards than companies in more developed markets;
(vi) the risk that there may be less protection of property rights than in
other countries; and (vii) fewer investor rights and limited legal or practical
remedies available to investors against emerging market companies. Emerging
markets are generally less liquid and less efficient than developed securities
markets.
Investments
in Europe.
Most
developed countries in Western Europe are members of the European Union (“EU”),
and many are also members of the European Monetary Union (EMU), which requires
compliance with restrictions on inflation rates, deficits, and debt levels.
Unemployment in certain European nations is historically high and several
countries face significant debt problems. These conditions can significantly
affect every country in Europe. The euro is the official currency of the EU.
Each Fund, through its investments in Europe, may have significant exposure to
the euro and events affecting the euro. Recent market events affecting several
of the EU member countries have adversely affected the sovereign debt issued by
those countries, and ultimately may lead to a decline in the value of the euro.
A significant decline in the value of the euro may produce unpredictable effects
on trade and commerce generally and could lead to increased volatility in
financial markets worldwide.
The
UK formally exited from the EU on January 31, 2020 (known as “Brexit”), and
effective December 31, 2020, the UK ended a transition period during which it
continued to abide by the EU’s rules and the UK’s trade relationships with the
EU were generally unchanged. During this period and beyond, the impact on the UK
and European economies and the broader global economy could be significant,
resulting in negative impacts, such as increased volatility and illiquidity,
potentially lower economic growth on markets in the UK, Europe, and globally,
and changes in legal and regulatory regimes to which certain Fund assets are or
become subject, any of which may adversely affect the value of Fund investments.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, including, but not limited to, current trade and
finance agreements. Brexit could lead to legal and tax uncertainty and
potentially divergent national laws and regulations, as the UK determines which
EU laws to replace or replicate. The extent of the impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of a Fund’s investments. If one or more other
countries were to exit the EU or abandon the use of the euro as a currency, the
value of investments tied to those countries or the euro could decline
significantly and unpredictably.
Russia’s
large-scale invasion of Ukraine on February 24, 2022 has led to various
countries imposing economic sanctions on certain Russian individuals and Russian
corporate and banking entities. A number of jurisdictions have also instituted
broader sanctions on Russia, including banning Russia from global payments
systems that facilitate cross-border payments. In response, the government of
Russia has imposed capital controls to restrict movements of capital entering
and exiting the country. As a result, the value and liquidity of Russian
securities and the Russian currency have experienced significant declines.
Further, as of June 1, 2022, the Russian securities markets effectively have not
been open for trading by foreign investors since February 28, 2022.
Russia’s
military incursion and resulting sanctions could have a severe adverse effect on
the region’s economies and more globally, including significant negative impacts
on the financial markets for certain securities and commodities and could affect
the value of a Fund’s investments. Eastern European markets are particularly
sensitive to social, political, economic, and currency events in Russia and may
suffer heavy losses as a result of their trading and investment links to the
Russian economy and currency. Changes in regulations on trade, decreasing
imports or exports, changes in the exchange rate of the euro, a significant
influx of refugees, and recessions among European countries may have a
significant adverse effect on the economies of other European countries
including those of Eastern Europe.
Investments
in Germany. Investment
in German issuers may subject a Fund to legal, regulatory, political, currency,
security, and economic risks specific to Germany. Recently, new concerns emerged
in relation to the economic health of the EU. These concerns have led to
tremendous downward pressure on certain financial institutions, including German
financial services companies. Secessionist movements, such as the Catalan
movement in Spain and the independence movement in Scotland, may have an adverse
effect on the German economy. The German economy is dependent to a significant
extent on the economies of certain key trading partners, including the U.S.,
France, Italy and other European countries. Reduction in spending on German
products and services, or changes in any of the economies may have an adverse
impact on the German economy. In addition,
heavy
regulation of labor and product markets in Germany may have an adverse effect on
German issuers. Such regulations may negatively impact economic growth or cause
prolonged periods of recession.
Investments
in Japan.
The Japanese economy has recently emerged from a prolonged economic downturn.
Since 2000, Japan’s economic growth rate has remained relatively low. Its
economy is characterized by government intervention and protectionism, an
unstable financial services sector, low domestic consumption, and relatively
high unemployment. Japan’s economy is heavily dependent on international trade
and has been adversely affected by trade tariffs and competition from emerging
economies. As such, economic growth is heavily dependent on continued growth in
international trade, government support of the financial services sector, among
other troubled sectors, and consistent government policy. Any changes or trends
in these economic factors could have a significant impact on Japan’s economy
overall and may negatively affect the Fund’s investment. Japan’s economy is also
closely tied to its two largest trading partners, the U.S. and China. Economic
volatility in either nation may create volatility for Japan’s economy as well.
Additionally, as China has increased its role with Japan as a trading partner,
political tensions between the countries has become strained. Any increase or
decrease in such tension may have consequences for investment in or exposure to
Japanese issuers.
In
March 2011, a massive earthquake and tsunami struck northeastern Japan causing
major damage to the country’s domestic energy supply, including damage to
nuclear power plants. In the wake of this natural disaster, Japan’s financial
markets fluctuated dramatically, and the resulting economic distress affected
Japan’s recovery from its recession. The government injected capital into the
economy and proposed plans for massive spending on reconstruction efforts in
disaster-affected areas to stimulate economic growth. The full extent of the
disaster’s impact on Japan’s economy and foreign investment in Japan is
difficult to estimate. The risks of natural disasters of varying degrees, such
as earthquakes and tsunamis, and the resulting damage, continue to exist. These
and other factors could have a negative impact on a Fund’s
performance.
Options
Each
Fund utilizes options contracts. A Fund may purchase and sell put and call
options. Such options may relate to particular securities and may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. Options trading is a highly specialized activity that entails
greater than ordinary investment risk. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves.
Options
written (or sold) by the Fund may oblige the Fund to make payments or incur
additional obligations in the future. New Rule 18f-4 under the 1940 Act (“Rule
18f-4”) imposes limits on the amount of leverage risk to which the Fund may be
exposed through such options. Under Rule 18f-4, a fund’s investment in such
derivatives is limited through a value-at-risk (“VaR”) test. Funds whose use of
such derivatives is more than a limited specified exposure amount are required
to establish and maintain a comprehensive derivatives risk management program,
subject to oversight by a fund’s board of trustees, and appoint a derivatives
risk manager. It is not currently clear what impact, if any, the new rule will
have on the availability, liquidity or performance of derivatives. To the extent
the Fund’s compliance with Rule 18f-4 changes how the Fund uses derivatives, the
new rule may adversely affect the Fund’s performance and/or increase costs
related to the Fund’s use of derivatives.
Cover
for Options Positions. Transactions
using options (other than options that the Fund has purchased) expose a Fund to
an obligation to another party. A Fund will not enter into any such transactions
unless it complies fully with Rule 18f-4, including any applicable VaR
limitations, and owns either (i) an offsetting (“covered”) position in
securities or other options or (ii) cash or liquid securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (i) above.
Assets
used as cover cannot be sold while the position in the corresponding option is
open, unless they are replaced with similar assets. As a result, the commitment
of a large portion of a Fund’s assets as cover could impede portfolio management
or the Fund’s ability to meet redemption requests or other current
obligations.
CFTC
Regulation. To
the extent a Fund invests in futures, options on futures or other instruments
subject to regulation by the Commodity Futures Trading Commission (“CFTC”), it
will seek to do so in reliance upon and in accordance with CFTC Rule 4.5.
Specifically, pursuant to CFTC Rule 4.5, the Trust may claim exclusion from the
definition of CPO, and thus from having to register as a CPO, with regard to a
Fund that enters into commodity futures, commodity options or swaps solely for
“bona fide hedging purposes,” or that limits its investment in commodities to a
“de minimis” amount, as defined in CFTC rules, so long as Shares are not
marketed as interests in a commodity pool or other vehicle for trading in
commodity futures, commodity options or swaps. The Trust, on behalf of each
Fund, has filed a notice of eligibility for exclusion from the definition of the
term “commodity pool operator” in accordance with CFTC Rule 4.5. Therefore,
neither the Trust nor a Fund is deemed to be a “commodity pool” or “commodity
pool operator” under the Commodity Exchange Act (“CEA”), and they are not
subject to registration or regulation as such under the CEA. It is expected that
a Fund will be able to operate pursuant to the limitations under CFTC Rule 4.5
without materially adversely affecting its ability to achieve its investment
objective. If, however, these limitations were to make it difficult for a Fund
to achieve its investment objective in the future, the Trust may determine to
operate the Fund as a regulated commodity pool pursuant to the Trust’s CPO
registration or to reorganize or close the Fund or to materially change the
Fund’s investment objective and strategy. In addition, as of the date of
this SAI, the Adviser is not deemed to be a “commodity pool operator” or
“commodity trading adviser” with respect to the advisory services it provides to
a Fund.
Other
Short-Term Instruments
The
Funds may invest in short-term instruments, including money market instruments,
on an ongoing basis to provide liquidity or for other reasons. Money market
instruments are generally short-term investments that may include but are not
limited to: (i) shares of money market funds; (ii) obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities
(including government-sponsored enterprises); (iii) negotiable certificates
of deposit (“CDs”), bankers’ acceptances, fixed time deposits and other
obligations of U.S. and foreign banks (including foreign branches) and similar
institutions; (iv) commercial paper rated at the date of purchase “Prime-1”
by Moody’s or “A‑1” by S&P or, if unrated, of comparable quality as
determined by the Sub-Adviser; (v) non-convertible corporate debt
securities (e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than 397 days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of
the Sub-Adviser, are of comparable quality to obligations of U.S. banks which
may be purchased by a Fund. Any of these instruments may be purchased on a
current or a forward-settled basis. Money market instruments also include shares
of money market funds. Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated interest rates.
Bankers’ acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international transactions.
Repurchase
Agreements
Each
Fund may invest in repurchase agreements to generate income from its excess cash
balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which a Fund acquires a financial instrument
(e.g.,
a security issued by the U.S. government or an agency thereof, a banker’s
acceptance or a certificate of deposit) from a seller, subject to resale to the
seller at an agreed upon price and date (normally, the next Business Day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the applicable Fund and is unrelated to the interest rate
on the underlying instrument.
In
these repurchase agreement transactions, the securities acquired by a Fund
(including accrued interest earned thereon) must have a total value more than
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of a Fund’s net assets will be
invested in illiquid investments, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The
use of repurchase agreements involves certain risks. For example, if the other
party to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, a Fund may incur
a loss upon disposition of the security. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization under the U.S.
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and, therefore, the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other party
to the agreement.
Securities
Lending
Each
Fund may lend portfolio securities in an amount up to one-third of its total
assets to brokers, dealers and other financial institutions. In a portfolio
securities lending transaction, a Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. A Fund may share the interest it receives on the
collateral securities with the borrower. The terms of each Fund’s loans permit
each Fund to reacquire loaned securities on five business days’ notice or in
time to vote on any important matter. Loans are subject to termination at the
option of the applicable Fund or borrower at any time, and the borrowed
securities must be returned when the loan is terminated. The Funds may pay fees
to arrange for securities loans.
The
SEC currently requires that the following conditions must be met whenever a
Fund’s portfolio securities are loaned: (1) the Fund must receive at least 100%
cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights
on the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs, and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from such loans. These
conditions may be subject to future modification. Such loans will be terminable
at any time upon specified notice. A Fund might experience the risk of loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund. In addition, the Funds will not enter into
any portfolio security lending arrangement having a duration of longer than one
year. The principal risk of portfolio lending is potential default or insolvency
of the borrower. In either of these cases, a Fund could experience delays in
recovering securities or collateral or could lose all or part of the value of
the loaned securities. As part of participating in a lending program, the
applicable Fund may be required to invest in collateralized debt or other
securities that bear the risk of loss of principal. In addition, all investments
made with the collateral received are subject to the risks associated with such
investments. If such investments lose value, a Fund will have to cover the loss
when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that a Fund may receive as collateral
will not become part of the Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay a Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent collateral.
Short
Sales
Each
Fund may engage in short sales. Short sales are transactions in which a Fund
sells an instrument it does not own in anticipation of a decline in the market
value of that instrument. To complete a short sale transaction, a Fund must
borrow the instrument to make delivery to the buyer. A Fund then is obligated to
replace the instrument borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the instrument was sold by a Fund. Until the instrument is replaced, a
Fund is required to pay to the lender amounts equal to any interest or dividends
which accrue during the period of the loan. To borrow the instrument, a Fund
also may be required to pay a premium, which would increase the cost of the
instrument sold. There will also be other costs associated with short sales.
A
Fund will incur a loss as a result of the short sale if the price of the
instrument increases between the date of the short sale and the date on which
the Fund replaces the borrowed instrument. Unlike taking a long position in an
instrument by purchasing the instrument, where potential losses are limited to
the purchase price, short sales have no cap on maximum loss. A Fund will realize
a gain if the instrument declines in price between those dates. This result is
the opposite of what one would expect from a cash purchase of a long position in
an instrument.
Until
a Fund replaces a borrowed instrument in connection with a short sale, the Fund
will (a) designate on its records as collateral cash or liquid assets at such a
level that the designated assets plus any amount deposited with the broker as
collateral will equal the current value of the instrument sold short or (b)
otherwise cover its short position in accordance with applicable law. The amount
designated on the Fund’s records will be marked to market daily. This may limit
a Fund’s investment flexibility, as well as its ability to meet redemption
requests or other current obligations.
There
is no guarantee that a Fund will be able to close out a short position at any
particular time or at an acceptable price. During the time that a Fund is short
an instrument, it is subject to the risk that the lender of the instrument will
terminate the loan at a time when the Fund is unable to borrow the same
instrument from another lender. If that occurs, a Fund may be “bought in” at the
price required to purchase the instrument needed to close out the short
position, which may be a disadvantageous price. Thus, there is a risk that a
Fund may be unable to fully implement its investment strategy due to a lack of
available instruments or for some other reason. It is possible that the market
value of the instruments a Fund holds in long positions will decline at the same
time that the market value of the instruments the Fund has sold short increases,
thereby increasing the Fund’s potential volatility. Short sales also involve
other costs. A Fund must normally repay to the lender an amount equal to any
dividends or interest that accrues while the loan is outstanding. In addition,
to borrow the instrument, a Fund may be required to pay a premium. A Fund also
will incur transaction costs in effecting short sales. The amount of any
ultimate gain for a Fund resulting from a short sale will be decreased, and the
amount of any ultimate loss will be increased, by the amount of premiums,
dividends, interest or expenses the Fund may be required to pay in connection
with the short sale.
Tax
Risks
As
with any investment, you should consider how your investment in Shares will be
taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in Shares.
To
qualify for the favorable U.S. federal income tax treatment accorded to a RIC
under the Code, a Fund must, among other requirements, derive at least 90% of
its gross income each taxable year from certain qualifying sources of income and
the Fund’s assets must be diversified so that at least 50% of the value of the
Fund’s total assets is represented by cash and cash items, U.S. government
securities, securities of other RICs, and other securities (each requirement
described in detail below in “Federal Income Taxes”). If a Fund were to fail to
meet the qualifying income test or asset diversification test and fail to
qualify as a RIC, it would be taxed in the same manner as an ordinary
corporation, and distributions to its shareholders would not be deductible by
the Fund in computing its taxable income. The failure by a Fund to qualify as a
RIC would have significant negative tax consequences to Fund shareholders and
would affect a shareholder’s return on its investment in the Fund. Under
certain circumstances, a Fund may be able to cure a failure to meet the
qualifying income test or asset diversification test if such failure was due to
reasonable cause and not willful neglect, but to do so the Fund may incur
significant fund-level taxes, which would effectively reduce (and could
eliminate) the Fund’s returns.
Please
see “Federal Income Taxes” below for more information.
Unless
your investment in Shares is made through a tax-exempt entity or tax-deferred
retirement account, such as an individual retirement account, you need to be
aware of the possible tax consequences when the Fund makes distributions or you
sell Shares.
U.S.
Government Securities
Each
Fund may invest in U.S. government securities. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities include U.S.
Treasury securities, which are backed by the full faith and credit of the U.S.
Treasury and 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. Certain U.S.
government securities are issued or guaranteed by agencies or instrumentalities
of the U.S. government including, but not limited to, obligations of U.S.
government agencies or instrumentalities such as the Federal National Mortgage
Association (“Fannie Mae”), the Government National Mortgage Association
(“Ginnie Mae”), the Small Business Administration, the Federal Farm Credit
Administration, the Federal Home Loan Banks, Banks for Cooperatives (including
the Central Bank for Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, the National Credit
Union Administration and the Federal Agricultural Mortgage Corporation (“Farmer
Mac”).
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury. Other
obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury, while the U.S. government provides financial support to
such U.S. government-sponsored federal agencies, no assurance can be given that
the U.S. government will always do so, since the U.S. government is not so
obligated by law. U.S. Treasury notes and bonds typically pay coupon interest
semi-annually and repay the principal at maturity.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury
announced that it was amending the Agreement to allow the $200 billion cap on
the U.S. Treasury’s funding commitment to increase as necessary to accommodate
any cumulative reduction in net worth over the next three years. Because of this
Agreement, the investments of holders, including the Funds, of mortgage-backed
securities and other obligations issued by Fannie Mae and Freddie Mac are
protected.
The
total public debt of the United States as a percentage of gross domestic product
has grown rapidly since the beginning of the 2008–2009 financial downturn.
Although high debt levels do not necessarily indicate or cause economic
problems, they may create certain systemic risks if sound debt management
practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when
they are due. This increase has also necessitated the need for the U.S. Congress
to negotiate adjustments to the statutory debt limit to increase the cap on the
amount the U.S. government is permitted to borrow to meet its existing
obligations and finance current budget deficits. In August 2011, S&P lowered
its long-term sovereign credit rating on the U.S. In explaining the downgrade at
that time, S&P cited, among other reasons, controversy over raising the
statutory debt limit and growth in public spending. An increase in national debt
levels may also necessitate the need for the U.S. Congress to negotiate
adjustments to the statutory debt ceiling to increase the cap on the amount the
U.S. Government is permitted to borrow to meet its existing obligations and
finance current budget deficits. Future downgrades could increase volatility in
domestic and foreign financial markets, result in higher interest rates, lower
prices of U.S. Treasury securities and increase the costs of different kinds of
debt. Any controversy or ongoing uncertainty regarding the statutory debt
ceiling negotiations may impact the U.S. long-term sovereign credit rating and
may cause market uncertainty. As a result, market prices and yields of
securities supported by the full faith and credit of the U.S. government may be
adversely affected.
INVESTMENT
RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Funds. These restrictions cannot be changed with respect to
a Fund without the approval of the holders of a majority of the Fund’s
outstanding voting securities. For the purposes of the 1940 Act, a “majority of
outstanding shares” means the vote of the lesser of: (1) 67% or more of the
voting securities of a Fund present at the meeting if the holders of more than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of a
Fund.
Except
with the approval of a majority of the outstanding voting securities, a Fund may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries, except that each Fund will concentrate to approximately the same
extent that the applicable Reference Index (as defined in the Fund’s Prospectus)
concentrates in the securities of such particular industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities, and tax-exempt securities of state
or municipal governments and their political subdivisions are not considered to
be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent a Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent a Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
In
addition to the investment restrictions adopted as fundamental policies as set
forth above, each Fund observes the following non-fundamental restrictions,
which may be changed without a shareholder vote.
1.Under
normal circumstances, at least 80% of the net assets, plus borrowings for
investment purposes, of each of the
Funds
will be invested in securities, or derivative instruments linked to securities,
of companies that are included in the Fund’s Reference Index.
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitation with respect to the borrowing of money will be
observed continuously.
The
following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
Concentration.
The
SEC has defined concentration as investing 25% or more of a Fund’s total assets
in an industry or group of industries, with certain exceptions.
Borrowing.
The 1940 Act presently allows a Fund to borrow from a bank (including pledging,
mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total
assets (not including temporary borrowings up to 5% of its total
assets).
Senior
Securities.
Senior securities may include any obligation or instrument issued by a Fund
evidencing indebtedness. The 1940 Act generally prohibits a fund from issuing
senior securities.
An
exemptive rule under the 1940 Act, however, permits a fund to enter into
transactions that might otherwise be deemed to be senior securities, such as
derivative transactions, reverse repurchase agreements and similar financing
transactions, and short sales, subject to certain conditions.
Lending.
Under the 1940 Act, a Fund may only make loans if expressly permitted by its
investment policies. The Funds’ current investment policy on lending is that a
Fund may not make loans if, as a result, more than 33 1/3% of its total assets
would be lent to other parties, except that a Fund may: (i) purchase or hold
debt instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending as
described in this SAI.
Real
Estate and Commodities.
The 1940 Act does not directly restrict a Fund’s ability to invest in real
estate or commodities, but the 1940 Act requires every investment company to
have a fundamental investment policy governing such investments.
Underwriting.
Under the 1940 Act, underwriting securities involves the Funds purchasing
securities directly from an issuer for the purpose of selling (distributing)
them or participating in any such activity either directly or
indirectly.
EXCHANGE
LISTING
AND
TRADING
Shares
are listed for trading and trade throughout the day on the Exchange.
There
can be no assurance that a Fund will continue to meet the requirements of the
Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the
Shares if any of the requirements set forth in the Exchange rules, including
compliance with Rule 6c-11(c) under the 1940 Act, are not continuously
maintained or such other event shall occur or condition shall exist that,
in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable. The Exchange will remove the Shares of a Fund from listing and
trading upon termination of such Fund.
The
Trust reserves the right to adjust the price levels of Shares in the future to
help maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the Fund.
MANAGEMENT
OF THE
TRUST
Board
Responsibilities.
The management and affairs of the Trust and its series are overseen by the
Board, which elects the officers of the Trust who are responsible for
administering the day-to-day operations of the Trust and the Funds. The Board
has approved contracts, as described below, under which certain companies
provide essential services to the Trust.
The
day-to-day business of the Trust, including the management of risk, is performed
by third-party service providers, such as the Adviser, the Sub-Adviser, the
Distributor, and the Administrator. The Board is responsible for overseeing the
Trust’s service providers and, thus, has oversight responsibility with respect
to risk management performed by those service providers. Risk management seeks
to identify and address risks, i.e.,
events or circumstances that could have material adverse effects on the
business, operations, shareholder services, investment performance or reputation
of a Fund. The Funds and their service providers employ a variety of processes,
procedures and controls to identify such events or circumstances, to lessen the
probability of their occurrence and/or to mitigate the effects of such events or
circumstances if they do occur. Each service provider is responsible for one or
more discrete aspects of the Trust’s business (e.g.,
the Sub-Adviser is responsible for the day-to-day management of each Fund’s
portfolio investments) and, consequently, for managing the risks associated with
that business. The Board has emphasized to the Funds’ service providers the
importance of maintaining vigorous risk management.
The
Board’s role in risk oversight begins before the inception of the Funds, at
which time certain of the Funds’ service providers present the Board with
information concerning the investment objectives, strategies, and risks of the
Funds as well as proposed investment limitations for the Funds. Additionally,
the Adviser and Sub-Adviser provide the Board with an overview of, among other
things, their investment philosophy, brokerage practices, and compliance
infrastructure. Thereafter, the Board continues its oversight function as
various personnel, including the Trust’s Chief Compliance Officer, as well as
personnel of the Sub-Adviser, and other service providers such as the Funds’
independent registered public accounting firm, make periodic reports to the
Audit Committee or to the Board with respect to various aspects of risk
management. The Board and the Audit Committee oversee efforts by management and
service providers to manage risks to which the Funds may be exposed.
The
Board is responsible for overseeing the nature, extent, and quality of the
services provided to the Funds by the Adviser and the Sub-Adviser and receives
information about those services at its regular meetings. In addition, on an
annual basis (following the initial two-year period), in connection with its
consideration of whether to renew the Investment Advisory Agreement with the
Adviser, and Sub-Advisory Agreement with the Sub-Adviser, the Board or its
designee may meet with the Adviser and/or Sub-Adviser to review such services.
Among other things, the Board regularly considers the Adviser’s and
Sub-Adviser’s adherence to each Fund’s investment restrictions and compliance
with various Fund policies and procedures and with applicable securities
regulations. The Board also reviews information about each Fund’s performance
and each Fund’s investments, including, for example, portfolio holdings
schedules.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund and Adviser or Sub-Adviser risk assessments.
At least annually, the Trust’s Chief Compliance Officer, as well as personnel of
the Adviser, provides the Board with a report reviewing the adequacy and
effectiveness of the Trust’s policies and procedures and those of its service
providers, including the Adviser and the Sub-Adviser. The report addresses the
operation of the policies and procedures of the Trust and each service provider
since the date of the last report; any material changes to the policies and
procedures since the date of the last report; any recommendations for material
changes to the policies and procedures; and any material compliance matters
since the date of the last report.
The
Board receives reports from the Funds’ service providers regarding operational
risks and risks related to the valuation and liquidity of portfolio securities.
Annually, the Funds’ independent registered public accounting firm reviews with
the Audit Committee its audit of the Funds’ financial statements, focusing on
major areas of risk encountered by the Funds and noting any significant
deficiencies or material weaknesses in the Funds’ internal controls.
Additionally, in connection with its oversight function, the Board oversees Fund
management’s implementation of disclosure controls and procedures, which are
designed to ensure that information required to be disclosed by the Trust in its
periodic reports with the SEC are recorded, processed, summarized, and reported
within the required time periods. The Board also oversees the Trust’s internal
controls over financial reporting, which comprise policies and procedures
designed to provide reasonable assurance regarding the reliability of the
Trust’s financial reporting and the preparation of the Trust’s financial
statements.
From
their review of these reports and discussions with the Adviser and Sub-Adviser,
the Chief Compliance Officer, independent registered public accounting firm and
other service providers, the Board and the Audit Committee learn in detail about
the material risks of each Fund, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The
Board recognizes that not all risks that may affect a Fund can be identified
and/or quantified, that it may not be practical or cost-effective to eliminate
or mitigate certain risks, that it may be necessary to bear certain risks (such
as investment-related risks) to achieve a Fund’s goals, and that the processes,
procedures and controls employed to address certain risks may be limited in
their effectiveness. Moreover, reports received by the Board as to risk
management matters are typically summaries of the relevant information. Most of
the Funds’ investment management and business affairs are carried out by or
through the Adviser, Sub-Adviser, and other service providers, each of which has
an independent interest in risk management but whose policies and the methods by
which one or more risk management functions are carried out may differ from the
Funds’ and each other’s in the setting of priorities, the resources available or
the effectiveness of relevant controls. As a result of the foregoing and other
factors, the Board’s ability to monitor and manage risk, as a practical matter,
is subject to limitations.
Members
of the Board. There
are four members of the Board, three of whom are not interested persons of the
Trust, as that term is defined in the 1940 Act (the “Independent Trustees”).
Mr. Michael A. Castino serves as Chairman of the Board and is an interested
person of the Trust, and Mr. Leonard M. Rush serves as the Trust’s Lead
Independent Trustee. As Lead Independent Trustee, Mr. Rush acts as a
spokesperson for the Independent Trustees in between meetings of the Board,
serves as a liaison for the Independent Trustees
with
the Trust’s service providers, officers, and legal counsel to discuss ideas
informally, and participates in setting the agenda for meetings of the Board and
separate meetings or executive sessions of the Independent Trustees.
The
Board is comprised of a super-majority (75 percent) of Independent Trustees.
There is an Audit Committee of the Board that is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Audit Committee chair
presides at the Audit Committee meetings, participates in formulating agendas
for Audit Committee meetings, and coordinates with management to serve as a
liaison between the Independent Trustees and management on matters within the
scope of responsibilities of the Audit Committee as set forth in its
Board-approved charter. The Trust has determined its leadership structure is
appropriate given the specific characteristics and circumstances of the Trust.
The Trust made this determination in consideration of, among other things, the
fact that the Independent Trustees of the Trust constitute a super-majority of
the Board, the number of Independent Trustees that constitute the Board, the
amount of assets under management in the Trust, and the number of funds overseen
by the Board. The Board also believes that its leadership structure facilitates
the orderly and efficient flow of information to the Independent Trustees from
Fund management.
Additional
information about each Trustee of the Trust is set forth below. The address of
each Trustee of the Trust is c/o U.S. Bank Global Fund Services, 615 E.
Michigan Street, Milwaukee, WI 53202.
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorships Held by Trustee
During
Past 5 Years |
Independent
Trustees |
Leonard
M. Rush, CPA Born: 1946 |
Lead
Independent Trustee and Audit Committee Chairman |
Indefinite
term; since 2012 |
Retired;
formerly Chief Financial Officer, Robert W. Baird & Co. Incorporated
(wealth management firm) (2000–2011). |
56 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
David
A. Massart Born: 1967 |
Trustee |
Indefinite
term; since 2012 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder, President, and Chief Investment Strategist, Next Generation
Wealth Management, Inc. (2005-2021). |
56 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
Janet
D. Olsen Born: 1956 |
Trustee |
Indefinite
term; since 2018 |
Retired;
formerly Managing Director and General Counsel, Artisan Partners Limited
Partnership (investment adviser) (2000–2013); Executive Vice President and
General Counsel, Artisan Partners Asset Management Inc. (2012–2013); Vice
President and General Counsel, Artisan Funds, Inc. (investment company)
(2001–2012). |
56 |
Independent
Trustee, PPM Funds (2 portfolios) (since 2018). |
Interested
Trustee |
Michael
A. Castino Born: 1967 |
Trustee
and Chairman |
Indefinite
term; Trustee since 2014; Chairman since 2013 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2013); Managing
Director of Index Services, Zacks Investment Management
(2011–2013). |
56 |
None |
Individual
Trustee Qualifications. The
Trust has concluded that each of the Trustees should serve on the Board because
of their ability to review and understand information about the Funds provided
to them by management, to identify and request other information they may deem
relevant to the performance of their duties, to question management and other
service providers regarding material factors bearing on the management and
administration of the Funds, and to exercise their business judgment in a manner
that serves the best interests of each Fund’s shareholders. The Trust has
concluded that each of the Trustees should serve as a Trustee based on his or
her own experience, qualifications, attributes and skills as described below.
The
Trust has concluded that Mr. Rush should serve as a Trustee because of his
substantial industry experience, including serving in several different senior
executive roles at various global financial services firms, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He most recently served as Managing Director and Chief Financial Officer
of Robert W. Baird & Co. Incorporated and several other affiliated entities
and served as the Treasurer for Baird Funds. He also served as the Chief
Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial
Expert for the Trust.
The
Trust has concluded that Mr. Massart should serve as a Trustee because of his
substantial industry experience, including over two decades working with high
net worth individuals, families, trusts, and retirement accounts to make
strategic and tactical asset allocation decisions, evaluate and select
investment managers, and manage complex client relationships, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He is currently a Partner and Managing Director at Beacon Pointe Advisors,
LLC. Previously, he served as President and Chief Investment Strategist of a SEC
registered investment advisory firm he co-founded, as a Managing Director of
Strong Private Client, and as a Manager of Wells Fargo Investments, LLC.
The
Trust has concluded that Ms. Olsen should serve as a Trustee because of her
substantial industry experience, including over a decade serving as a senior
executive of an investment management firm and a related public company, and the
experience she has gained by serving as an executive officer of another
investment company from 2001 to 2012. Ms. Olsen most recently served as Managing
Director and General Counsel of Artisan Partners Limited Partnership, a
registered investment adviser serving primarily investment companies and
institutional investors, and several affiliated entities, including its general
partner, Artisan Partners Asset Management Inc. (NYSE: APAM), and as an
executive officer of Artisan Funds Inc.
The
Trust has concluded that Mr. Castino should serve as Trustee because of the
experience he gained as Chairman of the Trust since 2013, as a senior officer of
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Fund Services” or the “Transfer Agent”), since 2012, and in his past
roles with investment management firms and indexing firms involved with ETFs, as
well as his experience in and knowledge of the financial services industry.
In
its periodic assessment of the effectiveness of the Board, the Board considers
the complementary individual skills and experience of the individual Trustees
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the funds.
Board
Committees.
The Board has established the following standing committees of the Board:
Audit
Committee.
The Board has a standing Audit Committee that is composed of each of the
Independent Trustees of the Trust. The Audit Committee operates under a written
charter approved by the Board. The principal responsibilities of the Audit
Committee include: recommending which firm to engage as the Funds’ independent
registered public accounting firm and whether to terminate this relationship;
reviewing the independent registered public accounting firm’s compensation, the
proposed scope and terms of its engagement, and the firm’s independence;
pre-approving audit and non-audit services provided by the Funds’ independent
registered public accounting firm to the Trust and certain other affiliated
entities; serving as a channel of communication between the independent
registered public accounting firm and the Trustees; reviewing the results of
each external audit, including any qualifications in the independent registered
public accounting firm’s opinion, any related management letter, management’s
responses to recommendations made by the independent registered public
accounting firm in connection with the audit, reports submitted to the Committee
by the internal auditing department of the Trust’s Administrator that are
material to the Trust as a whole, if any, and management’s responses to any such
reports; reviewing the Funds’ audited financial statements and considering any
significant disputes between the Trust’s management and the independent
registered public accounting firm that arose in connection with the preparation
of those financial statements; considering, in consultation with the independent
registered public accounting firm and the Trust’s senior internal accounting
executive, if any, the independent registered public accounting firms’ report on
the adequacy of the Trust’s internal financial controls; reviewing, in
consultation with the Funds’ independent registered public accounting firm,
major changes regarding auditing and accounting principles and practices to be
followed when preparing the Funds’ financial statements; and other audit related
matters. During the fiscal year ended August 31, 2022, the Audit Committee met
four times.
The
Audit Committee also serves as the Qualified Legal Compliance Committee (“QLCC”)
for the Trust for the purpose of compliance with Rules 205.2(k) and 205.3(c) of
the Code of Federal Regulations, regarding alternative reporting procedures for
attorneys retained or employed by an issuer who appear and practice before the
SEC on behalf of the issuer (the “issuer attorneys”). An issuer attorney who
becomes aware of evidence of a material violation by the Trust, or by any
officer, director, employee, or agent of the Trust, may report evidence of such
material violation to the QLCC as an alternative to the reporting requirements
of Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities).
Nominating
Committee.
The Board has a standing Nominating Committee that is composed of each of the
Independent Trustees of the Trust. The Nominating Committee operates under a
written charter approved by the Board. The principal responsibility of the
Nominating Committee is to consider, recommend and nominate candidates to fill
vacancies on the Trust’s Board, if any. The Nominating Committee generally will
not consider nominees recommended by shareholders. The Nominating Committee
meets periodically, as necessary. During the fiscal year ended August 31, 2022,
the Nominating Committee met one time.
Principal
Officers of the Trust
The
officers of the Trust conduct and supervise its daily business. The address of
each officer of the Trust is c/o U.S. Bank Global Fund Services,
615 E. Michigan Street, Milwaukee, WI 53202. Additional information about
the Trust’s officers is as follows:
|
|
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|
|
|
|
|
|
|
| |
Name
and
Year
of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s)
During
Past 5 Years |
Kristina
R. Nelson Born: 1982 |
President |
Indefinite
term;
since
2019 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2020); Vice
President, U.S. Bancorp Fund Services, LLC
(2014–2020). |
|
|
|
|
|
|
|
|
|
|
| |
Name
and
Year
of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s)
During
Past 5 Years |
Alyssa
M. Bernard Born: 1988 |
Vice
President |
Indefinite
term; since 2021 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2021); Assistant Vice
President, U.S. Bancorp Fund Services, LLC (2018–2021); Attorney, Waddell
& Reed Financial, Inc. (2017–2018). |
Cynthia
L. Andrae Born: 1971 |
Chief
Compliance Officer and Anti-Money Laundering Officer |
Indefinite
term;
since
2022
(other
roles since 2021) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2019); Compliance
Officer, U.S. Bancorp Fund Services, LLC (2015-2019). |
Kristen
M. Weitzel Born: 1977 |
Treasurer |
Indefinite
term;
since
2014
(other
roles since 2013) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2015). |
Isabella
K. Zoller Born: 1994 |
Secretary |
Indefinite
term;
since
2021
(other
roles since 2020) |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2021); Regulatory
Administration Attorney, U.S. Bancorp Fund Services, LLC (since 2019);
Regulatory Administration Intern, U.S. Bancorp Fund Services, LLC
(2018–2019); Law Student (2016–2019). |
Vladimir
V. Gurevich Born: 1983 |
Assistant
Treasurer |
Indefinite
term;
since
2022 |
Officer,
U.S. Bancorp Fund Services, LLC (since 2021); Fund Administrator, UMB Fund
Services, Inc. (2015–2021). |
Jason
E. Shlensky Born: 1987 |
Assistant
Treasurer |
Indefinite
term;
since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2019); Officer,
U.S. Bancorp Fund Services, LLC (2014–2019). |
Jessica
L. Vorbeck Born: 1984 |
Assistant
Treasurer |
Indefinite
term; since 2020 |
Officer,
U.S. Bancorp Fund Services, LLC (since 2018;
2014-2017). |
Trustee
Ownership of Shares.
The Funds are required to show the dollar amount ranges of each Trustee’s
“beneficial ownership” of Shares of each Fund and each other series of the Trust
as of the end of the most recently completed calendar year. Dollar amount ranges
disclosed are established by the SEC. “Beneficial ownership” is determined in
accordance with Rule 16a-1(a)(2) under the 1934 Act.
As
of December 31, 2021, no Trustee owned Shares of the Fund or shares of any other
series of the Trust.
Board
Compensation. The
Independent Trustees each receive an annual trustee fee of $198,800 for
attendance at the four regularly scheduled quarterly meetings and one annual
meeting, if necessary, and receive additional compensation for each additional
meeting attended of $2,000, as well as reimbursement for travel and other
out-of-pocket expenses incurred in connection with attendance at Board meetings.
The Lead Independent Trustee receives an additional annual fee of $15,000. The
Chairman of the Audit Committee receives an additional annual fee of $15,000.
The Trust has no pension or retirement plan.
The
following table shows the compensation earned by each Trustee for the Funds’
fiscal year ended August 31, 2022. Independent Trustee fees are paid by the
adviser to each series of the Trust and not by the Funds. Trustee compensation
does not include reimbursed out-of-pocket expenses in connection with attendance
at meetings.
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| |
Name |
Aggregate
Compensation
from
the Funds |
Total
Compensation from Fund Complex
Paid
to Trustees |
Interested
Trustee |
Michael
A. Castino |
$0 |
$0 |
Independent
Trustees |
David
A. Massart |
$0 |
$193,117 |
Janet
D. Olsen |
$0 |
$193,117 |
Leonard
M. Rush, CPA |
$0 |
$223,117 |
PRINCIPAL
SHAREHOLDERS,
CONTROL
PERSONS,
AND
MANAGEMENT OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding Shares of a Fund. A control person is a shareholder that
owns beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter affecting and voted on by shareholders of a Fund.
As
of December 1, 2022, the Trustees and officers, as a group, owned less than 1%
of the Shares of the Funds, and the following shareholders were considered
principal shareholders of the Funds:
Nasdaq-100
Risk-Managed Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
National
Financial Services, LLC
200
Liberty Street
New
York, NY 10281 |
22.78% |
Record |
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|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc.
211
Main Street
San
Francisco, CA 94105-1905 |
16.16% |
Record |
TD
Ameritrade, Inc.
200
South 108th Avenue
Omaha,
NE 68103-2226 |
11.95% |
Record |
JPMorgan
Chase Bank, N.A. 270 Park Avenue, 31st Floor New York, NY
10017 |
7.22% |
Record |
E*TRADE
Securities LLC Harborside 2 200 Hudson Street, Suite 501 Jersey
City, NJ 07311 |
5.31% |
Record |
S&P
500 Risk-Managed Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc.
211
Main Street
San
Francisco, CA 94105-1905 |
43.84% |
Record |
Bank
of New York Mellon 240 Greenwich Street New York, NY 10286 |
42.86% |
Record |
Dow
Jones Risk-Managed Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Bank
of New York Mellon 240 Greenwich Street New York, NY 10286 |
41.38% |
Record |
TD
Ameritrade, Inc.
200
South 108th Avenue
Omaha,
NE 68103-2226 |
31.24% |
Record |
National
Financial Services, LLC
200
Liberty Street
New
York, NY 10281 |
11.00% |
Record |
Charles
Schwab & Co., Inc.
211
Main Street
San
Francisco, CA 94105-1905 |
6.29% |
Record |
Russell
2000 Risk-Managed Income Fund
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Bank
of New York Mellon 240 Greenwich Street New York, NY 10286 |
90.77% |
Record |
CODES
OF
ETHICS
The
Trust, the Adviser, and the Sub-Adviser have each adopted codes of ethics
pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics are designed
to prevent affiliated persons of the Trust, the Adviser, and the Sub-Adviser
from engaging in deceptive, manipulative or fraudulent activities in connection
with securities held or to be acquired by a Fund (which may also be held by
persons subject to the codes of ethics). Each Code of Ethics permits personnel
subject to that Code of Ethics to invest in securities for their personal
investment accounts, subject to certain limitations, including limitations
related to securities that may be purchased or held by a Fund. The Distributor
(as defined below) relies on the principal underwriters exception under Rule
17j-1(c)(3), specifically where the Distributor is not affiliated with the
Trust, the Adviser, the Sub-Adviser, and no officer, director, or general
partner of the Distributor serves as an officer, director, or general partner of
the Trust, the Adviser, or the Sub-Adviser.
There
can be no assurance that the codes of ethics will be effective in preventing
such activities. Each code of ethics may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the SEC’s website at
http://www.sec.gov.
PROXY
VOTING
POLICIES
The
Funds have delegated proxy voting responsibilities to the Adviser, subject to
the Board’s oversight. In delegating proxy responsibilities, the Board has
directed that proxies be voted consistent with each Fund’s and its shareholders’
best interests and in compliance with all applicable proxy voting rules and
regulations. The Adviser has engaged Institutional Shareholder Services (“ISS”)
to make recommendations to the Adviser on the voting of proxies relating to
securities held by the Funds and has adopted the ISS Proxy
Voting
Guidelines as part of the Adviser’s proxy voting policies (the “Proxy Voting
Policies”) for such purpose. When the ISS Proxy Voting Guidelines do not cover a
specific proxy issue and ISS does not provide a recommendation, the Adviser will
use its best judgment in voting such proxies on behalf of the applicable
Fund(s).
A
copy of the ISS Proxy Voting Guidelines is set forth in Appendix
A to
this SAI. The Trust’s Chief Compliance Officer is responsible for monitoring the
effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have been
adopted by the Trust as the policies and procedures that the Adviser will use
when voting proxies on behalf of the Funds.
When
available, information on how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available (1) without charge, upon request, by calling 1–800–617–0004 and (2) on
the SEC’s website at www.sec.gov.
INVESTMENT
ADVISER
AND
SUB-ADVISER
Investment
Adviser
Nationwide
Fund Advisors, a Delaware business trust, serves as the investment adviser to
the Funds. Organized in 1999, the Adviser is a wholly-owned subsidiary of
Nationwide Financial Services, Inc. and an indirect subsidiary of Nationwide
Mutual Insurance Company.
The
Adviser arranges for sub-advisory, transfer agency, custody, fund
administration, distribution, and all other services necessary for the Funds to
operate. The Adviser provides oversight of the Sub-Adviser, monitors the
Sub-Adviser’s buying and selling of securities for the Funds, and reviews the
Sub-Adviser’s performance. For the services it provides to the Funds, each Fund
pays the Adviser a unified management fee, which is calculated daily and paid
monthly, at an annual rate of each Fund’s average daily net assets as
follows:
|
|
|
|
| |
Name
of Fund |
Management
Fee |
Nasdaq-100
Risk-Managed Income Fund |
0.68% |
S&P
500 Risk-Managed Income Fund |
0.68% |
Dow
Jones Risk-Managed Income Fund |
0.68% |
Russell
2000 Risk-Managed Income Fund |
0.68% |
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Funds, except for: the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, dividends and other
expenses on securities sold short, taxes, brokerage commissions and other
expenses incurred in placing orders for the purchase and sale of securities and
other investment instruments, acquired fund fees and expenses, accrued deferred
tax liability, extraordinary expenses, and distribution (12b-1) fees and
expenses.
The
Adviser, in turn, compensates the Sub-Adviser from the management fee it
receives from the applicable Fund. The Adviser shall not be liable to the Trust
or any shareholder for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties imposed upon it by its agreement with the Trust.
The
table below shows management fees paid to the Adviser by each of the Funds for
the fiscal periods/years ended August 31.
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| |
Name
of Fund |
2022 |
2021 |
2020 |
Nasdaq-100
Risk-Managed Income Fund |
$5,083,438 |
$1,745,618 |
$241,6081 |
S&P
500 Risk-Managed Income Fund |
$133,1882 |
N/A |
N/A |
Dow
Jones Risk-Managed Income Fund |
$134,8022 |
N/A |
N/A |
Russell
2000 Risk-Managed Income Fund |
$75,1412 |
N/A |
N/A |
1
For
the fiscal period December 19, 2019 (commencement of operations) through August
31, 2020.
2
For the fiscal period December 16, 2021 (commencement of operations) through
August 31, 2022.
Sub-Adviser
— Harvest Volatility Management, LLC
The
Trust, on behalf of the Funds, and the Adviser have retained Harvest
Volatility Management, LLC,
located at 420
Lexington Avenue, Suite 2620, New York, New York 10170,
to serve as sub-adviser for the Funds. Harvest is a registered investment
adviser and Delaware limited liability company. Richard L. Selvala, Chief
Executive Officer, and Curtis F. Brockelman, Jr., Managing Partner and Chief
Risk Officer, co-founded and each individually own controlling interest in
Harvest.
Pursuant
to a Sub-Advisory Agreement among the Trust, the Adviser, and Harvest, Harvest
is responsible for trading portfolio securities on behalf of the Funds,
including selecting broker-dealers to execute purchase and sale transactions,
subject to the supervision of the Adviser and the Board. For the services it
provides to the Funds, Harvest is compensated by the Adviser from the management
fees paid by the Funds to the Adviser.
The
Sub-Advisory Agreement with Harvest was approved by the Trustees (including all
the Independent Trustees) and the Adviser, as sole shareholder of each Fund, in
compliance with the 1940 Act.
The
Sub-Advisory Agreement will continue in force for an initial period of up to two
years. Thereafter, the Sub-Advisory Agreement is renewable from year to year
with respect to a Fund, so long as its continuance is approved at least annually
(1) by the vote, cast in person
at
a meeting called for that purpose, of a majority of those Trustees who are not
“interested persons” of the Trust; and (2) by the majority vote of either the
full Board or the vote of a majority of the outstanding Shares. The Sub-Advisory
Agreement with Harvest will terminate automatically in the event of its
assignment, and is terminable at any time without penalty by the Board or, with
respect to a Fund, by a majority of the outstanding Shares or by the Adviser on
not less than 60 days’ written notice to the Sub-Adviser, or by the Sub-Adviser
on 90 days’ written notice to the Adviser and the Trust. The Sub-Advisory
Agreement provides that the Sub-Adviser shall not be protected against any
liability to the Trust or its shareholders by reason of willful misfeasance,
fraud, bad faith, or gross negligence on its part in the performance of its
duties or from reckless disregard of its obligations or duties thereunder.
The
table below shows fees earned by the Sub-Adviser for services provided to each
of the Funds for the fiscal periods/years ended August 31.
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|
|
|
|
|
|
|
|
|
|
| |
Name
of Fund |
2022 |
2021 |
2020 |
|
Nasdaq-100
Risk-Managed Income Fund |
$2,112,719 |
$538,146 |
$60,4551 |
|
S&P
500 Risk-Managed Income Fund |
$66,5152 |
N/A |
N/A |
|
Dow
Jones Risk-Managed Income Fund |
$67,4012 |
N/A |
N/A |
|
Russell
2000 Risk-Managed Income Fund |
$37,5702 |
N/A |
N/A |
|
1
For
the fiscal period December 19, 2019 (commencement of operations) through August
31, 2020.
2
For the fiscal period December 16, 2021 (commencement of operations) through
August 31, 2022.
PORTFOLIO
MANAGERS
The
Funds are managed by
Curtis
F. Brockelman, Jr., Managing Partner, Co-Founder, Portfolio Manager, and Chief
Risk Officer of Harvest; Troy Cates, Managing Director and Portfolio Manager of
Harvest; and Garrett Paolella, Managing Director and Portfolio Manager of
Harvest.
Share
Ownership
The
Funds are required to show the dollar ranges of the portfolio managers’
“beneficial ownership” of Shares of each Fund as of the end of the most recently
completed fiscal year or a more recent date for a new portfolio manager. Dollar
amount ranges disclosed are established by the SEC. “Beneficial ownership” is
determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
As
of August 31, 2022, Messrs. Brockelman, Cates and Paolella beneficially owned
Shares of the Nasdaq-100 Risk-Managed Income Fund in the following dollar
ranges:
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|
|
|
|
|
|
|
| |
Portfolio
Manager |
Dollar
Range of Shares owned of |
Nasdaq-100
Risk-Managed Income Fund |
S&P
500 Risk-Managed Income Fund |
Dow
Jones Risk-Managed Income Fund |
Russell
2000 Risk-Managed Income Fund |
Curt
Brockelman |
Over
$1,000,000 |
None |
None |
None |
Troy
Cates |
$10,001
- $50,000 |
None |
None |
None |
Garrett
Paolella |
$10,001
- $50,000 |
None |
None |
None |
Other
Accounts
In
addition to the Funds, the portfolio managers managed the following other
accounts for the Sub-Adviser as of August 31, 2022, none of which were subject
to a performance fee:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Managers: |
Registered
Investment
Companies |
Other
Pooled
Investment
Vehicles |
Other
Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Number
of Accounts |
Total
Assets in the Accounts |
Curt
Brockelman |
0 |
$0 |
1 |
$28.5
million |
0 |
$0 |
Troy
Cates |
3 |
$3
million |
0 |
$0 |
0 |
$0 |
Garrett
Paolella |
3 |
$3
million |
1 |
$28.5
million |
0 |
$0 |
Portfolio
Manager Compensation
Mr.
Brockelman receives a base salary and is an equity owner of Harvest. He does not
receive a discretionary bonus. Messrs. Cates and Paolella receive a base salary
and yearly bonus from Harvest that is not tied to the performance of the
Funds.
Conflicts
of Interest
A
portfolio manager’s management of “other accounts” may give rise to potential
conflicts of interest in connection with their management of the Funds’
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have the same investment objectives as a Fund.
Therefore, a potential conflict of interest may arise because of the identical
investment objectives, whereby a portfolio manager could favor one account over
another. Another potential conflict could include a
portfolio
manager’s knowledge about the size, timing and possible market impact of Fund
trades, whereby a portfolio manager could use this information to the advantage
of other accounts and to the disadvantage of the Funds they manage. However, the
Sub-Adviser has established policies and procedures to ensure that the purchase
and sale of securities among all accounts such Sub-Adviser manages are fairly
and equitably allocated.
Conflicts
may also arise because portfolio decisions regarding a Fund may benefit other
accounts managed by the Sub-Adviser or its affiliates. For example, the sale of
a long position or establishment of a short position by a fund sub-advised by
the Sub-Adviser may impair the price of the same security sold short by (and
therefore benefit) one or more other funds sub-advised by the Sub-Adviser, and
the purchase of a security or covering of a short position in a security by a
Fund may increase the price of the same security held by (and therefore benefit)
one or more other funds sub-advised by the Sub-Adviser.
Conflicts
may also arise when selecting other funds sub-advised by the Sub-Adviser as
investments for a Fund because (i) the fees paid by the Adviser to the
Sub-Adviser for sub-advising certain other funds may be higher than the fees
paid by the applicable Fund or another fund and (ii) the fees received by the
Sub-Adviser and its affiliates may be higher for some funds than for the
applicable Fund or another fund.
Conflicts
may also arise because a portfolio manager has other responsibilities with
respect to a Sub-Adviser or another account managed by a Sub-Adviser. Mr.
Brockelman serves as Chief Risk Officer at Harvest, and there may be conflicts
between his responsibilities as a portfolio manager and as the Chief Risk
Officer. However, Harvest has established policies and procedures to ensure that
Mr. Brockelman’s risk-related activities with respect to the Funds are overseen
by other individuals to mitigate any impact from this conflict.
THE
DISTRIBUTOR
The
Trust, the Adviser, and
Quasar
Distributors, LLC (the “Distributor”), a wholly owned subsidiary of Foreside
Financial Group, LLC (d/b/a ACA Group), are parties to a distribution agreement
(the “Distribution Agreement”), whereby the Distributor acts as principal
underwriter for the Funds and distributes Shares. Shares are continuously
offered for sale by the Distributor only in Creation Units. The Distributor will
not distribute Shares in amounts less than a Creation Unit and does not maintain
a secondary market in Shares. The principal business address of the Distributor
is 111 East Kilbourn Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will review
orders for the purchase and redemption of Creation Units, provided that any
subscriptions and orders will not be binding on the Trust until accepted by the
Trust. The Distributor is a broker-dealer registered under the 1934 Act and a
member of FINRA.
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers may also be Authorized Participants (as discussed in
“Procedures
for Purchase of Creation Units”
below) or DTC participants (as defined below).
The
Distribution Agreement will continue for two years from its effective date and
is renewable annually thereafter. The continuance of the Distribution Agreement
must be specifically approved at least annually (i) by the vote of the Trustees
or by a vote of the shareholders of the Fund and (ii) by the vote of a majority
of the Independent Trustees who have no direct or indirect financial interest in
the operations of the Distribution Agreement or any related agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement is terminable without penalty by the Trust on 60 days’
written notice when authorized either by majority vote of its outstanding voting
Shares or by a vote of a majority of its Board (including a majority of the
Independent Trustees), or by the Distributor on 60 days’ written notice, and
will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Distributor, or reckless disregard by it of
its obligations thereunder, the Distributor shall not be liable for any action
or failure to act in accordance with its duties thereunder.
Intermediary
Compensation.
The
Adviser, the Sub-Adviser, or their affiliates, out of their own resources and
not out of Fund assets (i.e.,
without additional cost to the Fund or its shareholders), may pay certain broker
dealers, banks and other financial intermediaries (“Intermediaries”) for certain
activities related to a Fund, including participation in activities that are
designed to make Intermediaries more knowledgeable about exchange traded
products, including the Fund, or for other activities, such as marketing and
educational training or support. These arrangements are not financed by a Fund
and, thus, do not result in increased Fund expenses. They are not reflected in
the fees and expenses listed in the fees and expenses sections of a Fund’s
Prospectus and they do not change the price paid by investors for the purchase
of Shares or the amount received by a shareholder as proceeds from the
redemption of Shares. Such compensation may be paid to Intermediaries that
provide services to a Fund, including marketing and education support (such as
through conferences, webinars and printed communications).
The
Adviser has a separate arrangement to make payments, other than for the
marketing and educational activities described above, to Morgan Stanley Smith
Barney LLC (the “Firm”). Pursuant to the arrangement with the Firm, the Firm
agreed to make certain of the Nationwide ETFs available to the Firm’s customers.
These payments, which may be significant, are paid by the Adviser from its own
resources and not from the assets of a Fund.
The
Adviser and Sub-Adviser periodically assess the advisability of continuing to
make these payments. Payments to an Intermediary may be significant to the
Intermediary, and amounts that Intermediaries pay to your adviser, broker or
other investment professional, if
any,
may also be significant to such adviser, broker or investment professional.
Because an Intermediary may make decisions about what investment options it will
make available or recommend, and what services to provide in connection with
various products, based on payments it receives or is eligible to receive, such
payments create conflicts of interest between the Intermediary and its clients.
For example, these financial incentives may cause the Intermediary to recommend
a Fund over other investments. The same conflict of interest exists with respect
to your financial adviser, broker or investment professional if he or she
receives similar payments from his or her Intermediary firm.
Intermediary
information is current only as of the date of this SAI. Please contact your
adviser, broker, or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the
Adviser, Sub-Adviser, or their affiliates to an Intermediary may create the
incentive for an Intermediary to encourage customers to buy Shares.
If
you have any additional questions, please call 1-800-617-0004.
Distribution
and Service Plan.
The Trust has adopted a Distribution and Service Plan (the “Plan”) in accordance
with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. No payments pursuant to the
Plan are expected to be made during the twelve (12) month period from the date
of this SAI. Rule 12b-1 fees to be paid by a Fund under the Plan may only be
imposed after approval by the Board.
Continuance
of the Plan must be approved annually by a majority of the Trustees of the Trust
and by a majority of the Trustees who are not interested persons (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the Plan or in any agreements related to the Plan (“Qualified Trustees”). The
Plan requires that quarterly written reports of amounts spent under the Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding Shares of a Fund.
All material amendments of the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
The
Plan provides that each Fund pays the Distributor an annual fee of up to a
maximum of 0.25% of the average daily net assets of the Shares. Under the Plan,
the Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations and
insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor’s affiliates and subsidiaries (collectively,
“Agents”) as compensation for services and reimbursement of expenses incurred in
connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the
FINRA rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, each
Fund is authorized to compensate the Distributor up to the maximum amount to
finance any activity primarily intended to result in the sale of Creation Units
of the Fund or for providing or arranging for others to provide shareholder
services and for the maintenance of shareholder accounts. Such activities may
include, but are not limited to: (i) delivering copies of a Fund’s then
current reports, prospectuses, notices, and similar materials, to prospective
purchasers of Creation Units; (ii) marketing and promotional services,
including advertising; (iii) paying the costs of and compensating others,
including Authorized Participants (as discussed in “Procedures for Purchase of
Creation Units” below) with whom the Distributor has entered into written
Participant Agreements (as defined below), for performing shareholder servicing
on behalf of a Fund; (iv) compensating certain Authorized Participants for
providing assistance in distributing the Creation Units of a Fund, including the
travel and communication expenses and salaries and/or commissions of sales
personnel in connection with the distribution of the Creation Units of a Fund;
(v) payments to financial institutions and intermediaries such as banks,
savings and loan associations, insurance companies and investment counselors,
broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of
the Trust’s service providers as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance;
(vi) facilitating communications with beneficial owners of Shares,
including the cost of providing (or paying others to provide) services to
beneficial owners of Shares, including, but not limited to, assistance in
answering inquiries related to shareholder accounts; and (vii) such other
services and obligations as are set forth in the Distribution Agreement.
THE
TRANSFER
AGENT,
ADMINISTRATOR,
AND CUSTODIAN
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services,
located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the
Funds’ transfer agent and administrator.
Pursuant
to a Fund Administration Servicing Agreement and a Fund Accounting Servicing
Agreement between the Trust and Fund Services, Fund Services provides the Trust
with administrative and management services (other than investment advisory
services) and accounting services, including portfolio accounting services, tax
accounting services and furnishing financial reports. In this capacity, Fund
Services does not have any responsibility or authority for the management of the
Funds, the determination of investment policy, or for any matter pertaining to
the distribution of Shares. As compensation for the administration, accounting
and management services, the Adviser pays Fund Services a fee based on each
Fund’s average daily net assets, subject to a minimum annual fee. Fund Services
also is entitled to certain out-of-pocket expenses for the services mentioned
above, including pricing expenses.
The
table below shows fees earned by Fund Services for services provided to each of
the Funds for the fiscal periods/years ended August 31.
|
|
|
|
|
|
|
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
Nasdaq-100
Risk-Managed
Income Fund |
$363,780 |
$171,553 |
$
51,6061 |
|
S&P
500 Risk-Managed Income Fund |
$50,7092 |
N/A |
N/A |
|
Dow
Jones Risk-Managed Income Fund |
$37,1042 |
N/A |
N/A |
|
Russell
2000 Risk-Managed Income Fund |
$96,6792 |
N/A |
N/A |
|
1
For the fiscal period December 19, 2019 (commencement of operations) through
August 31, 2020.
2
For the fiscal period December 16, 2021 (commencement of operations) through
August 31, 2022.
Pursuant
to a Custody Agreement, U.S. Bank National Association (the “Custodian” or “U.S.
Bank”), 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212,
serves as the Custodian of the Funds’ assets. The Custodian holds and
administers the assets in each Fund’s portfolio. Pursuant to the Custody
Agreement, the Custodian receives an annual fee from the Adviser based on the
Trust’s total average daily net assets, subject to a minimum annual fee, and
certain settlement charges. The Custodian also is entitled to certain
out-of-pocket expenses.
LEGAL
COUNSEL
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue NW, Washington, DC
20004-2541, serves as legal counsel for the Trust.
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
Cohen
& Company, Ltd., located at 342 North Water Street, Suite 830, Milwaukee,
Wisconsin 53202, serves as the independent registered public accounting firm for
the Funds.
PORTFOLIO
HOLDINGS
DISCLOSURE
POLICIES
AND
PROCEDURES
The
Board has adopted a policy regarding the disclosure of information about each
Fund’s security holdings. Each Fund’s entire portfolio holdings are publicly
disseminated each day a Fund is open for business and may be available through
financial reporting and news services, including publicly available internet web
sites. In addition, the composition of the Deposit Securities (as defined below)
is publicly disseminated daily prior to the opening of the Exchange via the
National Securities Clearing Corporation (“NSCC”).
DESCRIPTION
OF
SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of funds and
Shares. Each Share represents an equal proportionate interest in the applicable
Fund with each other Share. Shares are entitled upon liquidation to a pro rata
share in the net assets of the applicable Fund. Shareholders have no preemptive
rights. The Declaration of Trust provides that the Trustees may create
additional series or classes of Shares. All consideration received by the Trust
for shares of any additional funds and all assets in which such consideration is
invested would belong to that fund and would be subject to the liabilities
related thereto. Share certificates representing Shares will not be issued.
Shares, when issued, are fully paid and non-assessable.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required, consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all funds of the Trust vote together as a
single class, except that if the matter being voted on affects only a particular
fund it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. As a Delaware statutory trust, the Trust is not required, and does not
intend, to hold annual meetings of shareholders. Approval of shareholders will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Upon the written request
of shareholders owning at least 10% of the Trust’s Shares, the Trust will call
for a meeting of shareholders to consider the removal of one or more Trustees
and other certain matters. In the event that such a meeting is requested, the
Trust will provide appropriate assistance and information to the shareholders
requesting the meeting.
Under
the Declaration of Trust, the Trustees have the power to liquidate a Fund
without shareholder approval. While the Trustees have no present intention of
exercising this power, they may do so if a Fund fails to reach a viable size
within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION
OF
TRUSTEES’
LIABILITY
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees shall not
be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, adviser or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee.
The Declaration of Trust also provides that the Trust shall indemnify each
person who is, or has been, a Trustee, officer, employee or agent of the Trust,
any person who is serving or has served at the Trust’s request as a Trustee,
officer, trustee, employee or agent of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise to the extent and in
the manner provided in the Amended and Restated By-laws. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any
liability
for his or her willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of the office of Trustee.
Nothing contained in this section attempts to disclaim a Trustee’s individual
liability in any manner inconsistent with the federal securities
laws.
BROKERAGE
TRANSACTIONS
The
policy of the Trust regarding purchases and sales of securities for a Fund is
that primary consideration will be given to obtaining the most favorable prices
and efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust’s policy is
to pay commissions which are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
The Trust believes that a requirement always to seek the lowest possible
commission cost could impede effective portfolio management and preclude the
Funds and the applicable Sub-Adviser from obtaining a high quality of brokerage
and research services. In seeking to determine the reasonableness of brokerage
commissions paid in any transaction, the applicable Sub-Adviser will rely upon
its experience and knowledge regarding commissions generally charged by various
brokers and on its judgment in evaluating the brokerage services received from
the broker effecting the transaction. Such determinations are necessarily
subjective and imprecise, as in most cases, an exact dollar value for those
services is not ascertainable. The Trust has adopted policies and procedures
that prohibit the consideration of sales of Shares as a factor in the selection
of a broker or dealer to execute its portfolio transactions.
The
Sub-Adviser owes a fiduciary duty to its clients to seek to provide best
execution on trades effected. In selecting a broker/dealer for each specific
transaction, the Sub-Adviser chooses the broker/dealer deemed most capable of
providing the services necessary to obtain the most favorable execution. “Best
execution” is generally understood to mean the most favorable cost or net
proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when
making this judgment, which may include, but is not limited to: liquidity,
price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker/dealers. The Sub-Adviser may also use electronic crossing
networks (“ECNs”) when appropriate.
Subject
to the foregoing policies, brokers or dealers selected to execute a Fund’s
portfolio transactions may include such Fund’s Authorized Participants (as
discussed in “Procedures
for Purchase of Creation Units”
below) or their affiliates. An Authorized Participant or its affiliates may be
selected to execute a Fund’s portfolio transactions in conjunction with an
all-cash creation unit order or an order including “cash-in-lieu” (as described
below under “Purchase
and Redemption of Shares in Creation Units”),
so long as such selection is in keeping with the foregoing policies. As
described below under “Purchase
and Redemption of Shares in Creation Units—Creation Transaction Fee”
and “—Redemption
Transaction Fee”,
each Fund may determine to not charge a variable fee on certain orders when the
Adviser has determined that doing so is in the best interests of Fund
shareholders, e.g.,
for creation orders that facilitate the rebalance of the applicable Fund’s
portfolio in a more tax efficient manner than could be achieved without such
order, even if the decision to not charge a variable fee could be viewed as
benefiting the Authorized Participant or its affiliate selected to execute the
Fund’s portfolio transactions in connection with such orders.
The
Sub-Adviser may use a Fund’s assets for, or participate in, third-party soft
dollar arrangements, in addition to receiving proprietary research from various
full-service brokers, the cost of which is bundled with the cost of the broker’s
execution services. The Sub-Adviser does not “pay up” for the value of any such
proprietary research. Section 28(e) of the 1934 Act permits the Sub-Adviser,
under certain circumstances, to cause a Fund to pay a broker or dealer a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction in
recognition of the value of brokerage and research services provided by the
broker or dealer. The Sub-Adviser may receive a variety of research services and
information on many topics, which it can use in connection with its management
responsibilities with respect to the various accounts over which it exercises
investment discretion or otherwise provides investment advice. The research
services may include qualifying order management systems, portfolio attribution
and monitoring services and computer software and access charges which are
directly related to investment research. Accordingly, a Fund may pay a broker
commission higher than the lowest available in recognition of the broker’s
provision of such services to the applicable Sub-Adviser, but only if the
Sub-Adviser determines the total commission (including the soft dollar benefit)
is comparable to the best commission rate that could be expected to be received
from other brokers. The amount of soft dollar benefits received depends on the
amount of brokerage transactions effected with the brokers. A conflict of
interest exists because there is an incentive to: 1) cause clients to pay a
higher commission than the firm might otherwise be able to negotiate; 2) cause
clients to engage in more securities transactions than would otherwise be
optimal; and 3) only recommend brokers that provide soft dollar benefits.
The
Sub-Adviser faces a potential conflict of interest when it uses client trades to
obtain brokerage or research services. This conflict exists because the
Sub-Adviser is able to use the brokerage or research services to manage client
accounts without paying cash for such services, which reduces a Sub-Adviser’s
expenses to the extent that the Sub-Adviser would have purchased such products
had they not been provided by brokers. Section 28(e) permits a Sub-Adviser to
use brokerage or research services for the benefit of any account it manages.
Certain accounts managed by a Sub-Adviser may generate soft dollars used to
purchase brokerage or research services that ultimately benefit other accounts
managed by the Sub-Adviser, effectively cross subsidizing the other accounts
managed by the Sub-Adviser that benefit directly from the product. A Sub-Adviser
may not necessarily use all of the brokerage or research services in connection
with managing a Fund whose trades generated the soft dollars used to purchase
such products.
The
Sub-Adviser is responsible, subject to oversight by the Adviser and the Board,
for placing orders on behalf of the applicable Fund(s) for the purchase or sale
of portfolio securities. If purchases or sales of portfolio securities of a Fund
and one or more other investment companies or clients supervised by the
Sub-Adviser are considered at or about the same time, transactions in such
securities are allocated among the several investment companies and clients in a
manner deemed equitable and consistent with its fiduciary obligations to all by
the Sub-Adviser. In some cases, this procedure could have a detrimental effect
on the price or volume of the security so far as the Fund is concerned. However,
in other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund. The primary consideration is prompt execution of orders at the most
favorable net price.
A
Fund may deal with affiliates in principal transactions to the extent permitted
by exemptive order or applicable rule or regulation.
The
table below shows brokerage commissions paid in the aggregate amount by the
Funds for the fiscal periods/years ended August 31.
|
|
|
|
|
|
|
|
|
|
|
| |
| 2022 |
2021 |
2020 |
|
Nasdaq-100
Risk-Managed
Income Fund |
$42,232 |
$13,312 |
$3,3091 |
|
S&P
500 Risk-Managed Income Fund |
$2,7432 |
N/A |
N/A |
|
Dow
Jones Risk-Managed Income Fund |
$30,9612 |
N/A |
N/A |
|
Russell
2000 Risk-Managed Income Fund |
$4,9812 |
N/A |
N/A |
|
1
For the fiscal period December 19, 2019 (commencement of operations) through
August 31, 2020.
2
For the fiscal period December 16, 2021 (commencement of operations) through
August 31, 2022.
Directed
Brokerage. During
the fiscal year ended August 31, 2022, the Funds did not direct brokerage
transactions to a broker because of research services provided.
Brokerage
with Fund Affiliates.
A Fund may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Funds, the Adviser, a Sub-Adviser or the
Distributor for a commission in conformity with the 1940 Act, the 1934 Act, and
rules promulgated by the SEC. These rules require that commissions paid to the
affiliate by the Funds for exchange transactions not exceed “usual and
customary” brokerage commissions. The rules define “usual and customary”
commissions to include amounts which are “reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time.” The Trustees, including those who are not “interested persons” of the
Funds, have adopted procedures for evaluating the reasonableness of commissions
paid to affiliates and review these procedures periodically.
During
the fiscal year ended August 31, 2022, the Funds did not pay brokerage
commissions to any registered broker-dealer affiliates of the Funds, the
Adviser, the Sub-Adviser, or the Distributor.
Securities
of “Regular Broker-Dealers.”
Each Fund is required to identify any securities of its “regular brokers and
dealers” (as such term is defined in the 1940 Act) that it may hold at the close
of its most recent fiscal year. “Regular brokers or dealers” of a Fund are the
ten brokers or dealers that, during the most recent fiscal year: (i) received
the greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Fund; or (iii) sold the largest dollar amounts of
Shares. The S&P 500 Risk-Managed Income Fund held $16,926 in securities of
Northern Trust, a “regular broker-dealer”, as of August 31, 2022. The other
Funds did not hold securities of “regular broker dealers” as of August 31, 2022.
PORTFOLIO
TURNOVER
RATE
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by the Sub-Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
The
table below lists the portfolio turnover rate for the Funds for the fiscal
periods/years ended August 31.
|
|
|
|
|
|
|
|
|
|
| |
| 2022 |
2021 |
|
| |
Nasdaq-100
Risk-Managed
Income Fund |
24% |
10% |
|
| |
S&P
500 Risk-Managed Income Fund |
13%1 |
N/A |
|
| |
Dow
Jones Risk-Managed Income Fund |
15%1 |
N/A |
|
| |
Russell
2000 Risk-Managed Income Fund |
23%1 |
N/A |
|
| |
1
For the fiscal period December 16, 2021 (commencement of operations) through
August 31, 2022.
BOOK
ENTRY
ONLY
SYSTEM
The
Depository Trust Company (“DTC”) acts as securities depositary for Shares.
Shares are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
Shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry
changes
in accounts of the DTC Participants, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. More
specifically, DTC is owned by a number of its DTC Participants and by the New
York Stock Exchange (“NYSE”) and FINRA. Access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly (the “Indirect Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to in this SAI as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares. The
Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered
in their names and will not receive or be entitled to physical delivery of Share
certificates. Each Beneficial Owner must rely on the procedures of DTC and any
DTC Participant and/or Indirect Participant through which such Beneficial Owner
holds its interests, to exercise any rights of a holder of Shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as follows. DTC will make available to the Trust upon request and for a
fee a listing of Shares held by each DTC Participant. The Trust shall obtain
from each such DTC Participant the number of Beneficial Owners holding Shares,
directly or indirectly, through such DTC Participant. The Trust shall provide
each such DTC Participant with copies of such notice, statement, or other
communication, in such form, number and at such place as such DTC Participant
may reasonably request, in order that such notice, statement or communication
may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant
a fair and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in a Fund as
shown on the records of DTC or its nominee. Payments by DTC Participants to
Indirect Participants and Beneficial Owners of Shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in Shares, or for maintaining, supervising, or reviewing any
records relating to such beneficial ownership interests, or for any other aspect
of the relationship between DTC and the DTC Participants or the relationship
between such DTC Participants and the Indirect Participants and Beneficial
Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to a Fund at any
time by giving reasonable notice to the Fund and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the applicable Fund shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such
replacement is unavailable, to issue and deliver printed certificates
representing ownership of Shares, unless the Trust makes other arrangements with
respect thereto satisfactory to the Exchange.
PURCHASE
AND
REDEMPTION
OF
SHARES
IN
CREATION
UNITS
The
Trust issues and redeems Shares only in Creation Units on a continuous basis
through the Transfer Agent, without a sales load (but subject to transaction
fees, if applicable), at their NAV per share next determined after receipt of an
order, on any Business Day, in proper form pursuant to the terms of the
Authorized Participant Agreement (“Participant Agreement”). The NAV of Shares is
calculated each business day as of the scheduled close of regular trading on the
NYSE, generally 4:00 p.m., Eastern time. The Funds will not issue fractional
Creation Units. A “Business Day” is any day on which the NYSE is open for
business.
Fund
Deposit.
The consideration for purchase of a Creation Unit of a Fund generally consists
of the in-kind deposit of a designated portfolio of securities (the “Deposit
Securities”) per each Creation Unit and the Cash Component (defined below),
computed as described below. Notwithstanding the foregoing, the Trust reserves
the right to permit or require the substitution of a “cash in lieu” amount
(“Deposit Cash”) to be added to the Cash Component to replace any Deposit
Security. When accepting purchases of Creation Units for all or a portion of
Deposit Cash, a Fund may incur additional costs associated with the acquisition
of Deposit Securities that would otherwise be provided by an in-kind purchaser.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the applicable Fund. The
“Cash Component” is an amount equal to the difference between the NAV of Shares
(per Creation Unit) and the value of the Deposit Securities or Deposit Cash, as
applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the value of the Deposit Securities or Deposit
Cash, as applicable), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the value of the Deposit Securities or
Deposit Cash, as applicable), the Cash
Component
shall be such negative amount and the creator will be entitled to receive cash
in an amount equal to the Cash Component. The Cash Component serves the function
of compensating for any differences between the NAV per Creation Unit and the
value of the Deposit Securities or Deposit Cash, as applicable. Computation of
the Cash Component excludes any stamp duty or other similar fees and expenses
payable upon transfer of beneficial ownership of the Deposit Securities, if
applicable, which shall be the sole responsibility of the Authorized Participant
(as defined below).
Each
Fund, through NSCC, makes available on each Business Day, prior to the opening
of business on the Exchange (currently 9:30 a.m., Eastern time), the list of the
names and the required number of Shares of each Deposit Security or the required
amount of Deposit Cash, as applicable, to be included in the current Fund
Deposit (based on information at the end of the previous Business Day) for the
applicable Fund. Such Fund Deposit is subject to any applicable adjustments as
described below, to effect purchases of Creation Units of the applicable Fund
until such time as the next-announced composition of the Deposit Securities or
the required amount of Deposit Cash, as applicable, is made available.
The
identity and number of Shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for a Fund Deposit for the Fund changes from time
to time.
The
Trust reserves the right to permit or require the substitution of Deposit Cash
to replace any Deposit Security, which shall be added to the Cash Component,
including, without limitation, in situations where the Deposit Security: (i) may
not be available in sufficient quantity for delivery; (ii) may not be eligible
for transfer through the systems of DTC for corporate securities and municipal
securities; (iii) may not be eligible for trading by an Authorized Participant
(as defined below) or the investor for which it is acting; (iv) would be
restricted under the securities laws or where the delivery of the Deposit
Security to the Authorized Participant would result in the disposition of the
Deposit Security by the Authorized Participant becoming restricted under the
securities laws; or (v) in certain other situations (collectively, “custom
orders”).
Procedures
for Purchase of Creation Units.
To be eligible to place orders with the Transfer Agent to purchase a Creation
Unit of a Fund, an entity must be (i) a “Participating Party” (i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the “Clearing Process”)), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
“Book
Entry Only System”).
In addition, each Participating Party or DTC Participant (each, an “Authorized
Participant”) must execute a Participant Agreement that has been agreed to by
the Distributor, and that has been accepted by the Transfer Agent, with respect
to purchases and redemptions of Creation Units. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or
any investor on whose behalf it will act, to certain conditions, including that
it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below), if applicable, and
any other applicable fees and taxes.
All
orders to purchase Shares directly from the Funds must be placed for one or more
Creation Units and in the manner set forth in the Participant Agreement and/or
applicable order form. The order cut-off time for orders to purchase Creation
Units of the Funds is expected to be 3:00 p.m. Eastern time, which times
may be modified by a Fund from time-to-time by amendment to the Participant
Agreement and/or applicable order form. The date on which an order to
purchase Creation Units (or an order to redeem Creation Units, as set forth
below) of the foregoing Funds is received and accepted is referred to as the
“Order Placement Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g.,
to provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from a Fund in Creation Units have
to be placed by the investor’s broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On
days when the Exchange closes earlier than normal, a Fund may require orders to
create Creation Units to be placed earlier in the day. In addition, if a market
or markets on which a Fund’s investments are primarily traded is closed, the
applicable Fund will also generally not accept orders on such day(s). Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Transfer Agent pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order
form. On behalf of the Funds, the Transfer Agent will notify the Custodian of
such order. The Custodian will then provide such information to the appropriate
local sub-custodian(s). Those placing orders through an Authorized Participant
should allow sufficient time to permit proper submission of the purchase order
to the Transfer Agent by the cut-off time on such Business Day. Economic or
market disruptions or changes, or telephone or other communication failure may
impede the ability to reach the Transfer Agent or an Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities) and/or through such other arrangements
allowed by the Trust or its agents. With respect to foreign Deposit Securities,
the Custodian shall cause the subcustodian of the Funds to maintain an account
into which the Authorized Participant shall deliver, on behalf of itself or the
party on whose behalf it is acting, such Deposit Securities (or Deposit Cash for
all or a part of such securities, as permitted or required), with any
appropriate adjustments as advised by the Trust. Foreign Deposit Securities must
be delivered to an account maintained at the applicable local subcustodian. A
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion so as to ensure the delivery of the requisite number of Deposit
Securities or Deposit Cash, as applicable, to the account of the applicable Fund
or its agents by no later than 12:00 p.m. Eastern time (or
such
other time as specified by the Trust) on the Settlement Date. If a Fund or its
agents do not receive all of the Deposit Securities, or the required Deposit
Cash in lieu thereof, by such time, then the order may be deemed rejected and
the Authorized Participant shall be liable to the applicable Fund for losses, if
any, resulting therefrom. The “Settlement Date” for the Funds is generally the
Business Day after the Order Placement Date. All questions as to the number of
Deposit Securities or Deposit Cash to be delivered, as applicable, and the
validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities or cash, as applicable, will be determined by the Trust,
whose determination shall be final and binding. The amount of cash represented
by the Cash Component must be transferred directly to the Custodian through the
Federal Reserve Bank wire transfer system in a timely manner so as to be
received by the Custodian no later than the Settlement Date. If the Cash
Component and the Deposit Securities or Deposit Cash, as applicable, are not
received by the Custodian in a timely manner by the Settlement Date, the
creation order may be cancelled. Upon written notice to the Distributor, such
canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then current NAV of the applicable
Fund.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in the appropriate amount are deposited with
the Custodian on the Settlement Date. If the order is not placed in proper form
as required, or federal funds in the appropriate amount are not received on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the applicable Fund for losses, if any, resulting
therefrom. A creation request is considered to be in “proper form” if all
procedures set forth in the Participant Agreement, order form and this SAI are
properly followed.
Issuance
of a Creation Unit. Except
as provided in this SAI, Creation Units will not be issued until the transfer of
good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities
(or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, the Transfer Agent and the Adviser shall be
notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units. The delivery of Creation Units so created generally will
occur no later than the second Business Day following the day on which the
purchase order is deemed received by the Transfer Agent. The Authorized
Participant shall be liable to the Fund for losses, if any, resulting from
unsettled orders.
Creation
Units may be purchased in advance of receipt by the Trust of all or a portion of
the applicable Deposit Securities as described below. In these circumstances,
the initial deposit will have a value greater than the NAV of Shares on the date
the order is placed in proper form since, in addition to available Deposit
Securities, cash must be deposited in an amount equal to the sum of (i) the Cash
Component, plus (ii) an additional amount of cash equal to a percentage of the
value as set forth in the Participant Agreement, of the undelivered Deposit
Securities (the “Additional Cash Deposit”), which shall be maintained in a
separate non-interest bearing collateral account. The Authorized Participant
must deposit with the Custodian the Additional Cash Deposit, as applicable, by
12:00 p.m. Eastern time (or such other time as specified by the Trust) on the
Settlement Date. If a Fund or its agents do not receive the Additional Cash
Deposit in the appropriate amount, by such time, then the order may be deemed
rejected and the Authorized Participant shall be liable to the applicable Fund
for losses, if any, resulting therefrom. An additional amount of cash shall be
required to be deposited with the Trust, pending delivery of the missing Deposit
Securities to the extent necessary to maintain the Additional Cash Deposit with
the Trust in an amount at least equal to the applicable percentage, as set forth
in the Participant Agreement, of the daily market value of the missing Deposit
Securities. The Participant Agreement will permit the Trust to buy the missing
Deposit Securities at any time. Authorized Participants will be liable to the
Trust for the costs incurred by the Trust in connection with any such purchases.
These costs will be deemed to include the amount by which the actual purchase
price of the Deposit Securities exceeds the value of such Deposit Securities on
the day the purchase order was deemed received by the Transfer Agent plus the
brokerage and related transaction costs associated with such purchases. The
Trust will return any unused portion of the Additional Cash Deposit once all of
the missing Deposit Securities have been properly received by the Custodian or
purchased by the Trust and deposited into the Trust. In addition, a transaction
fee, as described below under “Creation
Transaction Fee,”
may be charged. The delivery of Creation Units so created generally will occur
no later than the Settlement Date.
Acceptance
of Orders of Creation Units.
The Trust reserves the right to reject an order for Creation Units transmitted
to it by the Transfer Agent with respect to a Fund including, without
limitation, if (a) the order is not in proper form; (b) the Deposit Securities
or Deposit Cash, as applicable, delivered by the Participant are not as
disseminated through the facilities of the NSCC for that date by the Custodian;
(c) the investor(s), upon obtaining Shares ordered, would own 80% or more of the
currently outstanding Shares of the applicable Fund; (d) the acceptance of the
Fund Deposit would, in the opinion of counsel, be unlawful; (e) the acceptance
or receipt of the order for a Creation Unit would, in the opinion of counsel to
the Trust, be unlawful; or (f) in the event that circumstances outside the
control of the Trust, the Custodian, the Transfer Agent and/or the Adviser make
it for all practical purposes not feasible to process orders for Creation Units.
Examples
of such circumstances include acts of God or public service or utility problems
such as fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Distributor, the Custodian, a sub-custodian,
the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant
in the creation process, and other extraordinary events. The Transfer Agent
shall notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund
Deposits
nor shall either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor
shall not be liable for the rejection of any purchase order for Creation Units.
All
questions as to the number of Shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
Creation
Transaction Fee.
A fixed purchase (i.e.,
creation) transaction fee, payable to the Fund’s custodian, may be imposed for
the transfer and other transaction costs associated with the purchase of
Creation Units (“Creation Order Costs”). The standard fixed creation transaction
fee for each Fund, regardless of the number of Creation Units created in the
transaction, can be found in the table below. Each Fund may adjust the standard
fixed creation transaction fee from time to time. The fixed creation fee may be
waived on certain orders if the applicable Fund’s custodian has determined to
waive some or all of the Creation Order Costs associated with the order or
another party, such as the Adviser, has agreed to pay such fee.
In
addition, a variable fee, payable to the Fund, of up to the maximum percentage
listed in the table below of the value of the Creation Units subject to the
transaction may be imposed for cash purchases, non-standard orders, or partial
cash purchases of Creation Units. The variable charge is primarily designed to
cover additional costs (e.g.,
brokerage, taxes) involved with buying the securities with cash. Each Fund may
determine to not charge a variable fee on certain orders when the Adviser has
determined that doing so is in the best interests of Fund
shareholders,
e.g.,
for creation orders that facilitate the rebalance of the applicable Fund’s
portfolio in a more tax efficient manner than could be achieved without such
order.
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Name
of Fund |
Fixed
Creation Transaction Fee |
Maximum
Variable Transaction Fee |
Nasdaq-100
Risk-Managed
Income Fund |
$500 |
2% |
S&P
500 Risk-Managed Income Fund |
$500 |
2% |
Dow
Jones Risk-Managed Income Fund |
$500 |
2% |
Russell
2000 Risk-Managed Income Fund |
$750 |
2% |
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Risks
of Purchasing Creation Units.
There are certain legal risks unique to investors purchasing Creation Units
directly from a Fund. Because Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. Certain activities that
a shareholder performs as a dealer could, depending on the circumstances, result
in the shareholder being deemed a participant in the distribution in a manner
that could render the shareholder a statutory underwriter and subject to the
prospectus delivery and liability provisions of the Securities Act. For example,
a shareholder could be deemed a statutory underwriter if it purchases Creation
Units from a Fund, breaks them down into the constituent Shares, and sells those
Shares directly to customers, or if a shareholder chooses to couple the creation
of a supply of new Shares with an active selling effort involving solicitation
of secondary-market demand for Shares. Whether a person is an underwriter
depends upon all of the facts and circumstances pertaining to that person’s
activities, and the examples mentioned here should not be considered a complete
description of all the activities that could cause you to be deemed an
underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
Shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C)
of the Securities Act, will be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST
WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
to have such Shares redeemed by the Trust. There can be no assurance, however,
that there will be sufficient liquidity in the public trading market at any time
to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Funds, the Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on
each Business Day, the list of the names and Share quantities of each Fund’s
portfolio securities that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Fund Securities”). Fund Securities received on redemption may not be
identical to Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or combination
thereof, as determined by the Trust. With respect to in-kind redemptions of a
Fund, redemption proceeds for a Creation Unit will consist of Fund Securities—as
announced by the Custodian on the Business Day of the request for redemption
received in proper form plus cash in an amount equal to the difference between
the NAV of Shares being redeemed, as next determined after a receipt of a
request in proper form, and the value of the Fund Securities (the “Cash
Redemption Amount”), less a fixed redemption transaction fee, as applicable, as
set forth below. In the event that the Fund Securities have a value greater than
the NAV of Shares, a compensating cash payment equal to the differential is
required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an
Authorized Participant may receive the corresponding cash value of the
securities in lieu of the in-kind securities value representing one or more Fund
Securities.
Redemption
Transaction Fee.
A fixed redemption transaction fee, payable to the Fund’s custodian, may be
imposed for the transfer and other transaction costs associated with the
redemption of Creation Units (“Redemption Order Costs”). The standard fixed
redemption transaction fee for each Fund, regardless of the number of Creation
Units redeemed in the transaction, can be found in the table below. Each Fund
may adjust the redemption transaction fee from time to time. The fixed
redemption fee may be waived on certain orders if the applicable Fund’s
custodian has determined to waive some or all of the Redemption Order Costs
associated with the order or another party, such as the Adviser, has agreed to
pay such fee.
In
addition, a variable fee, payable to the Fund, of up to the maximum percentage
listed in the table below of the value of the Creation Units subject to the
transaction may be imposed for cash redemptions, non-standard orders, or partial
cash redemptions (when cash redemptions are available) of Creation Units. The
variable charge is primarily designed to cover additional costs (e.g.,
brokerage, taxes) involved with selling portfolio securities to satisfy a cash
redemption. Each Fund may determine to not charge a variable fee on certain
orders when the Adviser has determined that doing so is in the best interests of
Fund shareholders, e.g.,
for redemption orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such
order.
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Name
of Fund |
Fixed
Redemption Transaction Fee |
Maximum
Variable Transaction Fee |
Nasdaq-100
Risk-Managed
Income Fund |
$500 |
2% |
S&P
500 Risk-Managed Income Fund |
$500 |
2% |
Dow
Jones Risk-Managed Income Fund |
$500 |
2% |
Russell
2000 Risk-Managed Income Fund |
$750 |
2% |
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Procedures
for Redemption of Creation Units.
Orders to redeem Creation Units of the Funds must be submitted in proper form to
the Transfer Agent prior to 3:00 p.m. Eastern time. A redemption request is
considered to be in “proper form” if (i) an Authorized Participant has
transferred or caused to be transferred to the Trust’s Transfer Agent the
Creation Unit(s) being redeemed through the book-entry system of DTC so as to be
effective by the time as set forth in the Participant Agreement and (ii) a
request in form satisfactory to the Trust is received by the Transfer Agent from
the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant Agreement. If the Transfer
Agent does not receive the investor’s Shares through DTC’s facilities by the
times and pursuant to the other terms and conditions set forth in the
Participant Agreement, the redemption request shall be rejected.
The
Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Participant Agreement. Investors should be aware that their
particular broker may not have executed a Participant Agreement, and that,
therefore, requests to redeem Creation Units may have to be placed by the
investor’s broker through an Authorized Participant who has executed a
Participant Agreement. Investors making a redemption request should be aware
that such request must be in the form specified by such Authorized Participant.
Investors making a request to redeem Creation Units should allow sufficient time
to permit proper submission of the request by an Authorized Participant and
transfer of the Shares to the Trust’s Transfer Agent; such investors should
allow for the additional time that may be required to effect redemptions through
their banks, brokers or other financial intermediaries if such intermediaries
are not Authorized Participants.
Additional
Redemption Procedures.
In connection with taking delivery of Shares of Fund Securities upon redemption
of Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank or other custody providers in each jurisdiction in
which any of the Fund Securities are customarily traded, to which account such
Fund Securities will be delivered. Deliveries of redemption proceeds generally
will be made within one business day of the trade date.
In
addition, an investor may request a redemption in cash that a Fund may, in its
sole discretion, permit. In either case, the investor will receive a cash
payment equal to the NAV of its Shares based on the NAV of Shares of the
applicable Fund next determined after the redemption request is received in
proper form (minus a redemption transaction fee, if applicable, and additional
charge for requested cash redemptions specified above, to offset the Trust’s
brokerage and other transaction costs associated with the disposition of Fund
Securities). A Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities but does not differ in NAV.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Funds (whether or not it otherwise
permits cash redemptions) reserve the right to redeem Creation Units for cash to
the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
“qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status to receive Fund Securities.
Because
the portfolio securities of the Funds may trade on other exchanges on days that
the Exchange is closed or are otherwise not Business Days for such Fund,
shareholders may not be able to redeem their Shares of the applicable Fund, or
to purchase or sell Shares of the applicable Fund on the Exchange, on days when
the NAV of the applicable Fund could be significantly affected by events in the
relevant foreign markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to a Fund (1) for any period during which the Exchange is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the Exchange is suspended or restricted; (3) for any period during
which an emergency exists as a result of which disposal of the Shares of the
applicable Fund or determination of the NAV of the Shares is not reasonably
practicable; or (4) in such other circumstance as is permitted by the
SEC.
DETERMINATION
OF NAV
NAV
per Share for a Fund is computed by dividing the value of the net assets of the
applicable Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
Shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management fees, are accrued daily and considered for purposes of
determining NAV. The NAV of each Fund is calculated by Fund Services and
determined at the scheduled close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open, provided
that fixed-income assets may be valued as of the announced closing time for
trading in fixed-income instruments on any day that the Securities Industry and
Financial Markets Association (“SIFMA”) announces an early closing time.
Pursuant
to Rule 2a-5 under the 1940 Act, the Board has appointed the Adviser as the
Funds’ valuation designee (the “Valuation Designee”) to perform all fair
valuations of each Fund’s portfolio investments, subject to the Board’s
oversight. As the Valuation Designee, the Adviser has established procedures for
its fair valuation of each Fund’s portfolio investments. These procedures
address, among other things, determining when market quotations are not readily
available or reliable and the methodologies to be used for determining the fair
value of investments, as well as the use and oversight of third-party pricing
services for fair valuation. The Adviser’s fair value determinations will be
carried out in compliance with Rule 2a-5 and based on fair value methodologies
established and applied by the Adviser and periodically tested to ensure such
methodologies are appropriate and accurate with respect to each Fund’s portfolio
investments. The Adviser’s fair value methodologies may involve obtaining inputs
and prices from third-party pricing services.
In
calculating each Fund’s NAV per Share, each Fund’s investments are generally
valued using market quotations to the extent such market quotations are readily
available. If market quotations are not readily available or are deemed to be
unreliable by the Adviser, the Adviser will fair value such investments and use
the fair value to calculate each Fund’s NAV. When fair value pricing is
employed, the prices of securities used by the Adviser to calculate each Fund’s
NAV may differ from quoted or published prices for the same securities. Due to
the subjective and variable nature of fair value pricing, it is possible that
the fair value determined for a particular security may be materially different
(higher or lower) from the price of the security quoted or published by others,
or the value when trading resumes or is realized upon its sale. There may be
multiple methods that can be used to value a portfolio investment when market
quotations are not readily available. The value established for any portfolio
investment at a point in time might differ from what would be produced using a
different methodology or if it had been priced using market quotations.
DIVIDENDS
AND
DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions and Taxes.”
General
Policies.
Dividends from net investment income, if any, are declared and paid at least
annually by each Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but a Fund may make distributions
on a more frequent basis to comply with the distribution requirements of the
Code to preserve a Fund’s eligibility for treatment as a RIC, in all events in a
manner consistent with the provisions of the 1940 Act.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust.
Each
Fund makes additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the applicable Fund, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve a Fund’s eligibility for treatment as a RIC or to avoid
imposition of income or excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of the Funds through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables to participate in the
dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend
distributions of both income and realized gains will be automatically reinvested
in additional whole Shares issued by the
Trust
of the applicable Fund at NAV per Share. Distributions reinvested in additional
Shares will nevertheless be taxable to Beneficial Owners acquiring such
additional Shares to the same extent as if such distributions had been received
in cash.
FEDERAL
INCOME
TAXES
The
following is only a summary of certain U.S. federal income tax considerations
generally affecting a Fund and its shareholders that supplements the discussion
in the Prospectus. No attempt is made to present a comprehensive explanation of
the federal, state, local or foreign tax treatment of a Fund or its
shareholders, and the discussion here and in the Prospectus is not intended to
be a substitute for careful tax planning.
The
following general discussion of certain U.S. federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders
are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, foreign or local taxes.
Taxation
of the Funds.
Each Fund intends to qualify each year to be treated as a separate RIC under the
Code. As such, the Funds should not be subject to federal income taxes on their
net investment income and capital gains, if any, to the extent that they timely
distribute such income and capital gains to their shareholders. To qualify for
treatment as a RIC, a Fund must distribute annually to its shareholders at least
the sum of 90% of its net investment income (generally including the excess of
net short-term capital gains over net long-term capital losses) and 90% of its
net tax-exempt interest income, if any (the “Distribution Requirement”) and also
must meet several additional requirements. Among these requirements are the
following: (i) at least 90% of the applicable Fund’s gross income each taxable
year must be derived from dividends, interest, payments with respect to certain
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income derived with respect to its business of
investing in such stock, securities or foreign currencies and net income derived
from interests in qualified publicly traded partnerships (the “Qualifying Income
Requirement”); and (ii) at the end of each quarter of the Fund’s taxable year,
the Fund’s assets must be diversified so that (a) at least 50% of the value of
the Fund’s total assets is represented by cash and cash items, U.S. government
securities, securities of other RICs, and other 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 the Fund’s total assets and to not more than 10%
of the outstanding voting securities of such issuer, including the equity
securities of a qualified publicly traded partnership, and (b) not more than 25%
of the value of its total assets is invested, including through corporations in
which the Fund owns a 20% or more voting stock interest, in the securities
(other than U.S. government securities or securities of other RICs) of any one
issuer, the securities (other than securities of other RICs) of two or more
issuers which the applicable Fund controls and which are engaged in the same,
similar, or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships (the “Diversification Requirement”).
To
the extent a Fund makes investments that may generate income that is not
qualifying income, including certain derivatives, the Fund will seek to restrict
the resulting income from such investments so that the Fund’s non-qualifying
income does not exceed 10% of its gross income.
Although
the Funds intend to distribute substantially all of their net investment income
and may distribute their capital gains for any taxable year, the Funds will be
subject to federal income taxation to the extent any such income or gains are
not distributed. Each Fund is treated as a separate corporation for federal
income tax purposes. A Fund therefore is considered to be a separate entity in
determining its treatment under the rules for RICs described herein. The
requirements (other than certain organizational requirements) for qualifying RIC
status are determined at the fund level rather than at the Trust level.
If
a Fund fails to satisfy the Qualifying Income Requirement or the Diversification
Requirement in any taxable year, the applicable Fund may be eligible for relief
provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. Additionally, relief is provided for certain
de
minimis
failures of the Diversification Requirement where a Fund corrects the failure
within a specified period of time. To be eligible for the relief provisions with
respect to a failure to meet the Diversification Requirement, a Fund may be
required to dispose of certain assets. If these relief provisions were not
available to a Fund and it were to fail to qualify for treatment as a RIC for a
taxable year, all of its taxable income would be subject to tax at the regular
21% corporate rate without any deduction for distributions to shareholders, and
its distributions (including capital gains distributions) generally would be
taxable to the shareholders of the applicable Fund as ordinary income dividends,
subject to the dividends received deduction for corporate shareholders and the
lower tax rates on qualified dividend income received by non-corporate
shareholders, subject to certain limitations. To requalify for treatment as a
RIC in a subsequent taxable year, a Fund would be required to satisfy the RIC
qualification requirements for that year and to distribute any earnings and
profits from any year in which the applicable Fund failed to qualify for tax
treatment as a RIC. If a Fund failed to qualify as a RIC for a period greater
than two taxable years, it would generally be required to pay a Fund-level tax
on certain net built in gains recognized with respect to certain of its assets
upon a disposition of such assets within five years of qualifying as a RIC in a
subsequent year. The Board reserves the right not to maintain the qualification
of a Fund for treatment as a RIC if it determines such course of action to be
beneficial to shareholders. If a Fund determines that it will not qualify as a
RIC, the applicable Fund will establish procedures to reflect the anticipated
tax liability in the Fund’s NAV.
A
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, a Fund may carry a net
capital loss from any taxable year forward indefinitely to offset its capital
gains, if any, in years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they will not result in U.S. federal
income tax liability to the applicable Fund and may not be distributed as
capital gains to its shareholders. Generally, a Fund may not carry forward any
losses other than net capital losses. The carryover of capital losses may be
limited under the general loss limitation rules if the Fund experiences an
ownership change as defined in the Code.
The
table below shows the capital loss carry-forward amounts for each of the Funds
as of August 31, 2022. These amounts do not expire.
|
|
|
|
|
|
|
| |
| Short-Term |
Long-Term |
Nasdaq-100
Risk
Managed Income Fund |
$64,875,326 |
$65,609,574 |
S&P
500 Risk-Managed Income Fund |
$495,283 |
— |
Dow
Jones Risk-Managed Income Fund |
$386,073 |
$371,693 |
Russell
2000 Risk-Managed Income Fund |
$100,625 |
— |
A
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 the one-year period
ending on October 31 of that year, subject to an increase for any shortfall in
the prior year’s distribution. For this purpose, any ordinary income or capital
gain net income retained by a Fund and subject to corporate income tax will be
considered to have been distributed. The Funds intend 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 completely eliminated. A Fund may in certain circumstances be
required to liquidate Fund investments in order to make sufficient distributions
to avoid federal excise tax liability at a time when the investment adviser
might not otherwise have chosen to do so, and liquidation of investments in such
circumstances may affect the ability of the Fund to satisfy the requirement for
qualification as a RIC.
If
a Fund meets the Distribution Requirement but retains some or all of its income
or gains, it will be subject to federal income tax to the extent any such income
or gains are not distributed. A Fund may designate certain amounts retained as
undistributed net capital gain in a notice to its shareholders, who (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their proportionate shares of the undistributed amount so
designated, (ii) will be entitled to credit their proportionate shares of the
income tax paid by the Fund on that undistributed amount against their federal
income tax liabilities and to claim refunds to the extent such credits exceed
their tax liabilities, and (iii) will be entitled to increase their tax basis,
for federal income tax purposes, in their Shares by an amount equal to the
excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
Taxation
of Shareholders – Distributions.
Each Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income (computed without regard to the
deduction for dividends paid), its net tax-exempt income, if any, and any net
capital gain (net recognized long-term capital gains in excess of net recognized
short-term capital losses, taking into account any capital loss carryforwards).
The distribution of investment company taxable income (as so computed) and net
realized capital gain will be taxable to Fund shareholders regardless of whether
the shareholder receives these distributions in cash or reinvests them in
additional Shares.
Each
Fund (or your broker) will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount of distributions of net capital
gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for
treatment as qualified dividend income, which, subject to certain limitations
and requirements, is taxable to non-corporate shareholders at rates of up to
20%. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares.
Qualified
dividend income includes, in general, subject to certain holding period and
other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign
corporations include those incorporated in possessions of the United States,
those incorporated in certain countries with comprehensive tax treaties with the
United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market
in the United States. Dividends received by a Fund from an underlying fund
taxable as a RIC or from a REIT may be treated as qualified dividend income
generally only to the extent so reported by such underlying fund or REIT,
however, dividends received by a Fund from a REIT are generally not treated as
qualified dividend income. If 95% or more of a Fund’s gross income (calculated
without taking into account net capital gain derived from sales or other
dispositions of stock or securities) consists of qualified dividend income, the
Fund may report all distributions of such income as qualified dividend income.
Certain of the Funds’ investment strategies may limit their ability to make
distributions eligible to be treated as qualified dividend income.
Fund
dividends will not be treated as qualified dividend income if a Fund does not
meet holding period and other requirements with respect to dividend paying
stocks in its portfolio, and the shareholder does not meet holding period and
other requirements with respect to the Shares on which the dividends were paid.
Distributions by a Fund of its net short-term capital gains will be taxable as
ordinary income. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares. Distributions may be subject to state and
local taxes.
In
the case of corporate shareholders, certain dividends received by a Fund from
U.S. corporations (generally, dividends received by the Fund in respect of any
share of stock (1) with a tax holding period of at least 46 days during the
91-day period beginning on the date that is 45 days before the date on which the
stock becomes ex-dividend as to that dividend and (2) that is held in an
unleveraged position) and distributed and appropriately so reported by the Fund
may be eligible for the 50% dividends received deduction. Certain preferred
stock must have a holding period of at least 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes
ex-dividend as to that dividend to be eligible. Capital gain dividends
distributed to a Fund from other RICs are not eligible, and dividends
distributed to a Fund from REITs are generally not eligible for the dividends
received deduction. To qualify for the deduction, corporate shareholders must
meet the minimum holding period requirement stated above with respect to their
Shares, taking into account any holding period reductions from certain hedging
or other transactions or positions that diminish their risk of loss with respect
to their Shares, and, if they borrow to acquire or otherwise incur debt
attributable to Shares, they may be denied a portion of the dividends received
deduction with respect to those Shares. Certain of the Funds’ investment
strategies may limit their ability to make distributions eligible for the
dividends-received deduction for corporate shareholders.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by a Fund in October, November or December and payable to shareholders
of record in such a month that is paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it was declared.
Shareholders
who have not held Shares for a full year should be aware that a Fund may report
and distribute, as ordinary dividends or capital gain dividends, a percentage of
income that is not equal to the percentage of the Fund’s ordinary income or net
capital gain, respectively, actually earned during the applicable shareholder’s
period of investment in the Fund. A taxable shareholder may wish to avoid
investing in a Fund shortly before a dividend or other distribution, because the
distribution will generally be taxable even though it may economically represent
a return of a portion of the shareholder’s investment.
To
the extent that a Fund makes a distribution of income received by the Fund in
lieu of dividends (a “substitute payment”) with respect to securities on loan
pursuant to a securities lending transaction, such income will not constitute
qualified dividend income to individual shareholders and will not be eligible
for the dividends received deduction for corporate shareholders.
If
a Fund’s distributions exceed its earnings and profits, all or a portion of the
distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in a Fund and result in a
higher capital gain or lower capital loss when the Shares on which the
distribution was received are sold. After a shareholder’s basis in the Shares
has been reduced to zero, distributions in excess of earnings and profits will
be treated as gain from the sale of the shareholder’s Shares.
Taxation
of Shareholders – Sale or Exchange of Shares.
A sale or exchange of Shares may give rise to a gain or loss. For tax purposes,
an exchange of your Fund shares of a different fund is the same as a sale. In
general, provided that a shareholder holds Shares as capital assets, any gain or
loss realized upon a taxable disposition of Shares will be treated as long-term
capital gain or loss if Shares have been held for more than 12 months.
Otherwise, such gain or loss on the taxable disposition of Shares will generally
be treated as short-term capital gain or loss. Any loss realized upon a taxable
disposition of Shares held for six months or less will be treated as long-term
capital loss, rather than short-term capital loss, to the extent of any amounts
treated as distributions to the shareholder of long-term capital gain (including
any amounts credited to the shareholder as undistributed capital gains). All or
a portion of any loss realized upon a taxable disposition of Shares may be
disallowed if substantially identical Shares are acquired (through the
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the disposition. In such a case, the basis of
the newly acquired Shares will be adjusted to reflect the disallowed loss.
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for Shares and then may be subsequently adjusted for other applicable
transactions as required by the Code. The difference between the selling price
and the cost basis of Shares generally determines the amount of the capital gain
or loss realized on the sale or exchange of Shares. Contact the broker through
whom you purchased your Shares to obtain information with respect to the
available cost basis reporting methods and elections for your account.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. The ability of Authorized
Participants to receive a full or partial cash redemption of Creation Units of a
Fund may limit the tax efficiency of such Fund. An Authorized Participant who
redeems Creation Units will generally recognize a gain or loss equal to the
difference between the exchanger’s basis in the Creation Units and the sum of
the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The Internal Revenue Service (“IRS”),
however, may assert that a loss realized upon an exchange of securities for
Creation Units cannot currently be deducted under the rules governing “wash
sales” (for a person who does not mark-to-market its portfolio) or on the basis
that there has been no significant change in economic position.
The
Trust, on behalf of the Funds, has the right to reject an order for Creation
Units if the purchaser (or a group of purchasers) would, upon obtaining the
Creation Units so ordered, own 80% or more of the outstanding Shares and if,
pursuant to Section 351 of the Code, a Fund would have a basis in the deposit
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require the provision of information
necessary to determine beneficial Share ownership for purposes of the 80%
determination. If a Fund does issue Creation Units to a purchaser (or a group of
purchasers) that would, upon obtaining the Creation Units so ordered, own 80% or
more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation Units.
Authorized
Participants purchasing or redeeming Creation Units should consult their own tax
advisers with respect to the tax treatment of any creation or redemption
transaction and whether the wash sales rule applies and when a loss may be
deductible.
Taxation
of Shareholders – Net Investment Income Tax.
U.S. individuals with adjusted gross income (subject to certain adjustments)
exceeding certain threshold amounts ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases) are subject to a 3.8%
tax on all or a portion of their “net investment income,” which includes taxable
interest, dividends, and certain capital gains (generally including capital gain
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
Taxation
of Fund Investments.
Certain of a Fund’s investments may be subject to complex provisions of the Code
(including provisions relating to hedging transactions, straddles, integrated
transactions, foreign currency contracts, forward foreign currency contracts,
and notional principal contracts) that, among other things, may affect a Fund’s
ability to qualify as a RIC, affect the character of gains and losses realized
by the Fund (e.g.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require a Fund to mark to market certain types of positions
in its portfolio (i.e.,
treat them as if they were closed out) which may cause the Fund to recognize
income without the Fund receiving cash with which to make distributions in
amounts sufficient to enable the Fund to satisfy the RIC distribution
requirements for avoiding income and excise taxes. A Fund intends to monitor its
transactions, intends to make appropriate tax elections, and intends to make
appropriate entries in its books and records to mitigate the effect of these
rules and preserve the Fund’s qualification for treatment as a RIC. To the
extent a Fund invests in an underlying fund that is taxable as a RIC, the rules
applicable to the tax treatment of complex securities will also apply to the
underlying funds that also invest in such complex securities and
investments.
Each
Fund is required for federal income tax purposes to mark to market and recognize
as income for each taxable year its net unrealized gains and losses on certain
futures and options contracts subject to Code Section 1256 (“Section 1256
Contract”) as of the end of the year as well as those actually realized during
the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. A Fund may be required to defer the recognition
of losses on Section 1256 Contracts to the extent of any unrecognized gains on
offsetting positions held by the Fund. These provisions may also require a Fund
to mark-to-market certain types of positions in its portfolios (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the distribution requirement and for avoiding the excise
tax discussed above. Accordingly, in order to avoid certain income and excise
taxes, a Fund may be required to liquidate its investments at a time when the
investment adviser might not otherwise have chosen to do so.
Offsetting
positions held by each Risk-Managed Income Fund (e.g.,
the Fund’s options collar strategy) involving certain derivative instruments,
such as options, forward, and futures, as well as its long and short positions
in portfolio securities, may be considered, for U.S. federal income tax
purposes, to constitute “straddles.” Straddles are defined to include
“offsetting positions” in actively traded personal property. For instance, a
straddle can arise if the Fund writes a certain covered call option on a stock
(i.e., a call on a stock owned by the Fund), or writes a call option on a stock
index to the extent the Fund’s stock holdings (and any subset thereof) and the
index on which it has written a call overlap sufficiently to constitute a
straddle under applicable Treasury Regulations. The tax treatment of “straddles”
is governed by section 1092 of the Code which, in certain circumstances,
overrides or modifies the provisions of Code Section 1256 described above. If
the Fund is treated as entering into a “straddle” and at least one (but not all)
of the Fund’s positions in derivative contracts comprising a part of such
straddle is a Section 1256 Contract, described above, then such straddle could
be characterized as a “mixed straddle.” The Fund may make one or more elections
with respect to “mixed straddles.” Depending upon which election is made, if
any, the results with respect to the Fund may differ. Generally, to the extent
the straddle rules apply to positions established by the Fund, losses realized
by the Fund may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be characterized as short-term capital gain. In
addition, the existence of a straddle can cause the holding periods to be tolled
on the offsetting positions. As a result, the straddle rules could cause
distributions that would otherwise constitute “qualified dividend income” or
qualify for the dividends received deduction to fail to satisfy the applicable
holding period requirements described above. Furthermore, the Fund may be
required to capitalize, rather than deduct currently, any interest expense and
carrying charges applicable to a position that is part of a straddle, including
any interest on indebtedness incurred or continued to purchase or carry any
positions that are part of a straddle. The application of the straddle rules to
certain offsetting Fund positions can therefore affect the amount, timing and/or
character of distributions to shareholders, and may result in significant
differences from the amount, timing and/or character of distributions that would
have been made by the Fund if it had not entered into offsetting positions in
respect of certain of its portfolio securities.
If
a Fund enters into a “constructive sale” of any appreciated financial position
in its portfolio, the Fund will be treated as if it had sold and immediately
repurchased the property and must recognize gain (but not loss) with respect to
that position. A constructive sale of an appreciated financial position occurs
when the Fund enters into certain offsetting transactions with respect to the
same or substantially identical property, including, but not limited to: (i) a
short sale; (ii) an offsetting notional principal contract; (iii) a futures or
forward contract; or (iv) other transactions identified in future Treasury
Regulations. The character of the gain from constructive sales will depend upon
the Fund’s holding period in the appreciated financial position. Losses realized
from a sale of a position that was previously the subject of a constructive sale
will be recognized when the position is subsequently disposed of. The character
of such losses will depend upon the Fund’s holding period in the position
beginning with the date the constructive sale was deemed to have occurred and
the application of various loss deferral provisions in the Code. Constructive
sale treatment does not apply to certain closed transactions, including if such
a transaction is closed on or before the 30th day after the close of the Fund’s
taxable year and the Fund holds the appreciated financial position unhedged
throughout the 60-day period beginning with the day such transaction was
closed.
Foreign
Investments.
Dividends and interest received by a Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
treaties between certain countries and the U.S. may reduce or eliminate such
taxes.
If
more than 50% of the value of a Fund’s assets at the close of any taxable year
consists of stock or securities of foreign corporations, which for this purpose
may include obligations of foreign governmental issuers, the Fund may elect, for
U.S. federal income tax purposes, to treat any foreign income or withholding
taxes paid by the Fund as paid by its shareholders. For any year that a Fund is
eligible for and makes such an election, each shareholder of the Fund will be
required to include in income an amount equal to his or her allocable share of
qualified foreign income taxes paid by the Fund, and shareholders will be
entitled, subject to certain holding period requirements and other limitations,
to credit their portions of these amounts against their U.S. federal income tax
due, if any, or to deduct their portions from their U.S. taxable income, if any.
No deductions for foreign taxes paid by a Fund may be claimed, however, by
non-corporate shareholders who do not itemize deductions. No deduction for such
taxes will be permitted to individuals in computing their alternative minimum
tax liability. Shareholders that are not subject to U.S. federal income tax, and
those who invest in a Fund through tax-advantaged accounts (including those who
invest through individual retirement accounts or other tax-advantaged retirement
plans), generally will receive no benefit from any tax credit or deduction
passed through by such Fund. Each Fund does not expect to satisfy the
requirements for passing through to its shareholders any share of foreign taxes
paid by the Fund, with the result that shareholders will not include such taxes
in their gross incomes and will not be entitled to a tax deduction or credit for
such taxes on their own tax returns. Foreign taxes paid by a Fund will reduce
the return from the Fund’s investments.
If
a Fund holds shares in a “passive foreign investment company” (“PFIC”), it may
be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on a Fund in respect of deferred taxes arising
from such distributions or gains.
Each
Fund may be eligible to treat a PFIC as a “qualified electing fund” (“QEF”)
under the Code in which case, in lieu of the foregoing requirements, the Fund
will be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts will be subject to the 90% and excise
tax distribution requirements described above. To make this election, a Fund
would be required to obtain certain annual information from the PFICs in which
it invests, which may be difficult or impossible to obtain. Alternatively, a
Fund may make a mark-to-market election that will result in such Fund being
treated as if it had sold and repurchased its PFIC stock at the end of each
year. In such case, a Fund would report any gains resulting from such deemed
sales as ordinary income and would deduct any losses resulting from such deemed
sales as ordinary losses to the extent of previously recognized gains. The
election must be made separately for each PFIC owned by a Fund and, once made,
is effective for all subsequent taxable years, unless revoked with the consent
of the IRS. By making the election, a Fund could potentially ameliorate the
adverse tax consequences with respect to its ownership of shares in a PFIC, but
in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock. A Fund may have to distribute this excess income to satisfy the 90%
distribution requirement and to avoid imposition of the 4% excise tax. To
distribute this income and avoid a tax at the fund level, a Fund might be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss.
Each Fund intends to make the appropriate tax elections, if possible, and take
any additional steps that are necessary to mitigate the effect of these rules.
Amounts included in income each year by a Fund arising from a QEF election, will
be “qualifying income” under the Qualifying Income Requirement (as described
above) even if not distributed to the Fund, if the Fund derives such income from
its business of investing in stock, securities or currencies.
A
Fund’s transactions in foreign currencies and forward foreign currency contracts
will generally be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require a Fund to mark-to-market certain types of positions
in its portfolio (i.e., treat them as if they were closed out) which may cause
the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the Distribution Requirements and
for avoiding the excise tax described above. The Funds intend to monitor their
transactions, intend to make the appropriate tax elections, and intend to make
the appropriate entries in their books and records when they acquire any foreign
currency or forward foreign currency contract in order to
mitigate
the effect of these rules so as to prevent disqualification of a Fund as a RIC
and minimize the imposition of income and excise taxes.
Additional
Tax Information Concerning REITs.
A Fund may invest in REITs. Investments in REIT equity securities may require a
Fund to accrue and distribute income not yet received. To generate sufficient
cash to make the requisite distributions, a Fund may be required to sell
securities in its portfolio (including when it is not advantageous to do so)
that it otherwise would have continued to hold. A Fund’s investments in REIT
equity securities may at other times result in a Fund’s receipt of cash in
excess of the REIT’s earnings; if a Fund distributes these amounts, these
distributions could constitute a return of capital to such Fund’s shareholders
for federal income tax purposes. Dividends paid by a REIT, other than capital
gain distributions, will be taxable as ordinary income up to the amount of the
REIT’s current and accumulated earnings and profits. Capital gain dividends paid
by a REIT to a Fund will be treated as long-term capital gains by the Fund and,
in turn, may be distributed by the Fund to its shareholders as a capital gain
distribution. Dividends received by a Fund from a REIT generally will not
constitute qualified dividend income or qualify for the dividends received
deduction. If a REIT is operated in a manner such that it fails to qualify as a
REIT, an investment in the REIT would become subject to double taxation, meaning
the taxable income of the REIT would be subject to federal income tax at the
regular corporate rate without any deduction for dividends paid to shareholders
and the dividends would be taxable to shareholders as ordinary income (or
possibly as qualified dividend income) to the extent of the REIT’s current and
accumulated earnings and profits.
REITs
in which a Fund invests often do not provide complete and final tax information
to the Funds until after the time that the Funds issue a tax reporting
statement. As a result, a Fund may at times find it necessary to reclassify the
amount and character of its distributions to you after it issues your tax
reporting statement. When such reclassification is necessary, you will be sent a
corrected, final Form 1099-DIV to reflect the reclassified information. If you
receive a corrected Form 1099-DIV, use the information on this corrected form,
and not the information on the previously issued tax reporting statement, in
completing your tax returns.
“Qualified
REIT dividends” (i.e., ordinary REIT dividends other than capital gain dividends
and portions of REIT dividends designated are qualified dividend income eligible
for capital gain tax rates) as eligible for a 20% deduction by non-corporate
taxpayers. This deduction, if allowed in full, equates to a maximum effective
tax rate of 29.6% (37% top rate applied to income after 20% deduction).
Distributions by a Fund to its shareholders that are attributable to qualified
REIT dividends received by such Fund and which such Fund properly reports as
“section 199A dividends,” are treated as “qualified REIT dividends” in the hands
of non-corporate shareholders. A section 199A dividend is treated as a qualified
REIT dividend only if the shareholder receiving such dividend holds the
dividend-paying RIC 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. A Fund is permitted to report such part of its dividends as
section 199A dividends as are eligible, but is not required to do
so.
Backup
Withholding.
Each Fund will be required in certain cases to withhold (as “backup
withholding”) on amounts payable to any shareholder who (1) fails to provide a
correct taxpayer identification number certified under penalty of perjury; (2)
is subject to backup withholding by the IRS for failure to properly report all
payments of interest or dividends; (3) fails to provide a certified statement
that he or she is not subject to “backup withholding”; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident
alien). The backup withholding rate is currently 24%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on
shareholders who are neither citizens nor permanent residents of the
U.S.
Non-U.S.
Shareholders.
Any non-U.S. investors in a Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisers prior to investing in the
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
Each Fund may, under certain circumstances, report all or a portion of a
dividend as an “interest-related dividend” or a “short-term capital gain
dividend,” which would generally be exempt from this 30% U.S. withholding tax,
provided certain other requirements are met. Short-term capital gain dividends
received by a nonresident alien individual who is present in the U.S. for a
period or periods aggregating 183 days or more during the taxable year are not
exempt from this 30% withholding tax. Gains realized by foreign shareholders
from the sale or other disposition of Shares generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from a Fund. Backup withholding will not be applied to payments that are subject
to the 30% (or lower applicable treaty rate) withholding tax described in this
paragraph. Different tax consequences may result if the foreign shareholder is
engaged in a trade or business within the United States. In addition, the tax
consequences to a foreign shareholder entitled to claim the benefits of a tax
treaty may be different than those described above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
each Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In general, no such withholding will be required with respect to a
U.S. person or non-U.S. person that timely provides the certifications required
by a fund or its agent on a valid IRS Form W-9 or applicable series of IRS Form
W-8, respectively. Shareholders potentially subject to withholding include
foreign financial institutions (“FFIs”), such as non-U.S. investment funds, and
non-financial foreign entities (“NFFEs”). To avoid withholding under FATCA, an
FFI generally must enter into an information sharing agreement with the IRS in
which it agrees to report certain identifying information (including name,
address, and taxpayer identification number) with respect to its U.S. account
holders (which, in the case of an entity shareholder, may include its direct and
indirect U.S. owners), and an
NFFE
generally must identify and provide other required information to a Fund or
other withholding agent regarding its U.S. owners, if any. Such non-U.S.
shareholders also may fall into certain exempt, excepted or deemed compliant
categories as established by regulations and other guidance. A non-U.S.
shareholder resident or doing business in a country that has entered into an
intergovernmental agreement with the United States to implement FATCA will be
exempt from FATCA withholding provided that the shareholder and the applicable
foreign government comply with the terms of the agreement.
A
non-U.S. entity that invests in a Fund will need to provide the fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in a Fund should consult their tax
advisors in this regard.
Tax-Exempt
Shareholders.
Certain tax-exempt shareholders, including qualified pension plans, IRAs, salary
deferral arrangements, 401(k) plans, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated
business taxable income (“UBTI”). Tax-exempt entities are not permitted to
offset losses from one unrelated trade or business against the income or gain of
another unrelated trade or business. Certain net losses incurred prior to
January 1, 2018 are permitted to offset gain and income created by an
unrelated trade or business, if otherwise available. Under current law, each
Fund generally serves to block UBTI from being realized by its tax-exempt
shareholders with respect to their shares of Fund income. However,
notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by
virtue of their investment in a Fund if, for example, (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii)
the Fund invests in a REIT that is a taxable mortgage pool (“TMP”) or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC, or
(iii) Shares constitute debt-financed property in the hands of the tax-exempt
shareholders within the meaning of section 514(b) of the Code. Charitable
remainder trusts are subject to special rules and should consult their tax
advisers. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult with their tax advisers regarding these issues.
A
Fund’s shares held in a tax-qualified retirement account will generally not be
subject to federal taxation on income and capital gains distributions from the
Fund until a shareholder begins receiving payments from their retirement
account. Because each shareholder’s tax situation is different, shareholders
should consult their tax advisors with specific reference to their own tax
situations, including their state, local, and foreign tax
liabilities.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss on
disposition of Shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on IRS Form 8886. Direct shareholders of portfolio securities are in
many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
Other
Issues.
In those states which have income tax laws, the tax treatment of a Fund and of
Fund shareholders with respect to distributions by the Fund may differ from
federal tax treatment.
FINANCIAL
STATEMENTS
The
Annual
Report
for the Funds for the fiscal year ended August 31, 2022 is a separate document
and the financial statements and accompanying notes appearing therein are
incorporated by reference into this SAI. You may request a copy of the Funds’
Annual Report at no charge by calling 1‑800‑617‑0004 or through the Funds’
website at www.etf.nationwide.com.
ADDITIONAL
NOTICES
Additional
Notices for the Russell 2000 Risk-Managed Income Fund only
FTSE
Russell (“Russell”) is the Reference Index Provider for the Reference Index. The
Reference Index Provider is not affiliated with the Fund, the Adviser, the
Distributor or any of their respective affiliates. The Adviser or its affiliates
have entered into a license agreement with the Reference Index Provider to use
the Reference Index.
The
Fund has been developed solely by the Adviser. The Fund is not in any way
connected to or sponsored, endorsed, sold or promoted by the London Stock
Exchange Group plc and its group undertakings (collectively, the “LSE Group”).
FTSE Russell is a trading name of certain of the LSE Group companies. All rights
in the Russell 2000 Index (the “Index”) vest in the relevant LSE Group company
which owns the Index. “Russell®” is a trademark of the relevant LSE Group
company and is used by any other LSE Group company under license. The Index is
calculated by or on behalf of FTSE International Limited or its affiliate, agent
or partner. The LSE Group does not accept any liability whatsoever to any person
arising out of (a) the use of, reliance on or any error in the Index or (b)
investment in or operation of the Fund. The LSE Group makes no claim,
prediction, warranty or representation either as to the results to be obtained
from the Fund or the suitability of the Index for the purpose to which it is
being put by the Adviser.
Additional
Notices for the S&P 500 Risk-Managed Income Fund and the Dow Jones
Risk-Managed Income Fund only
Each
Reference Index is a product of S&P Dow Jones Indices LLC, a division of
S&P Global, or its affiliates (“SPDJI”), and has been licensed for use by
the Adviser. Standard & Poor’s®, S&P®, and S&P 500® are registered
trademarks of Standard & Poor’s Financial
Services
LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark
Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by
SPDJI and sublicensed for certain purposes by the Adviser. It is not possible to
invest directly in an index. The Funds are not sponsored, endorsed, sold or
promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates
(collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices makes no
representation or warranty, express or implied, to the owners of the Funds or
any member of the public regarding the advisability of investing in securities
generally or in the Funds particularly. Past performance of an index is not an
indication or guarantee of future results. S&P Dow Jones Indices’ only
relationship to the Adviser with respect to each Reference Index is the
licensing of each Reference Index and certain trademarks, service marks and/or
trade names of S&P Dow Jones Indices and/or its licensors. Each Reference
Index is determined, composed and calculated by S&P Dow Jones Indices
without regard to the Adviser or the Funds. S&P Dow Jones Indices has no
obligation to take the needs of the Adviser or the owners of the Funds into
consideration in determining, composing or calculating each Reference Index.
S&P Dow Jones Indices is not responsible for and has not participated in the
determination of the prices, and amount of shares of the Funds or the timing of
the issuance or sale of shares of the Funds or in the determination or
calculation of the equation by which shares of the Funds are to be converted
into cash, surrendered or redeemed, as the case may be. S&P Dow Jones
Indices has no obligation or liability in connection with the administration,
marketing or trading of the Funds. There is no assurance that investment
products based on each Reference Index will accurately track index performance
or provide positive investment returns. S&P Dow Jones Indices LLC is not an
investment or tax advisor. A tax advisor should be consulted to evaluate the
impact of any tax-exempt securities on portfolios and the tax consequences of
making any particular investment decision. Inclusion of a security within an
index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold
such security, nor is it considered to be investment advice.
S&P
DOW JONES INDICES DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR
THE COMPLETENESS OF EACH REFERENCE INDEX OR ANY DATA RELATED THERETO OR ANY
COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION
(INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO. S&P DOW JONES
INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS,
OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY
THE ADVISER, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
EACH REFERENCE INDEX OR WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES
INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR
CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING
LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE.
THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN
S&P DOW JONES INDICES AND THE ADVISER, OTHER THAN THE LICENSORS OF S&P
DOW JONES INDICES.
APPENDIX
A
ISS
Proxy Voting Policies and Guidelines
U
N I T E D S T A T E S
Proxy
Voting Guidelines
Benchmark
Policy Recommendations
TITLE
Effective
for Meetings on or after February 1, 2022 Published December 13,
2021
I
S S G O V E R N A N C E . C O M
©
2021 | Institutional Shareholder Services and/or its affiliates
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T
A B L E O F C O N T E N T
S
Coverage 7
1.Board
of Directors 8
Voting
on Director Nominees in Uncontested
Elections 8
Independence 8
ISS
Classification of Directors – U.S. 9
Composition 11
Attendance 11
Overboarded
Directors 11
Gender
Diversity 11
Racial
and/or Ethnic Diversity 12
Responsiveness 12
Accountability 13
Poison
Pills 13
Classified
Board Structure 13
Removal
of Shareholder Discretion on Classified
Boards 13
Director
Performance Evaluation 13
Unilateral
Bylaw/Charter Amendments and Problematic Capital
Structures 13
Unequal
Voting Rights 14
Problematic
Capital Structure - Newly Public
Companies 14
Common
Stock Capital Structure with Unequal Voting
Rights 14
Problematic
Governance Structure - Newly Public
Companies 15
Management
Proposals to Ratify Existing Charter or Bylaw
Provisions 15
Restricting
Binding Shareholder Proposals 15
Problematic
Audit-Related Practices 15
Problematic
Compensation Practices 16
Problematic
Pledging of Company Stock 16
Climate
Accountability 16
Governance
Failures 17
Voting
on Director Nominees in Contested
Elections 17
Vote-No
Campaigns 17
Proxy
Contests/Proxy Access 17
Other
Board-Related Proposals 18
Adopt
Anti-Hedging/Pledging/Speculative Investments
Policy 18
Board
Refreshment 18
Term/Tenure
Limits 18
Age
Limits 18
Board
Size 18
Classification/Declassification
of the Board 18
CEO
Succession Planning 19
Cumulative
Voting 19
Director
and Officer Indemnification and Liability
Protection 19
Establish/Amend
Nominee Qualifications 19
Establish
Other Board Committee Proposals 20
Filling
Vacancies/Removal of Directors 20
Independent
Board Chair 20
Majority
of Independent Directors/Establishment of Independent
Committees 21
Majority
Vote Standard for the Election of
Directors 21
Proxy
Access 21
Require
More Nominees than Open Seats 21
Shareholder
Engagement Policy (Shareholder Advisory
Committee) 21
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2.Audit-Related 23
Auditor
Indemnification and Limitation of
Liability 23
Auditor
Ratification 23
Shareholder
Proposals Limiting Non-Audit Services 23
Shareholder
Proposals on Audit Firm Rotation 23
3.Shareholder
Rights & Defenses 25
Advance
Notice Requirements for Shareholder
Proposals/Nominations 25
Amend
Bylaws without Shareholder Consent 25
Control
Share Acquisition Provisions 25
Control
Share Cash-Out Provisions 25
Disgorgement
Provisions 26
Fair
Price Provisions 26
Freeze-Out
Provisions 26
Greenmail 26
Shareholder
Litigation Rights 26
Federal
Forum Selection Provisions 26
Exclusive
Forum Provisions for State Law Matters 27
Fee
shifting 27
Net
Operating Loss (NOL) Protective
Amendments 27
Poison
Pills (Shareholder Rights Plans) 28
Shareholder
Proposals to Put Pill to a Vote and/or Adopt a Pill
Policy 28
Management
Proposals to Ratify a Poison Pill 28
Management
Proposals to Ratify a Pill to Preserve Net Operating Losses
(NOLs) 28
Proxy
Voting Disclosure, Confidentiality, and
Tabulation 29
Ratification
Proposals: Management Proposals to Ratify Existing Charter or Bylaw
Provisions 29
Reimbursing
Proxy Solicitation Expenses 29
Reincorporation
Proposals 30
Shareholder
Ability to Act by Written Consent 30
Shareholder
Ability to Call Special Meetings 30
Stakeholder
Provisions 31
State
Antitakeover Statutes 31
Supermajority
Vote Requirements 31
Virtual
Shareholder Meetings 31
4.Capital/Restructuring 32
Capital 32
Adjustments
to Par Value of Common Stock 32
Common
Stock Authorization 32
General
Authorization Requests 32
Specific
Authorization Requests 33
Dual
Class Structure 33
Issue
Stock for Use with Rights Plan 33
Preemptive
Rights 33
Preferred
Stock Authorization 33
General
Authorization Requests 33
Recapitalization
Plans 34
Reverse
Stock Splits 35
Share
Repurchase Programs 35
Share
Repurchase Programs Shareholder Proposals 35
Stock
Distributions: Splits and Dividends 35
Tracking
Stock 35
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Restructuring 36
Appraisal
Rights 36
Asset
Purchases 36
Asset
Sales 36
Bundled
Proposals 36
Conversion
of Securities 36
Corporate
Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged
Buyouts/Wrap Plans 37
Formation
of Holding Company 37
Going
Private and Going Dark Transactions (LBOs and Minority
Squeeze-outs) 37
Joint
Ventures 38
Liquidations 38
Mergers
and Acquisitions 38
Private
Placements/Warrants/Convertible
Debentures 39
Reorganization/Restructuring
Plan (Bankruptcy) 40
Special
Purpose Acquisition Corporations (SPACs) 40
Special
Purpose Acquisition Corporations (SPACs) - Proposals for
Extensions 41
Spin-offs 41
Value
Maximization Shareholder Proposals 41
5.Compensation 42
Executive
Pay Evaluation 42
Advisory
Votes on Executive Compensation—Management Proposals
(Say-on-Pay) 42
Pay-for-Performance
Evaluation 43
Problematic
Pay Practices 43
Compensation
Committee Communications and
Responsiveness 44
Frequency
of Advisory Vote on Executive Compensation ("Say When on
Pay") 45
Voting
on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed
Sale 45
Equity-Based
and Other Incentive Plans 45
Shareholder
Value Transfer (SVT) 46
Three-Year
Burn Rate 47
Egregious
Factors 48
Liberal
Change in Control Definition 48
Repricing
Provisions 48
Problematic
Pay Practices or Significant Pay-for-Performance
Disconnect 48
Amending
Cash and Equity Plans (including Approval for Tax Deductibility
(162(m)) 48
Specific
Treatment of Certain Award Types in Equity Plan
Evaluations 49
Dividend
Equivalent Rights 49
Operating
Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts
(REITs) 49
Other
Compensation Plans 49
401(k)
Employee Benefit Plans 49
Employee
Stock Ownership Plans (ESOPs) 50
Employee
Stock Purchase Plans—Qualified Plans 50
Employee
Stock Purchase Plans—Non-Qualified Plans 50
Option
Exchange Programs/Repricing Options 50
Stock
Plans in Lieu of Cash 51
Transfer
Stock Option (TSO) Programs 51
Director
Compensation 52
Shareholder
Ratification of Director Pay Programs 52
Equity
Plans for Non-Employee Directors 52
Non-Employee
Director Retirement Plans 52
Shareholder
Proposals on Compensation 53
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Bonus
Banking/Bonus Banking “Plus” 53
Compensation
Consultants—Disclosure of Board or Company’s
Utilization 53
Disclosure/Setting
Levels or Types of Compensation for Executives and
Directors 53
Golden
Coffins/Executive Death Benefits 53
Hold
Equity Past Retirement or for a Significant Period of
Time 53
Pay
Disparity 54
Pay
for Performance/Performance-Based Awards 54
Pay
for Superior Performance 54
Pre-Arranged
Trading Plans (10b5-1 Plans) 55
Prohibit
Outside CEOs from Serving on Compensation
Committees 55
Recoupment
of Incentive or Stock Compensation in Specified
Circumstances 55
Severance
Agreements for Executives/Golden
Parachutes 56
Share
Buyback Impact on Incentive Program
Metrics 56
Supplemental
Executive Retirement Plans (SERPs) 56
Tax
Gross-Up Proposals 56
Termination
of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of
Unvested Equity
............................................................................................................................................................................56
6.Routine/Miscellaneous 58
Adjourn
Meeting 58
Amend
Quorum Requirements 58
Amend
Minor Bylaws 58
Change
Company Name 58
Change
Date, Time, or Location of Annual Meeting 58
Other
Business 58
7.Social
and Environmental Issues 59
Global
Approach 59
Endorsement
of Principles 59
Animal
Welfare 59
Animal
Welfare Policies 59
Animal
Testing 60
Animal
Slaughter 60
Consumer
Issues 60
Genetically
Modified Ingredients 60
Reports
on Potentially Controversial Business/Financial
Practices 60
Pharmaceutical
Pricing, Access to Medicines, and Prescription Drug
Reimportation 61
Product
Safety and Toxic/Hazardous Materials 61
Tobacco-Related
Proposals 61
Climate
Change 62
Say
on Climate (SoC) Management Proposals 62
Say
on Climate (SoC) Shareholder Proposals 62
Climate
Change/Greenhouse Gas (GHG) Emissions 63
Energy
Efficiency 63
Renewable
Energy 64
Diversity 64
Board
Diversity 64
Equality
of Opportunity 64
Gender
Identity, Sexual Orientation, and Domestic Partner
Benefits 65
Gender,
Race/Ethnicity Pay Gap 65
Racial
Equity and/or Civil Rights Audit
Guidelines 65
Environment
and Sustainability 65
Facility
and Workplace Safety 65
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General
Environmental Proposals and Community Impact
Assessments 66
Hydraulic
Fracturing 66
Operations
in Protected Areas 66
Recycling 66
Sustainability
Reporting 67
Water
Issues 67
General
Corporate Issues 67
Charitable
Contributions 67
Data
Security, Privacy, and Internet Issues 67
Environmental,
Social, and Governance (ESG) Compensation-Related
Proposals 67
Human
Rights, Human Capital Management, and International
Operations 68
Human
Rights Proposals 68
Mandatory
Arbitration 68
Operations
in High Risk Markets 69
Outsourcing/Offshoring 69
Sexual
Harassment 69
Weapons
and Military Sales 69
Political
Activities 69
Lobbying 69
Political
Contributions 70
Political
Ties 70
8.Mutual
Fund Proxies 71
Election
of Directors 71
Closed
End Funds- Unilateral Opt-In to Control Share Acquisition
Statutes 71
Converting
Closed-end Fund to Open-end Fund 71
Proxy
Contests 71
Investment
Advisory Agreements 71
Approving
New Classes or Series of Shares 71
Preferred
Stock Proposals 71
1940
Act Policies 72
Changing
a Fundamental Restriction to a Nonfundamental
Restriction 72
Change
Fundamental Investment Objective to
Nonfundamental 72
Name
Change Proposals 72
Change
in Fund's Subclassification 72
Business
Development Companies—Authorization to Sell Shares of Common Stock at a Price
below Net Asset Value 72
Disposition
of Assets/Termination/Liquidation 73
Changes
to the Charter Document 73
Changing
the Domicile of a Fund 73
Authorizing
the Board to Hire and Terminate Subadvisers Without Shareholder
Approval 73
Distribution
Agreements 73
Master-Feeder
Structure 74
Mergers 74
Shareholder
Proposals for Mutual Funds 74
Establish
Director Ownership Requirement 74
Reimburse
Shareholder for Expenses Incurred 74
Terminate
the Investment Advisor 74
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C
o v e r a g e
The
U.S. research team provides proxy analyses and voting recommendations for the
common shareholder meetings of U.S. - incorporated companies that are
publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are
held in our institutional investor clients' portfolios. Coverage generally
includes corporate actions for common equity holders, such as written consents
and bankruptcies. ISS’ U.S. coverage includes investment companies (including
open-end funds, closed-end funds, exchange-traded funds, and unit investment
trusts), limited partnerships (“LPs”), master limited partnerships (“MLPs”),
limited liability companies (“LLCs”), and business development companies. ISS
reviews its universe of coverage on an annual basis, and the coverage is subject
to change based on client need and industry trends.
Foreign-incorporated
companies
In
addition to U.S.- incorporated, U.S.- listed companies, ISS’ U.S. policies are
applied to certain foreign- incorporated company analyses. Like the SEC, ISS
distinguishes two types of companies that list but are not incorporated in the
U.S.:
▪U.S.
Domestic Issuers – which have a majority of outstanding shares held in the U.S.
and meet other criteria, as determined by the SEC, and are subject to the same
disclosure and listing standards as U.S. incorporated companies (e.g. they are
required to file DEF14A proxy statements) – are generally covered under
standard
U.S.
policy guidelines.
▪Foreign
Private Issuers (FPIs)
– which are allowed to take exemptions from most disclosure requirements (e.g.,
they are allowed to file 6-K for their proxy materials) and U.S. listing
standards – are generally covered under a combination of policy
guidelines:
▪FPI
Guidelines (see the Americas
Regional Proxy Voting Guidelines),
may apply to companies incorporated in governance havens, and apply certain
minimum independence and disclosure standards in the evaluation of key proxy
ballot items, such as the election of directors; and/or
▪Guidelines
for the market that is responsible for, or most relevant to, the item on the
ballot.
U.S.
incorporated companies listed only on non-U.S. exchanges are generally covered
under the ISS guidelines for the market on which they are traded.
An
FPI is generally covered under ISS’ approach to FPIs outlined above, even if
such FPI voluntarily files a proxy statement and/or other filing normally
required of a U.S. Domestic Issuer, so long as the company retains its FPI
status.
In
all cases – including with respect to other companies with cross-market features
that may lead to ballot items related to multiple markets – items that are on
the ballot solely due to the requirements of another market (listing,
incorporation, or national code) may be evaluated under the policy of the
relevant market, regardless of the
“assigned”
primary market coverage.
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1.B
o a r d o f D i r e ct o r s
Voting
on Director Nominees in Uncontested Elections
Four
fundamental principles apply when determining votes on director
nominees:
Independence:
Boards should be sufficiently independent from management (and significant
shareholders) to ensure that they are able and motivated to effectively
supervise management's performance for the benefit of all shareholders,
including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive
compensation programs that support that strategy. The chair of the board should
ideally be an independent director, and all boards should have an independent
leadership position or a similar role in order to help provide appropriate
counterbalance to executive management, as well as having sufficiently
independent committees that focus on key governance concerns such as audit,
compensation, and nomination of directors.
Composition:
Companies should ensure that directors add value to the board through their
specific skills and expertise and by having sufficient time and commitment to
serve effectively. Boards should be of a size appropriate to accommodate
diversity, expertise, and independence, while ensuring active and collaborative
participation by all members. Boards should be sufficiently diverse to ensure
consideration of a wide range of perspectives.
Responsiveness:
Directors should respond to investor input, such as that expressed through
significant opposition to management proposals, significant support for
shareholder proposals (whether binding or non-binding), and tender offers where
a majority of shares are tendered.
Accountability:
Boards should be sufficiently accountable to shareholders, including through
transparency of the company's governance practices and regular board elections,
by the provision of sufficient information for shareholders to be able to assess
directors and board composition, and through the ability of shareholders to
remove directors.
General
Recommendation: Generally
vote for director nominees, except under the following circumstances (with new
nominees1
considered
on case-by-case basis):
Independence
Vote
against2
or withhold from non-independent directors (Executive Directors and
Non-Independent Non- Executive Directors per ISS’
Classification of Directors)
when:
▪Independent
directors comprise 50 percent or less of the board;
▪The
non-independent director serves on the audit, compensation, or nominating
committee;
▪The
company lacks an audit, compensation, or nominating committee so that the full
board functions as that committee; or
▪The
company lacks a formal nominating committee, even if the board attests that the
independent directors fulfill the functions of such a committee.
1
A
"new nominee" is a director who is being presented for election by shareholders
for the first time. Recommendations on new nominees who have served for less
than one year are made on a case-by-case basis depending on the timing of their
appointment and the problematic governance issue in question.
2
In general, companies with a plurality vote standard use “Withhold” as the
contrary vote option in director elections; companies with a majority vote
standard use “Against”. However, it will vary by company and the proxy must be
checked to determine the valid contrary vote option for the particular
company.
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ISS
Classification of Directors – U.S.
1.Executive
Director
1.1.Current
officer1
of
the company or one of its affiliates2.
2.Non-Independent
Non-Executive Director
Board
Identification
2.1.Director
identified as not independent by the board.
Controlling/Significant
Shareholder
2.2.Beneficial
owner of more than 50 percent of the company's voting power (this may be
aggregated if voting power is distributed among more than one member of a
group).
Current
Employment at Company or Related Company
2.3.Non-officer
employee of the firm (including employee representatives).
2.4.Officer1,
former officer, or general or limited partner of a joint venture or partnership
with the company.
Former
Employment
2.5.Former
CEO of the company. 3,
4
2.6.Former
non-CEO officer1
of
the company or an affiliate2
within
the past five years.
2.7.Former
officer1
of
an acquired company within the past five years.4
2.8.Officer1
of
a former parent or predecessor firm at the time the company was sold or split
off within the past five years.
2.9.Former
interim officer if the service was longer than 18 months. If the service was
between 12 and 18 months an assessment of the interim officer’s employment
agreement will be made.5
Family
Members
2.10.Immediate
family member6
of
a current or former officer1
of
the company or its affiliates2
within
the last five years.
2.11.Immediate
family member6
of
a current employee of company or its affiliates2
where
additional factors raise concern (which may include, but are not limited to, the
following: a director related to numerous employees; the company or its
affiliates employ relatives of numerous board members; or a non- Section 16
officer in a key strategic role).
Professional,
Transactional, and Charitable Relationships
2.12.Director
who (or whose immediate family member6)
currently provides professional services7
in
excess of $10,000 per year to: the company, an affiliate2,
or an individual officer of the company or an affiliate; or who is (or whose
immediate family member6
is)
a partner, employee, or controlling shareholder of an organization which
provides the services.
2.13.Director
who (or whose immediate family member6)
currently has any material transactional relationship8
with
the company or its affiliates2;
or who is (or whose immediate family member6
is)
a partner in, or a controlling shareholder or an executive officer of, an
organization which has the material transactional relationship8
(excluding
investments in the company through a private placement).
2.14.Director
who (or whose immediate family member6)
is
a trustee, director, or employee of a charitable or non-profit organization that
receives material grants or endowments8
from
the company or its affiliates2.
Other
Relationships
2.15.Party
to a voting agreement9
to
vote in line with management on proposals being brought to shareholder
vote.
2.16.Has
(or an immediate family member6
has)
an interlocking relationship as defined by the SEC involving members of the
board of directors or its Compensation Committee.10
2.17.Founder11
of
the company but not currently an employee.
2.18.Director
with pay comparable to Named Executive Officers.
2.19.Any
material12
relationship
with the company.
3.Independent
Director
3.1.No
material12
connection
to the company other than a board seat.
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Footnotes:
1.The
definition of officer will generally follow that of a “Section 16 officer”
(officers subject to Section 16 of the Securities and Exchange Act of 1934) and
includes the chief executive, operating, financial, legal, technology, and
accounting officers of a company (including the president, treasurer, secretary,
controller, or any vice president in charge of a principal business unit,
division, or policy function). Current interim officers are included in this
category. For private companies, the equivalent positions are applicable. A
non-employee director serving as an officer due to statutory requirements (e.g.
corporate secretary) will generally be classified as a Non-Independent
Non-Executive Director under “Any material relationship with the company.”
However, if the company provides explicit disclosure that the director is not
receiving additional compensation exceeding $10,000 per year for serving in that
capacity, then the director will be classified as an Independent
Director.
2.“Affiliate”
includes a subsidiary, sibling company, or parent company. ISS uses 50 percent
control ownership by the parent company as the standard for applying its
affiliate designation. The manager/advisor of an externally managed issuer (EMI)
is considered an affiliate.
3.Includes
any former CEO of the company prior to the company’s initial public offering
(IPO).
4.When
there is a former CEO of a special purpose acquisition company (SPAC) serving on
the board of an acquired company, ISS will generally classify such directors as
independent unless determined otherwise taking into account the following
factors: the applicable listing standards determination of such director’s
independence; any operating ties to the firm; and the existence of any other
conflicting relationships or related party transactions.
5.ISS
will look at the terms of the interim officer’s employment contract to determine
if it contains severance pay, long-term health and pension benefits, or other
such standard provisions typically contained in contracts of permanent,
non-temporary CEOs. ISS will also consider if a formal search process was under
way for a full-time officer at the time.
6.“Immediate
family member” follows the SEC’s definition of such and covers spouses, parents,
children, step-parents, step- children, siblings, in-laws, and any person (other
than a tenant or employee) sharing the household of any director, nominee for
director, executive officer, or significant shareholder of the
company.
7.Professional
services can be characterized as advisory in nature, generally involve access to
sensitive company information or to strategic decision-making, and typically
have a commission- or fee-based payment structure. Professional services
generally include but are not limited to the following: investment
banking/financial advisory services, commercial banking (beyond deposit
services), investment services, insurance services, accounting/audit services,
consulting services, marketing services, legal services, property management
services, realtor services, lobbying services, executive search services, and IT
consulting services. The following would generally be considered transactional
relationships and not professional services: deposit services, IT tech support
services, educational services, and construction services. The case of
participation in a banking syndicate by a non-lead bank should be considered a
transactional (and hence subject to the associated materiality test) rather than
a professional relationship. “Of Counsel” relationships are only considered
immaterial if the individual does not receive any form of compensation (in
excess of $10,000 per year) from, or is a retired partner of, the firm providing
the professional service. The case of a company providing a professional service
to one of its directors or to an entity with which one of its directors is
affiliated, will be considered a transactional rather than a professional
relationship. Insurance services and marketing services are assumed to be
professional services unless the company explains why such services are not
advisory.
8.A
material transactional relationship, including grants to non-profit
organizations, exists if the company makes annual payments to, or receives
annual payments from, another entity, exceeding the greater of: $200,000 or 5
percent of the recipient’s gross revenues, for a company that follows NASDAQ
listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s
gross revenues, for a company that follows NYSE listing standards. For a company
that follows neither of the preceding standards, ISS will apply the NASDAQ-based
materiality test. (The recipient is the party receiving the financial proceeds
from the transaction).
9.Dissident
directors who are parties to a voting agreement pursuant to a settlement or
similar arrangement may be classified as Independent Directors if an analysis of
the following factors indicates that the voting agreement does not compromise
their alignment with all shareholders’ interests: the terms of the agreement;
the duration of the standstill provision in the agreement; the limitations and
requirements of actions that are agreed upon; if the dissident director
nominee(s) is subject to the standstill; and if there any conflicting
relationships or related party transactions.
10.Interlocks
include: executive officers serving as directors on each other’s compensation or
similar committees (or, in the absence of such a committee, on the board); or
executive officers sitting on each other’s boards and at least one serves on the
other’s compensation or similar committees (or, in the absence of such a
committee, on the board).
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11.The
operating involvement of the founder with the company will be considered; if the
founder was never employed by the company, ISS may deem him or her an
Independent Director.
12.For
purposes of ISS’s director independence classification, “material” will be
defined as a standard of relationship (financial, personal, or otherwise) that a
reasonable person might conclude could potentially influence one’s objectivity
in the boardroom in a manner that would have a meaningful impact on an
individual's ability to satisfy requisite fiduciary standards on behalf of
shareholders.
Composition
Attendance
at
Board and Committee Meetings: Generally
vote against or withhold from directors (except nominees who served only part of
the fiscal year3)
who attend less than 75 percent of the aggregate of their board and committee
meetings for the period for which they served, unless an acceptable reason for
absences is disclosed in the proxy or another SEC filing. Acceptable reasons for
director absences are generally limited to the following:
▪Medical
issues/illness;
▪Family
emergencies; and
▪Missing
only one meeting (when the total of all meetings is three or
fewer).
In
cases of chronic poor attendance without reasonable justification, in addition
to voting against the director(s) with poor attendance, generally vote against
or withhold from appropriate members of the nominating/governance committees or
the full board.
If
the proxy disclosure is unclear and insufficient to determine whether a director
attended at least 75 percent of the aggregate of his/her board and committee
meetings during his/her period of service, vote against or withhold from the
director(s) in question.
Overboarded
Directors:
Generally
vote against or withhold from individual directors who:
▪Sit
on more than five public company boards; or
▪Are
CEOs of public companies who sit on the boards of more than two public companies
besides their own— withhold only at their outside boards4.
Gender
Diversity:
For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or
withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) at companies where there are no women on the company's
board. An exception will be made if there was a woman on the board at the
preceding annual meeting and the board makes a firm commitment to return to a
gender-diverse status within a year.
3
Nominees
who served for only part of the fiscal year are generally exempted from the
attendance policy.
4
Although
all of a CEO’s subsidiary boards with publicly-traded common stock will be
counted as separate boards, ISS will not recommend a withhold vote for the CEO
of a parent company board or any of the controlled (>50 percent ownership)
subsidiaries of that parent but may do so at subsidiaries that are less than 50
percent controlled and boards outside the parent/subsidiary
relationships.
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This
policy will also apply for companies not in the Russell 3000 and S&P1500
indices, effective for meetings on or after Feb.
1, 2023.
Racial
and/or Ethnic Diversity: For
companies in the Russell 3000 or S&P 1500 indices, generally vote against or
withhold from the chair of the nominating committee (or other directors on a
case-by-case basis) where the board has no apparent racially or ethnically
diverse members5.
An exception will be made if there was racial and/or ethnic diversity on the
board at the preceding annual meeting and the board makes a firm commitment to
appoint at least one racial and/or ethnic diverse member within a
year.
Responsiveness
Vote
case-by-case on individual directors, committee members, or the entire board of
directors as appropriate if:
▪The
board failed to act on a shareholder proposal that received the support of a
majority of the shares cast in the previous year or failed to act on a
management proposal seeking to ratify an existing charter/bylaw provision that
received opposition of a majority of the shares cast in the previous year.
Factors that will be considered are:
▪Disclosed
outreach efforts by the board to shareholders in the wake of the
vote;
▪Rationale
provided in the proxy statement for the level of implementation;
▪The
subject matter of the proposal;
▪The
level of support for and opposition to the resolution in past
meetings;
▪Actions
taken by the board in response to the majority vote and its engagement with
shareholders;
▪The
continuation of the underlying issue as a voting item on the ballot (as either
shareholder or management proposals); and
▪Other
factors as appropriate.
▪The
board failed to act on takeover offers where the majority of shares are
tendered;
▪At
the previous board election, any director received more than 50 percent
withhold/against votes of the shares cast and the company has failed to address
the issue(s) that caused the high withhold/against vote.
Vote
case-by-case on Compensation Committee members (or, in exceptional cases, the
full board) and the Say on Pay proposal if:
▪The
company’s previous say-on-pay received the support of less than 70 percent of
votes cast. Factors that will be considered are:
▪The
company's response, including:
▪Disclosure
of engagement efforts with major institutional investors, including the
frequency and timing of engagements and the company participants (including
whether independent directors participated);
▪Disclosure
of the specific concerns voiced by dissenting shareholders that led to the
say-on-pay opposition;
▪Disclosure
of specific and meaningful actions taken to address shareholders'
concerns;
▪Other
recent compensation actions taken by the company;
▪Whether
the issues raised are recurring or isolated;
▪The
company's ownership structure; and
▪Whether
the support level was less than 50 percent, which would warrant the highest
degree of responsiveness.
5
Aggregate
diversity statistics provided by the board will only be considered if specific
to racial and/or ethnic diversity.
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▪The
board implements an advisory vote on executive compensation on a less frequent
basis than the frequency that received the plurality of votes cast.
Accountability
Problematic
Takeover Defenses/Governance Structure
Poison
Pills:
Vote
against or withhold from all nominees (except new nominees1,
who should be considered case- by-case) if:
▪The
company has a poison pill that was not approved by shareholders6.
However, vote case-by-case on nominees if the board adopts an initial pill with
a term of one year or less, depending on the disclosed rationale for the
adoption, and other factors as relevant (such as a commitment to put any renewal
to a shareholder vote);
▪The
board makes a material adverse modification to an existing pill, including, but
not limited to, extension, renewal, or lowering the trigger, without shareholder
approval; or
▪The
pill, whether short-term7
or
long-term, has a deadhand or slowhand feature.
Classified
Board Structure:
The
board is classified, and a continuing director responsible for a problematic
governance issue at the board/committee level that would warrant a
withhold/against vote recommendation is not up for election. All appropriate
nominees (except new) may be held accountable.
Removal
of Shareholder Discretion on Classified Boards:
The company has opted into, or failed to opt out of, state laws requiring a
classified board structure.
Director
Performance Evaluation:
The
board lacks mechanisms to promote accountability and oversight, coupled with
sustained poor performance relative to peers. Sustained poor performance is
measured by one-, three-, and five-year total shareholder returns in the bottom
half of a company’s four-digit GICS industry group (Russell 3000 companies
only). Take into consideration the company’s operational metrics and other
factors as warranted. Problematic provisions include but are not limited
to:
▪A
classified board structure;
▪A
supermajority vote requirement;
▪Either
a plurality vote standard in uncontested director elections, or a majority vote
standard in contested elections;
▪The
inability of shareholders to call special meetings;
▪The
inability of shareholders to act by written consent;
▪A
multi-class capital structure; and/or
▪A
non-shareholder-approved poison pill.
Unilateral
Bylaw/Charter Amendments and Problematic Capital Structures:
Generally
vote against or withhold from directors individually, committee members, or the
entire board (except new nominees1,
who should be considered case-by-case) if the board amends the company's bylaws
or charter without shareholder approval in a manner that materially diminishes
shareholders' rights or that could adversely impact shareholders, considering
the following factors:
▪The
board's rationale for adopting the bylaw/charter amendment without shareholder
ratification;
▪Disclosure
by the company of any significant engagement with shareholders regarding the
amendment;
6
Public shareholders only, approval prior to a company’s becoming public is
insufficient.
7
If the short-term pill with a deadhand or slowhand feature is enacted but
expires before the next shareholder vote, ISS will generally still recommend
withhold/against nominees at the next shareholder meeting following its
adoption.
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▪The
level of impairment of shareholders' rights caused by the board's unilateral
amendment to the bylaws/charter;
▪The
board's track record with regard to unilateral board action on bylaw/charter
amendments or other entrenchment provisions;
▪The
company's ownership structure;
▪The
company's existing governance provisions;
▪The
timing of the board's amendment to the bylaws/charter in connection with a
significant business development; and
▪Other
factors, as deemed appropriate, that may be relevant to determine the impact of
the amendment on shareholders.
Unless
the adverse amendment is reversed or submitted to a binding shareholder vote, in
subsequent years vote case-by-case on director nominees. Generally vote against
(except new nominees1,
who should be considered case-by-case) if the directors:
▪Classified
the board;
▪Adopted
supermajority vote requirements to amend the bylaws or charter; or
▪Eliminated
shareholders' ability to amend bylaws.
Unequal
Voting Rights
Problematic
Capital Structure - Newly Public Companies:
For
2022,
for newly public companies8,
generally vote against or withhold from the entire board (except new
nominees1,
who should be considered case-by-case) if, prior to or in connection with the
company's public offering, the company or its board implemented a multi-class
capital structure in which the classes have unequal voting rights without
subjecting the multi-class capital structure to a reasonable time-based sunset.
In assessing the reasonableness of a time-based sunset provision,
consideration
will be given to the company’s lifespan, its post-IPO ownership structure and
the board’s disclosed rationale for the sunset period selected. No sunset period
of more than seven years from the date of the IPO will be considered to be
reasonable.
Continue
to vote against or withhold from incumbent directors in subsequent years, unless
the problematic capital structure is reversed, removed, or subject to a newly
added reasonable sunset.
Common
Stock Capital Structure with Unequal Voting Rights:
Starting Feb
1, 2023, generally
vote withhold or against directors individually, committee members, or the
entire board (except new nominees1,
who should be considered case-by-case), if the company employs a common stock
structure with unequal voting rights9.
Exceptions
to this policy will generally be limited to:
▪Newly-public
companies8
with
a sunset provision of no more than seven years from the date of going
public;
▪Limited
Partnerships and the Operating Partnership (OP) unit structure of
REITs;
▪Situations
where the unequal voting rights are considered de
minimis;
or
▪The
company provides sufficient protections for minority shareholders, such as
allowing minority shareholders a regular binding vote on whether the capital
structure should be maintained.
8
Newly-public
companies generally include companies that emerge from bankruptcy, SPAC
transactions, spin-offs, direct listings, and those who complete a traditional
initial public offering.
9
This
generally includes classes of common stock that have additional votes per share
than other shares; classes of shares that are not entitled to vote on all the
same ballot items or nominees; or stock with time-phased voting rights (“loyalty
shares”).
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Problematic
Governance Structure - Newly Public Companies:
For newly public companies8,
generally vote against or withhold from directors individually, committee
members, or the entire board (except new nominees1,
who should be considered case-by-case) if, prior to or in connection with the
company's public offering, the company or its board adopted the following bylaw
or charter provisions that are considered to be materially adverse to
shareholder rights:
▪Supermajority
vote requirements to amend the bylaws or charter;
▪A
classified board structure; or
▪Other
egregious provisions.
A
reasonable sunset provision will be considered a mitigating factor.
Unless
the adverse provision is reversed or removed, vote case-by-case on director
nominees in subsequent years.
Management
Proposals to Ratify Existing Charter or Bylaw Provisions:
Vote
against/withhold from individual directors, members of the governance committee,
or the full board, where boards ask shareholders to ratify existing charter or
bylaw provisions considering the following factors:
▪The
presence of a shareholder proposal addressing the same issue on the same
ballot;
▪The
board's rationale for seeking ratification;
▪Disclosure
of actions to be taken by the board should the ratification proposal
fail;
▪Disclosure
of shareholder engagement regarding the board’s ratification
request;
▪The
level of impairment to shareholders' rights caused by the existing
provision;
▪The
history of management and shareholder proposals on the provision at the
company’s past meetings;
▪Whether
the current provision was adopted in response to the shareholder
proposal;
▪The
company's ownership structure; and
▪Previous
use of ratification proposals to exclude shareholder proposals.
Restrictions
on Shareholders’ Rights
Restricting
Binding Shareholder Proposals:
Generally
vote against or withhold from the members of the governance committee
if:
▪The
company’s governing documents impose undue restrictions on shareholders’ ability
to amend the bylaws. Such restrictions include but are not limited to: outright
prohibition on the submission of binding shareholder proposals or share
ownership requirements, subject matter restrictions, or time holding
requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing
basis.
Submission
of management proposals to approve or ratify requirements in excess of SEC Rule
14a-8 for the submission of binding bylaw amendments will generally be viewed as
an insufficient restoration of shareholders' rights. Generally continue to vote
against or withhold on an ongoing basis until shareholders are provided with an
unfettered ability to amend the bylaws or a proposal providing for such
unfettered right is submitted for shareholder approval.
Problematic
Audit-Related Practices
Generally
vote against or withhold from the members of the Audit Committee
if:
▪The
non-audit fees paid to the auditor are excessive;
▪The
company receives an adverse opinion on the company’s financial statements from
its auditor; or
▪There
is persuasive evidence that the Audit Committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.
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Vote
case-by-case on members of the Audit Committee and potentially the full board
if:
▪Poor
accounting practices are identified that rise to a level of serious concern,
such as: fraud; misapplication of GAAP; and material weaknesses identified in
Section 404 disclosures. Examine the severity, breadth, chronological sequence,
and duration, as well as the company’s efforts at remediation or corrective
actions, in determining whether withhold/against votes are
warranted.
Problematic
Compensation Practices
In
the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot
item or in egregious situations, vote against or withhold from the members of
the Compensation Committee and potentially the full board if:
▪There
is an unmitigated misalignment between CEO pay and company performance
(pay
for performance);
▪The
company maintains significant problematic
pay practices;
or
▪The
board exhibits a significant level of poor
communication and responsiveness to
shareholders.
Generally
vote against or withhold from the Compensation Committee chair, other committee
members, or potentially the full board if:
▪The
company fails to include a Say on Pay ballot item when required under SEC
provisions, or under the company’s declared frequency of say on pay;
or
▪The
company fails to include a Frequency of Say on Pay ballot item when required
under SEC provisions.
Generally
vote against members of the board committee responsible for approving/setting
non-employee director compensation if there is a pattern (i.e. two or more
years) of awarding excessive non-employee director compensation without
disclosing a compelling rationale or other mitigating factors.
Problematic
Pledging of Company Stock:
Vote
against the members of the committee that oversees risks related to pledging, or
the full board, where a significant level of pledged company sto1ck by
executives or directors raises concerns. The following factors will be
considered:
▪The
presence of an anti-pledging policy, disclosed in the proxy statement, that
prohibits future pledging activity;
▪The
magnitude of aggregate pledged shares in terms of total common shares
outstanding, market value, and trading volume;
▪Disclosure
of progress or lack thereof in reducing the magnitude of aggregate pledged
shares over time;
▪Disclosure
in the proxy statement that shares subject to stock ownership and holding
requirements do not include pledged company stock; and
▪Any
other relevant factors.
Climate
Accountability
For
companies that are significant greenhouse gas (GHG) emitters, through their
operations or value chain10,
generally vote against or withhold from the incumbent chair of the responsible
committee (or other directors on a case-by-case basis) in cases where ISS
determines that the company is not taking the minimum steps needed to
understand, assess, and mitigate risks related to climate change to the company
and the larger economy.
10
For
2022, companies defined as “significant GHG emitters” will be those on the
current Climate Action 100+ Focus Group list.
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For
2022,
minimum steps to understand and mitigate those risks are considered to be the
following. Both minimum criteria will be required to be in
compliance:
▪Detailed
disclosure of climate-related risks, such as according to the framework
established by the Task Force on Climate-related Financial Disclosures (TCFD),
including:
▪Board
governance measures;
▪Corporate
strategy;
▪Risk
management analyses; and
▪Metrics
and targets.
▪Appropriate
GHG emissions reduction targets.
For
2022,
“appropriate GHG emissions reductions targets” will be any well-defined GHG
reduction targets. Targets for Scope 3 emissions will not be required for 2022
but the targets should cover at least a significant portion of the company’s
direct emissions. Expectations about what constitutes “minimum steps to mitigate
risks related to
climate
change” will increase over time.
Governance
Failures
Under
extraordinary circumstances, vote against or withhold from directors
individually, committee members, or the entire board, due to:
▪Material
failures of governance, stewardship, risk oversight11,
or fiduciary responsibilities at the company;
▪Failure
to replace management as appropriate; or
▪Egregious
actions related to a director’s service on other boards that raise substantial
doubt about his or her ability to effectively oversee management and serve the
best interests of shareholders at any company.
Voting
on Director Nominees in Contested Elections
Vote-No
Campaigns
General
Recommendation: In
cases where companies are targeted in connection with public “vote-no”
campaigns, evaluate director nominees under the existing governance policies for
voting on director nominees in uncontested elections. Take into consideration
the arguments submitted by shareholders and other publicly available
information.
Proxy
Contests/Proxy Access
General
Recommendation: Vote
case-by-case on the election of directors in contested elections, considering
the following factors:
▪Long-term
financial performance of the company relative to its industry;
▪Management’s
track record;
▪Background
to the contested election;
▪Nominee
qualifications and any compensatory arrangements;
▪Strategic
plan of dissident slate and quality of the critique against
management;
▪Likelihood
that the proposed goals and objectives can be achieved (both slates);
and
11
Examples
of failure of risk oversight include but are not limited to: bribery; large or
serial fines or sanctions from regulatory bodies; demonstrably poor risk
oversight of environmental and social issues, including climate change;
significant adverse legal judgments or settlement; or hedging of company
stock.
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▪Stock
ownership positions.
In
the case of candidates nominated pursuant to proxy access, vote case-by-case
considering any applicable factors listed above or additional factors which may
be relevant, including those that are specific to the company, to the nominee(s)
and/or to the nature of the election (such as whether there are more candidates
than board seats).
Other
Board-Related Proposals
Adopt
Anti-Hedging/Pledging/Speculative Investments Policy
General
Recommendation: Generally
vote for proposals seeking a policy that prohibits named executive officers from
engaging in derivative or speculative transactions involving company stock,
including hedging, holding stock in a margin account, or pledging stock as
collateral for a loan. However, the company’s existing policies
regarding
responsible
use of company stock will be considered.
Board
Refreshment
Board
refreshment is best implemented through an ongoing program of individual
director evaluations, conducted annually, to ensure the evolving needs of the
board are met and to bring in fresh perspectives, skills, and diversity as
needed.
Term/Tenure
Limits
General
Recommendation: Vote
case-by-case on management proposals regarding director term/tenure limits,
considering:
▪The
rationale provided for adoption of the term/tenure limit;
▪The
robustness of the company’s board evaluation process;
▪Whether
the limit is of sufficient length to allow for a broad range of director
tenures;
▪Whether
the limit would disadvantage independent directors compared to non-independent
directors; and
▪Whether
the board will impose the limit evenly, and not have the ability to waive it in
a discriminatory manner.
Vote
case-by-case on shareholder proposals asking for the company to adopt director
term/tenure limits, considering:
▪The
scope of the shareholder proposal; and
▪Evidence
of problematic issues at the company combined with, or exacerbated by, a lack of
board refreshment.
Age
Limits
General
Recommendation: Generally
vote against management and shareholder proposals to limit the tenure of
independent directors through mandatory retirement ages. Vote for proposals to
remove mandatory age limits.
Board
Size
General
Recommendation: Vote
for proposals seeking to fix the board size or designate a range for the board
size.
Vote
against proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
Classification/Declassification
of the Board
General
Recommendation: Vote
against proposals to classify (stagger) the board.
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Vote
for proposals to repeal classified boards and to elect all directors
annually.
CEO
Succession Planning
General
Recommendation: Generally
vote for proposals seeking disclosure on a CEO succession planning policy,
considering, at a minimum, the following factors:
▪The
reasonableness/scope of the request; and
▪The
company’s existing disclosure on its current CEO succession planning
process.
Cumulative
Voting
General
Recommendation: Generally
vote against management proposals to eliminate cumulate voting, and for
shareholder proposals to restore or provide for cumulative voting,
unless:
▪The
company has proxy access12,
thereby allowing shareholders to nominate directors to the
company’s
ballot;
and
▪The
company has adopted a majority vote standard, with a carve-out for plurality
voting in situations where there are more nominees than seats, and a director
resignation policy to address failed elections.
Vote
for proposals for cumulative voting at controlled companies (insider voting
power > 50%).
Director
and Officer Indemnification and Liability Protection
General
Recommendation: Vote
case-by-case on proposals on director and officer indemnification and liability
protection.
Vote
against proposals that would:
▪Eliminate
entirely directors' and officers' liability for monetary damages for violating
the duty of care.
▪Expand
coverage beyond just legal expenses to liability for acts that are more serious
violations of fiduciary obligation than mere carelessness.
▪Expand
the scope of indemnification to provide for mandatory indemnification of company
officials in connection with acts that previously the company was permitted to
provide indemnification for, at the discretion of the company's board
(i.e.,
"permissive indemnification"), but that previously the company was not required
to indemnify.
Vote
for only those proposals providing such expanded coverage in cases when a
director’s or officer’s legal
defense
was unsuccessful if both of the following apply:
▪If
the director was found to have acted in good faith and in a manner that s/he
reasonably believed was in the best interests of the company; and
▪If
only the director’s legal expenses would be covered.
Establish/Amend
Nominee Qualifications
General
Recommendation: Vote
case-by-case on proposals that establish or amend director qualifications. Votes
should be based on the reasonableness of the criteria and the degree to which
they may preclude dissident nominees from joining the board.
Vote
case-by-case on shareholder resolutions seeking a director nominee who possesses
a particular subject matter expertise, considering:
12
A
proxy access right that meets the recommended
guidelines.
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▪The
company’s board committee structure, existing subject matter expertise, and
board nomination provisions relative to that of its peers;
▪The
company’s existing board and management oversight mechanisms regarding the issue
for which board
oversight
is sought;
▪The
company’s disclosure and performance relating to the issue for which board
oversight is sought and any significant related controversies; and
▪The
scope and structure of the proposal.
Establish
Other Board Committee Proposals
General
Recommendation: Generally
vote against shareholder proposals to establish a new board committee, as such
proposals seek a specific oversight mechanism/structure that potentially limits
a company’s flexibility to determine an appropriate oversight mechanism for
itself. However, the following factors will be considered:
▪Existing
oversight mechanisms (including current committee structure) regarding the issue
for which board oversight is sought;
▪Level
of disclosure regarding the issue for which board oversight is
sought;
▪Company
performance related to the issue for which board oversight is
sought;
▪Board
committee structure compared to that of other companies in its industry sector;
and
▪The
scope and structure of the proposal.
Filling
Vacancies/Removal of Directors
General
Recommendation: Vote
against proposals that provide that directors may be removed only for
cause.
Vote
for proposals to restore shareholders’ ability to remove directors with or
without cause.
Vote
against proposals that provide that only continuing directors may elect
replacements to fill board vacancies. Vote for proposals that permit
shareholders to elect directors to fill board vacancies.
Independent
Board Chair
General
Recommendation: Generally
vote for shareholder proposals requiring that the board chair position be filled
by an independent director, taking into consideration the
following:
▪The
scope and rationale of the proposal;
▪The
company's current board leadership structure;
▪The
company's governance structure and practices;
▪Company
performance; and
▪Any
other relevant factors that may be applicable.
The
following factors will increase the likelihood of a “for”
recommendation:
▪A
majority non-independent board and/or the presence of non-independent directors
on key board committees;
▪A
weak or poorly-defined lead independent director role that fails to serve as an
appropriate counterbalance to a combined CEO/chair role;
▪The
presence of an executive or non-independent chair in addition to the CEO, a
recent recombination of the role of CEO and chair, and/or departure from a
structure with an independent chair;
▪Evidence
that the board has failed to oversee and address material risks facing the
company;
▪A
material governance failure, particularly if the board has failed to adequately
respond to shareholder concerns or if the board has materially diminished
shareholder rights; or
▪Evidence
that the board has failed to intervene when management’s interests are contrary
to shareholders'
interests.
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Majority
of Independent Directors/Establishment of Independent Committees
General
Recommendation: Vote
for shareholder proposals asking that a majority or more of directors
be
independent
unless the board composition already meets the proposed threshold by ISS’
definition of Independent
Director
(See ISS'
Classification of Directors.)
Vote
for shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors unless
they currently meet that standard.
Majority
Vote Standard for the Election of Directors
General
Recommendation: Generally
vote for management proposals to adopt a majority of votes cast standard for
directors in uncontested elections. Vote against if no carve-out for a plurality
vote standard in contested elections is included.
Generally
vote for precatory and binding shareholder resolutions requesting that the board
change the company’s bylaws to stipulate that directors need to be elected with
an affirmative majority of votes cast, provided it does not conflict with the
state law where the company is incorporated. Binding resolutions need to allow
for a carve- out for a plurality vote standard when there are more nominees than
board seats.
Companies
are strongly encouraged to also adopt a post-election policy (also known as a
director resignation policy) that will provide guidelines so that the company
will promptly address the situation of a holdover director.
Proxy
Access
General
Recommendation: Generally
vote for management and shareholder proposals for proxy access with the
following provisions:
▪Ownership
threshold: maximum
requirement not more than three percent (3%) of the voting power;
▪Ownership
duration: maximum
requirement not longer than three (3) years of continuous ownership for each
member of the nominating group;
▪Aggregation:
minimal
or no limits on the number of shareholders permitted to form a nominating
group;
▪Cap:
cap
on nominees of generally twenty-five percent (25%) of the board.
Review
for reasonableness any other restrictions on the right of proxy access.
Generally vote against proposals that are more restrictive than these
guidelines.
Require
More Nominees than Open Seats
General
Recommendation: Vote
against shareholder proposals that would require a company to nominate more
candidates than the number of open board seats.
Shareholder
Engagement Policy (Shareholder Advisory Committee)
General
Recommendation: Generally
vote for shareholder proposals requesting that the board establish an internal
mechanism/process, which may include a committee, in order to improve
communications between directors and shareholders, unless the company has the
following features, as appropriate:
▪Established
a communication structure that goes beyond the exchange requirements to
facilitate the exchange of information between shareholders and members of the
board;
▪Effectively
disclosed information with respect to this structure to its
shareholders;
▪Company
has not ignored majority-supported shareholder proposals, or a majority withhold
vote on a director nominee; and
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▪The
company has an independent chair or a lead director, according to ISS’
definition.
This individual must be made available for periodic consultation and direct
communication with major shareholders.
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2.A
u d i t - R e l a t ed
Auditor
Indemnification and Limitation of Liability
General
Recommendation: Vote
case-by-case on the issue of auditor indemnification and limitation of
liability.
Factors
to be assessed include, but are not limited to:
▪The
terms of the auditor agreement—the degree to which these agreements impact
shareholders' rights;
▪The
motivation and rationale for establishing the agreements;
▪The
quality of the company’s disclosure; and
▪The
company’s historical practices in the audit area.
Vote
against or withhold from members of an audit committee in situations where there
is persuasive evidence that the audit committee entered into an inappropriate
indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the
audit firm.
Auditor
Ratification
General
Recommendation: Vote
for proposals to ratify auditors unless any of the following apply:
▪An
auditor has a financial interest in or association with the company, and is
therefore not independent;
▪There
is reason to believe that the independent auditor has rendered an opinion that
is neither accurate nor
indicative
of the company’s financial position;
▪Poor
accounting practices are identified that rise to a serious level of concern,
such as fraud or misapplication of GAAP; or
▪Fees
for non-audit services (“Other” fees) are excessive.
Non-audit
fees are excessive if:
▪Non-audit
(“other”) fees > audit fees + audit-related fees + tax compliance/preparation
fees
Tax
compliance and preparation include the preparation of original and amended tax
returns and refund claims, and tax payment planning. All other services in the
tax category, such as tax advice, planning, or consulting, should be added to
“Other” fees. If the breakout of tax fees cannot be determined, add all tax fees
to “Other” fees.
In
circumstances where "Other" fees include fees related to significant one-time
capital structure events (such as initial public offerings, bankruptcy
emergence, and spin-offs) and the company makes public disclosure of the amount
and nature of those fees that are an exception to the standard "non-audit fee"
category, then such fees may be excluded from the non-audit fees considered in
determining the ratio of non-audit to audit/audit-related fees/tax compliance
and preparation for purposes of determining whether non-audit fees are
excessive.
Shareholder
Proposals Limiting Non-Audit Services
General
Recommendation: Vote
case-by-case on shareholder proposals asking companies to prohibit or limit
their auditors from engaging in non-audit services.
Shareholder
Proposals on Audit Firm Rotation
General
Recommendation: Vote
case-by-case on shareholder proposals asking for audit firm rotation, taking
into account:
▪The
tenure of the audit firm;
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▪The
length of rotation specified in the proposal;
▪Any
significant audit-related issues at the company;
▪The
number of Audit Committee meetings held each year;
▪The
number of financial experts serving on the committee; and
▪Whether
the company has a periodic renewal process where the auditor is evaluated for
both audit quality and competitive price.
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3.S
h a re h o l d e r R i g h t s & D e f e n s e s
Advance
Notice Requirements for Shareholder Proposals/Nominations
General
Recommendation: Vote
case-by-case on advance notice proposals, giving support to those proposals
which allow shareholders to submit proposals/nominations as close to the meeting
date as reasonably possible and within the broadest window possible, recognizing
the need to allow sufficient notice for company, regulatory,
and
shareholder review.
To
be reasonable, the company’s deadline for shareholder notice of a
proposal/nominations must be no earlier than 120 days prior to the anniversary
of the previous year’s meeting and have a submittal window of no shorter than 30
days from the beginning of the notice period (also known as a 90-120-day
window). The submittal window is the period under which shareholders must file
their proposals/nominations prior to the deadline.
In
general, support additional efforts by companies to ensure full disclosure in
regard to a proponent’s economic and voting position in the company so long as
the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such
proposals.
Amend
Bylaws without Shareholder Consent
General
Recommendation: Vote
against proposals giving the board exclusive authority to amend the
bylaws.
Vote
case-by-case on proposals giving the board the ability to amend the bylaws in
addition to shareholders, taking into account the following:
▪Any
impediments to shareholders' ability to amend the bylaws (i.e. supermajority
voting requirements);
▪The
company's ownership structure and historical voting turnout;
▪Whether
the board could amend bylaws adopted by shareholders; and
▪Whether
shareholders would retain the ability to ratify any board-initiated
amendments.
Control
Share Acquisition Provisions
General
Recommendation: Vote
for proposals to opt out of control share acquisition statutes unless doing so
would enable the completion of a takeover that would be detrimental to
shareholders.
Vote
against proposals to amend the charter to include control share acquisition
provisions.
Vote
for proposals to restore voting rights to the control shares.
Control
share acquisition statutes function by denying shares their voting rights when
they contribute to ownership in excess of certain thresholds. Voting rights for
those shares exceeding ownership limits may only be restored by approval of
either a majority or supermajority of disinterested shares. Thus, control share
acquisition statutes effectively require a hostile bidder to put its offer to a
shareholder vote or risk voting disenfranchisement if the bidder continues
buying up a large block of shares.
Control
Share Cash-Out Provisions
General
Recommendation: Vote
for proposals to opt out of control share cash-out statutes.
Control
share cash-out statutes give dissident shareholders the right to "cash-out" of
their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a
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preset
threshold level, remaining shareholders are given the right to sell their shares
to the acquirer, who must buy them at the highest acquiring price.
Disgorgement
Provisions
General
Recommendation: Vote
for proposals to opt out of state disgorgement provisions.
Disgorgement
provisions require an acquirer or potential acquirer of more than a certain
percentage of a company's stock to disgorge, or pay back, to the company any
profits realized from the sale of that company's stock purchased 24 months
before achieving control status. All sales of company stock by the acquirer
occurring within a certain period of time (between 18 months and 24 months)
prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.
Fair
Price Provisions
General
Recommendation: Vote
case-by-case on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), evaluating factors such as the vote
required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair
price.
Generally
vote against fair price provisions with shareholder vote requirements greater
than a majority of disinterested shares.
Freeze-Out
Provisions
General
Recommendation: Vote
for proposals to opt out of state freeze-out provisions. Freeze-out provisions
force an investor who surpasses a certain ownership threshold in a company to
wait a specified period of time before gaining control of the
company.
Greenmail
General
Recommendation: Vote
for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise
restrict a company’s ability to make greenmail payments.
Vote
case-by-case on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.
Greenmail
payments are targeted share repurchases by management of company stock from
individuals or groups seeking control of the company. Since only the hostile
party receives payment, usually at a substantial premium over the market value
of its shares, the practice discriminates against all other
shareholders.
Shareholder
Litigation Rights
Federal
Forum Selection Provisions
Federal
forum selection provisions require that U.S. federal courts be the sole forum
for shareholders to litigate claims arising under federal securities
law.
General
Recommendation: Generally
vote for federal forum selection provisions in the charter or bylaws that
specify "the district courts of the United States" as the exclusive forum for
federal securities law matters, in the absence of serious concerns about
corporate governance or board responsiveness to shareholders.
Vote
against provisions that restrict the forum to a particular federal district
court; unilateral adoption (without a shareholder vote) of such a provision will
generally be considered a one-time failure under the Unilateral
Bylaw/Charter Amendments policy.
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Exclusive
Forum Provisions for State Law Matters
Exclusive
forum provisions in the charter or bylaws restrict shareholders’ ability to
bring derivative lawsuits against the company, for claims arising out of state
corporate law, to the courts of a particular state (generally the state of
incorporation).
General
Recommendation: Generally
vote for charter or bylaw provisions that specify courts located within the
state of Delaware as the exclusive forum for corporate law matters for Delaware
corporations, in the absence of serious concerns about corporate governance or
board responsiveness to shareholders.
For
states other than Delaware, vote case-by-case on exclusive forum provisions,
taking into consideration:
▪The
company's stated rationale for adopting such a provision;
▪Disclosure
of past harm from duplicative shareholder lawsuits in more than one
forum;
▪The
breadth of application of the charter or bylaw provision, including the types of
lawsuits to which it would apply and the definition of key terms;
and
▪Governance
features such as shareholders' ability to repeal the provision at a later date
(including the vote standard applied when shareholders attempt to amend the
charter or bylaws) and their ability to hold directors accountable through
annual director elections and a majority vote standard in uncontested
elections.
Generally
vote against provisions that specify a state other than the state of
incorporation as the exclusive forum for corporate law matters, or that specify
a particular local court within the state; unilateral adoption of such a
provision will generally be considered a one-time failure under the Unilateral
Bylaw/Charter Amendments policy.
Fee
shifting
Fee-shifting
provisions in the charter or bylaws require that a shareholder who sues a
company unsuccessfully pay all litigation expenses of the defendant corporation
and its directors and officers.
General
Recommendation: Generally
vote against provisions that mandate fee-shifting whenever plaintiffs are not
completely successful on the merits (i.e., including cases where the plaintiffs
are partially successful).
Unilateral
adoption of a fee-shifting provision will generally be considered an ongoing
failure under the Unilateral
Bylaw/Charter Amendments policy.
Net
Operating Loss (NOL) Protective Amendments
General
Recommendation: Vote
against proposals to adopt a protective amendment for the stated purpose of
protecting a company's net operating losses (NOL) if the effective term of the
protective amendment would exceed the shorter of three years and the exhaustion
of the NOL.
Vote
case-by-case, considering the following factors, for management proposals to
adopt an NOL protective amendment that would remain in effect for the shorter of
three years (or less) and the exhaustion of the NOL:
▪The
ownership threshold (NOL protective amendments generally prohibit stock
ownership transfers that would result in a new 5-percent holder or increase the
stock ownership percentage of an existing 5-percent holder);
▪The
value of the NOLs;
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▪Shareholder
protection mechanisms (sunset provision or commitment to cause expiration of the
protective amendment upon exhaustion or expiration of the NOL);
▪The
company's existing governance structure including: board independence, existing
takeover defenses, track record of responsiveness to shareholders, and any other
problematic governance concerns; and
▪Any
other factors that may be applicable.
Poison
Pills (Shareholder Rights Plans)
Shareholder
Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General
Recommendation: Vote
for shareholder proposals requesting that the company submit its poison pill to
a shareholder vote or redeem it unless the company has: (1) A
shareholder-approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the board
will only
adopt
a shareholder rights plan if either:
▪Shareholders
have approved the adoption of the plan; or
▪The
board, in its exercise of its fiduciary responsibilities, determines that it is
in the best interest of shareholders under the circumstances to adopt a pill
without the delay in adoption that would result from seeking stockholder
approval (i.e., the “fiduciary out” provision). A poison pill adopted under this
fiduciary out will be put to a shareholder ratification vote within 12 months of
adoption or expire. If the pill is not approved by a majority of the votes cast
on this issue, the plan will immediately terminate.
If
the shareholder proposal calls for a time period of less than 12 months for
shareholder ratification after adoption, vote for the proposal, but add the
caveat that a vote within 12 months would be considered sufficient
implementation.
Management
Proposals to Ratify a Poison Pill
General
Recommendation: Vote
case-by-case on management proposals on poison pill ratification, focusing on
the features of the shareholder rights plan. Rights plans should contain the
following attributes:
▪No
lower than a 20 percent trigger, flip-in or flip-over;
▪A
term of no more than three years;
▪No
deadhand, slowhand, no-hand, or similar feature that limits the ability of a
future board to redeem the pill;
▪Shareholder
redemption feature (qualifying offer clause); if the board refuses to redeem the
pill 90 days after a qualifying offer is announced, 10 percent of the shares may
call a special meeting or seek a written consent to vote on rescinding the
pill.
In
addition, the rationale for adopting the pill should be thoroughly explained by
the company. In examining the request for the pill, take into consideration the
company’s existing governance structure, including: board independence, existing
takeover defenses, and any problematic governance concerns.
Management
Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General
Recommendation: Vote
against proposals to adopt a poison pill for the stated purpose of protecting a
company's net operating losses (NOL) if the term of the pill would exceed the
shorter of three years and the exhaustion of the NOL.
Vote
case-by-case on management proposals for poison pill ratification, considering
the following factors, if the term of the pill would be the shorter of three
years (or less) and the exhaustion of the NOL:
▪The
ownership threshold to transfer (NOL pills generally have a trigger slightly
below 5 percent);
▪The
value of the NOLs;
▪Shareholder
protection mechanisms (sunset provision, or commitment to cause expiration of
the pill upon exhaustion or expiration of NOLs);
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▪The
company's existing governance structure including: board independence, existing
takeover defenses, track record of responsiveness to shareholders, and any other
problematic governance concerns; and
▪Any
other factors that may be applicable.
Proxy
Voting Disclosure, Confidentiality, and Tabulation
General
Recommendation: Vote
case-by-case on proposals regarding proxy voting mechanics, taking into
consideration whether implementation of the proposal is likely to enhance or
protect shareholder rights. Specific issues covered under the policy include,
but are not limited to, confidential voting of individual proxies and ballots,
confidentiality of running vote tallies, and the treatment of abstentions and/or
broker non-votes in the company's vote-counting methodology.
While
a variety of factors may be considered in each analysis, the guiding principles
are: transparency, consistency, and fairness in the proxy voting process. The
factors considered, as applicable to the proposal, may include:
▪The
scope and structure of the proposal;
▪The
company's stated confidential voting policy (or other relevant policies) and
whether it ensures a "level playing field" by providing shareholder proponents
with equal access to vote information prior to the annual meeting;
▪The
company's vote standard for management and shareholder proposals and whether it
ensures consistency and fairness in the proxy voting process and maintains the
integrity of vote results;
▪Whether
the company's disclosure regarding its vote counting method and other relevant
voting policies with respect to management and shareholder proposals are
consistent and clear;
▪Any
recent controversies or concerns related to the company's proxy voting
mechanics;
▪Any
unintended consequences resulting from implementation of the proposal;
and
▪Any
other factors that may be relevant.
Ratification
Proposals: Management Proposals to Ratify Existing Charter or Bylaw
Provisions
General
Recommendation: Generally
vote against management proposals to ratify provisions of the
company’s
existing
charter or bylaws, unless these governance provisions align with best
practice.
In
addition, voting against/withhold from individual directors, members of the
governance committee, or the full board may be warranted,
considering:
▪The
presence of a shareholder proposal addressing the same issue on the same
ballot;
▪The
board's rationale for seeking ratification;
▪Disclosure
of actions to be taken by the board should the ratification proposal
fail;
▪Disclosure
of shareholder engagement regarding the board’s ratification
request;
▪The
level of impairment to shareholders' rights caused by the existing
provision;
▪The
history of management and shareholder proposals on the provision at the
company’s past meetings;
▪Whether
the current provision was adopted in response to the shareholder
proposal;
▪The
company's ownership structure; and
▪Previous
use of ratification proposals to exclude shareholder proposals.
Reimbursing
Proxy Solicitation Expenses
General
Recommendation: Vote
case-by-case on proposals to reimburse proxy solicitation expenses.
When
voting in conjunction with support of a dissident slate, vote for the
reimbursement of all appropriate proxy solicitation expenses associated with the
election.
Generally
vote for shareholder proposals calling for the reimbursement of reasonable costs
incurred in connection with nominating one or more candidates in a contested
election where the following apply:
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▪The
election of fewer than 50 percent of the directors to be elected is contested in
the election;
▪One
or more of the dissident’s candidates is elected;
▪Shareholders
are not permitted to cumulate their votes for directors; and
▪The
election occurred, and the expenses were incurred, after the adoption of this
bylaw.
Reincorporation
Proposals
General
Recommendation: Management
or shareholder proposals to change a company's state of incorporation should be
evaluated case-by-case, giving consideration to both financial and corporate
governance concerns including the following:
▪Reasons
for reincorporation;
▪Comparison
of company's governance practices and provisions prior to and following the
reincorporation; and
▪Comparison
of corporation laws of original state and destination state.
Vote
for reincorporation when the economic factors outweigh any neutral or negative
governance changes.
Shareholder
Ability to Act by Written Consent
General
Recommendation: Generally
vote against management and shareholder proposals to restrict or prohibit
shareholders' ability to act by written consent.
Generally
vote for management and shareholder proposals that provide shareholders with the
ability to act by written consent, taking into account the following
factors:
▪Shareholders'
current right to act by written consent;
▪The
consent threshold;
▪The
inclusion of exclusionary or prohibitive language;
▪Investor
ownership structure; and
▪Shareholder
support of, and management's response to, previous shareholder
proposals.
Vote
case-by-case on shareholder proposals if, in addition to the considerations
above, the company has the following governance and antitakeover
provisions:
▪An
unfettered13
right for shareholders to call special meetings at a 10 percent
threshold;
▪A
majority vote standard in uncontested director elections;
▪No
non-shareholder-approved pill; and
▪An
annually elected board.
Shareholder
Ability to Call Special Meetings
General
Recommendation: Vote
against management or shareholder proposals to restrict or prohibit
shareholders’
ability to call special meetings.
Generally
vote for management or shareholder proposals that provide shareholders with the
ability to call special meetings taking into account the following
factors:
▪Shareholders’
current right to call special meetings;
▪Minimum
ownership threshold necessary to call special meetings (10 percent
preferred);
▪The
inclusion of exclusionary or prohibitive language;
13
"Unfettered" means no restrictions on agenda items, no restrictions on the
number of shareholders who can group together to reach the 10 percent threshold,
and only reasonable limits on when a meeting can be called: no greater than 30
days after the last annual meeting and no greater than 90 prior to the next
annual meeting.
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▪Investor
ownership structure; and
▪Shareholder
support of, and management’s response to, previous shareholder
proposals.
Stakeholder
Provisions
General
Recommendation: Vote
against proposals that ask the board to consider non-shareholder constituencies
or other non-financial effects when evaluating a merger or business
combination.
State
Antitakeover Statutes
General
Recommendation: Vote
case-by-case on proposals to opt in or out of state takeover statutes (including
fair price provisions, stakeholder laws, poison pill endorsements, severance pay
and labor contract provisions, and anti-greenmail provisions).
Supermajority
Vote Requirements
General
Recommendation: Vote
against proposals to require a supermajority shareholder vote.
▪Vote
for management or shareholder proposals to reduce supermajority vote
requirements. However, for companies with shareholder(s) who have significant
ownership levels, vote case-by-case, taking into account:
▪Ownership
structure;
▪Quorum
requirements; and
▪Vote
requirements.
Virtual
Shareholder Meetings
General
Recommendation: Generally
vote for management proposals allowing for the convening of shareholder meetings
by electronic means, so long as they do not preclude in-person meetings.
Companies are encouraged to disclose the circumstances under which
virtual-only14
meetings
would be held, and to allow for comparable rights and opportunities for
shareholders to participate electronically as they would have during an
in-person meeting.
Vote
case-by-case on shareholder proposals concerning virtual-only meetings,
considering:
▪Scope
and rationale of the proposal; and
▪Concerns
identified with the company’s prior meeting practices.
14
Virtual-only
shareholder meeting” refers to a meeting of shareholders that is held
exclusively using technology without a
corresponding
in-person meeting.
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4.C
a p i ta l / R e s t r u c t u r i n g
Capital
Adjustments
to Par Value of Common Stock
General
Recommendation: Vote
for management proposals to reduce the par value of common stock unless the
action is being taken to facilitate an anti-takeover device or some other
negative corporate governance action.
Vote
for management proposals to eliminate par value.
Common
Stock Authorization
General
Authorization Requests
General
Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of common
stock that are to be used for general corporate purposes:
▪If
share usage (outstanding plus reserved) is less than 50% of the current
authorized shares, vote for an increase of up to 50%
of current authorized shares.
▪If
share usage is 50% to 100% of the current authorized, vote for an increase of up
to 100%
of current authorized shares.
▪If
share usage is greater than current authorized shares, vote for an increase of
up to the current share usage.
▪In
the case of a stock split, the allowable increase is calculated (per above)
based on the post-split adjusted authorization.
Generally
vote against proposed increases, even if within the above ratios, if the
proposal or the company’s prior
or
ongoing use of authorized shares is problematic, including, but not limited
to:
▪The
proposal seeks to increase the number of authorized shares of the class of
common stock that has superior voting rights to other share
classes;
▪On
the same ballot is a proposal for a reverse split for which support is warranted
despite the fact that it would result in an excessive increase in the share
authorization;
▪The
company has a non-shareholder approved poison pill (including an NOL pill);
or
▪The
company has previous sizeable placements (within the past 3 years) of stock with
insiders at prices substantially below market value, or with problematic voting
rights, without shareholder approval.
However,
generally vote for proposed increases beyond the above ratios or problematic
situations when there is disclosure of specific and severe risks to shareholders
of not approving the request, such as:
▪In,
or subsequent to, the company's most recent 10-K filing, the company discloses
that there is substantial doubt about its ability to continue as a going
concern;
▪The
company states that there is a risk of imminent bankruptcy or imminent
liquidation if shareholders do not approve the increase in authorized capital;
or
▪A
government body has in the past year required the company to increase its
capital ratios.
For
companies incorporated in states that allow increases in authorized capital
without shareholder approval, generally vote withhold or against all nominees if
a unilateral capital authorization increase does not conform to the above
policies.
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Specific
Authorization Requests
General
Recommendation: Generally
vote for proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with
transaction(s) (such as acquisitions, SPAC transactions, private placements, or
similar transactions) on the same ballot, or disclosed in the proxy statement,
that warrant support. For such transactions, the allowable increase will be the
greater of:
▪twice
the amount needed to support the transactions on the ballot, and
▪the
allowable increase as calculated for general issuances above.
Dual
Class Structure
General
Recommendation: Generally
vote against proposals to create a new class of common stock
unless:
▪The
company discloses a compelling rationale for the dual-class capital structure,
such as:
▪The
company's auditor has concluded that there is substantial doubt about the
company's ability to continue as a going concern; or
▪The
new class of shares will be transitory;
▪The
new class is intended for financing purposes with minimal or no dilution to
current shareholders in both the short term and long term; and
▪The
new class is not designed to preserve or increase the voting power of an insider
or significant shareholder.
Issue
Stock for Use with Rights Plan
General
Recommendation: Vote
against proposals that increase authorized common stock for the explicit purpose
of implementing a non-shareholder-approved shareholder rights plan (poison
pill).
Preemptive
Rights
General
Recommendation: Vote
case-by-case on shareholder proposals that seek preemptive rights, taking into
consideration:
▪The
size of the company;
▪The
shareholder base; and
▪The
liquidity of the stock.
Preferred
Stock Authorization
General
Authorization Requests
General
Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of
preferred stock that are to be used for general corporate purposes:
▪If
share usage (outstanding plus reserved) is less than 50% of the current
authorized shares, vote for an increase of up to 50%
of current authorized shares.
▪If
share usage is 50% to 100% of the current authorized, vote for an increase of up
to 100%
of current authorized shares.
▪If
share usage is greater than current authorized shares, vote for an increase of
up to the current share usage.
▪In
the case of a stock split, the allowable increase is calculated (per above)
based on the post-split adjusted authorization.
▪If
no preferred shares are currently issued and outstanding, vote against the
request, unless the company discloses a specific use for the
shares.
Generally
vote against proposed increases, even if within the above ratios, if the
proposal or the company’s prior
or
ongoing use of authorized shares is problematic, including, but not limited
to:
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▪If
the shares requested are blank check preferred shares that can be used for
antitakeover purposes;15
▪The
company seeks to increase a class of non-convertible preferred shares entitled
to more than one vote per share on matters that do not solely affect the rights
of preferred stockholders "supervoting shares");
▪The
company seeks to increase a class of convertible preferred shares entitled to a
number of votes greater than the number of common shares into which they are
convertible ("supervoting shares") on matters that do not solely affect the
rights of preferred stockholders;
▪The
stated intent of the increase in the general authorization is to allow the
company to increase an existing designated class of supervoting preferred
shares;
▪On
the same ballot is a proposal for a reverse split for which support is warranted
despite the fact that it would result in an excessive increase in the share
authorization;
▪The
company has a non-shareholder approved poison pill (including an NOL pill);
or
▪The
company has previous sizeable placements (within the past 3 years) of stock with
insiders at prices substantially below market value, or with problematic voting
rights, without shareholder approval.
However,
generally vote for proposed increases beyond the above ratios or problematic
situations when there is disclosure of specific and severe risks to shareholders
of not approving the request, such as:
▪In,
or subsequent to, the company's most recent 10-K filing, the company discloses
that there is substantial doubt about its ability to continue as a going
concern;
▪The
company states that there is a risk of imminent bankruptcy or imminent
liquidation if shareholders do not approve the increase in authorized capital;
or
▪A
government body has in the past year required the company to increase its
capital ratios.
For
companies incorporated in states that allow increases in authorized capital
without shareholder approval, generally vote withhold or against all nominees if
a unilateral capital authorization increase does not conform to the above
policies.
Specific
Authorization Requests
General
Recommendation: Generally
vote for proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with
transaction(s) (such as acquisitions, SPAC transactions, private placements, or
similar transactions) on the same ballot, or disclosed in the
proxy
statement, that warrant support. For such transactions, the allowable increase
will be the greater of:
▪twice
the amount needed to support the transactions on the ballot, and
▪the
allowable increase as calculated for general issuances above.
Recapitalization
Plans
General
Recommendation: Vote
case-by-case on recapitalizations (reclassifications of securities), taking into
account the following:
▪More
simplified capital structure;
▪Enhanced
liquidity;
▪Fairness
of conversion terms;
▪Impact
on voting power and dividends;
▪Reasons
for the reclassification;
15
To
be acceptable, appropriate disclosure would be needed that the shares are
“declawed”: i.e., representation by the board that it will not, without prior
stockholder approval, issue or use the preferred stock for any defensive or
anti-takeover purpose or for the purpose of implementing any stockholder rights
plan.
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▪Conflicts
of interest; and
▪Other
alternatives considered.
Reverse
Stock Splits
General
Recommendation: Vote
for management proposals to implement a reverse stock split if:
▪The
number of authorized shares will be proportionately reduced; or
▪The
effective increase in authorized shares is equal to or less than the allowable
increase calculated in accordance with ISS' Common Stock Authorization
policy.
Vote
case-by-case on proposals that do not meet either of the above conditions,
taking into consideration the following factors:
▪Stock
exchange notification to the company of a potential delisting;
▪Disclosure
of substantial doubt about the company's ability to continue as a going concern
without additional financing;
▪The
company's rationale; or
▪Other
factors as applicable.
Share
Repurchase Programs
General
Recommendation: For
U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that
are traded solely on U.S. exchanges, vote for management proposals to institute
open-market share repurchase
plans
in which all shareholders may participate on equal terms, or to grant the board
authority to conduct open- market repurchases, in the absence of
company-specific concerns regarding:
▪Greenmail,
▪The
use of buybacks to inappropriately manipulate incentive compensation
metrics,
▪Threats
to the company's long-term viability, or
▪Other
company-specific factors as warranted.
Vote
case-by-case on proposals to repurchase shares directly from specified
shareholders, balancing the stated rationale against the possibility for the
repurchase authority to be misused, such as to repurchase shares from insiders
at a premium to market price.
Share
Repurchase Programs Shareholder Proposals
General
Recommendation: Generally
vote against shareholder proposals prohibiting executives from selling shares of
company stock during periods in which the company has announced that it may or
will be repurchasing shares of its stock. Vote for the proposal when there is a
pattern of abuse by executives exercising options or
selling
shares during periods of share buybacks.
Stock
Distributions: Splits and Dividends
General
Recommendation: Generally
vote for management proposals to increase the common share authorization for
stock split or stock dividend, provided that the effective increase in
authorized shares is equal to or is less than the allowable increase calculated
in accordance with ISS' Common Stock Authorization policy.
Tracking
Stock
General
Recommendation: Vote
case-by-case on the creation of tracking stock, weighing the strategic value of
the transaction against such factors as:
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▪Adverse
governance changes;
▪Excessive
increases in authorized capital stock;
▪Unfair
method of distribution;
▪Diminution
of voting rights;
▪Adverse
conversion features;
▪Negative
impact on stock option plans; and
▪Alternatives
such as spin-off.
Restructuring
Appraisal
Rights
General
Recommendation: Vote
for proposals to restore or provide shareholders with rights of
appraisal.
Asset
Purchases
General
Recommendation: Vote
case-by-case on asset purchase proposals, considering the following
factors:
▪Purchase
price;
▪Fairness
opinion;
▪Financial
and strategic benefits;
▪How
the deal was negotiated;
▪Conflicts
of interest;
▪Other
alternatives for the business;
▪Non-completion
risk.
Asset
Sales
General
Recommendation: Vote
case-by-case on asset sales, considering the following factors:
▪Impact
on the balance sheet/working capital;
▪Potential
elimination of diseconomies;
▪Anticipated
financial and operating benefits;
▪Anticipated
use of funds;
▪Value
received for the asset;
▪Fairness
opinion;
▪How
the deal was negotiated;
▪Conflicts
of interest.
Bundled
Proposals
General
Recommendation: Vote
case-by-case on bundled or “conditional” proxy proposals. In the case of items
that are conditioned upon each other, examine the benefits and costs of the
packaged items. In instances when
the
joint effect of the conditioned items is not in shareholders’ best interests,
vote against the proposals. If the combined effect is positive, support such
proposals.
Conversion
of Securities
General
Recommendation: Vote
case-by-case on proposals regarding conversion of securities. When evaluating
these proposals, the investor should review the dilution to existing
shareholders, the conversion price relative to market value, financial issues,
control issues, termination penalties, and conflicts of interest.
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Vote
for the conversion if it is expected that the company will be subject to onerous
penalties or will be forced to file for bankruptcy if the transaction is not
approved.
Corporate
Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged
Buyouts/Wrap Plans
General
Recommendation: Vote
case-by-case on proposals to increase common and/or preferred shares and to
issue shares as part of a debt restructuring plan, after
evaluating:
▪Dilution
to existing shareholders' positions;
▪Terms
of the offer - discount/premium in purchase price to investor, including any
fairness opinion; termination penalties; exit strategy;
▪Financial
issues - company's financial situation; degree of need for capital; use of
proceeds; effect of the financing on the company's cost of capital;
▪Management's
efforts to pursue other alternatives;
▪Control
issues - change in management; change in control, guaranteed board and committee
seats; standstill provisions; voting agreements; veto power over certain
corporate actions; and
▪Conflict
of interest - arm's length transaction, managerial incentives.
Vote
for the debt restructuring if it is expected that the company will file for
bankruptcy if the transaction is not approved.
Formation
of Holding Company
General
Recommendation: Vote
case-by-case on proposals regarding the formation of a holding company, taking
into consideration the following:
▪The
reasons for the change;
▪Any
financial or tax benefits;
▪Regulatory
benefits;
▪Increases
in capital structure; and
▪Changes
to the articles of incorporation or bylaws of the company.
Absent
compelling financial reasons to recommend for the transaction, vote against the
formation of a holding company if the transaction would include either of the
following:
▪Increases
in common or preferred stock in excess of the allowable maximum (see discussion
under “Capital”);
or
▪Adverse
changes in shareholder rights.
Going
Private and Going Dark Transactions (LBOs and Minority
Squeeze-outs)
General
Recommendation: Vote
case-by-case on going private transactions, taking into account the
following:
▪Offer
price/premium;
▪Fairness
opinion;
▪How
the deal was negotiated;
▪Conflicts
of interest;
▪Other
alternatives/offers considered; and
▪Non-completion
risk.
Vote
case-by-case on going dark transactions, determining whether the transaction
enhances shareholder value by taking into consideration:
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▪Whether
the company has attained benefits from being publicly-traded (examination of
trading volume, liquidity, and market research of the stock);
▪Balanced
interests of continuing vs. cashed-out shareholders, taking into account the
following:
▪Are
all shareholders able to participate in the transaction?
▪Will
there be a liquid market for remaining shareholders following the
transaction?
▪Does
the company have strong corporate governance?
▪Will
insiders reap the gains of control following the proposed
transaction?
▪Does
the state of incorporation have laws requiring continued reporting that may
benefit shareholders?
Joint
Ventures
General
Recommendation: Vote
case-by-case on proposals to form joint ventures, taking into account the
following:
▪Percentage
of assets/business contributed;
▪Percentage
ownership;
▪Financial
and strategic benefits;
▪Governance
structure;
▪Conflicts
of interest;
▪Other
alternatives; and
▪Non-completion
risk.
Liquidations
General
Recommendation: Vote
case-by-case on liquidations, taking into account the following:
▪Management’s
efforts to pursue other alternatives;
▪Appraisal
value of assets; and
▪The
compensation plan for executives managing the liquidation.
Vote
for the liquidation if the company will file for bankruptcy if the proposal is
not approved.
Mergers
and Acquisitions
General
Recommendation: Vote
case-by-case on mergers and acquisitions. Review and evaluate the merits and
drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
▪Valuation
-
Is the value to be received by the target shareholders (or paid by the acquirer)
reasonable? While the fairness opinion may provide an initial starting point for
assessing valuation reasonableness, emphasis is placed on the offer premium,
market reaction, and strategic rationale.
▪Market
reaction -
How has the market responded to the proposed deal? A negative market reaction
should cause closer scrutiny of a deal.
▪Strategic
rationale -
Does the deal make sense strategically? From where is the value derived? Cost
and revenue synergies should not be overly aggressive or optimistic, but
reasonably achievable. Management should also have a favorable track record of
successful integration of historical acquisitions.
▪Negotiations
and process -
Were the terms of the transaction negotiated at arm's-length? Was the process
fair and equitable? A fair process helps to ensure the best price for
shareholders. Significant negotiation "wins" can also signify the deal makers'
competency. The comprehensiveness of the sales process (e.g., full auction,
partial auction, no auction) can also affect shareholder value.
▪Conflicts
of interest -
Are insiders benefiting from the transaction disproportionately and
inappropriately as compared to non-insider shareholders? As the result of
potential conflicts, the directors and officers of the company may be more
likely to vote to approve a merger than if they did not hold these interests.
Consider whether these interests may have influenced these directors and
officers to support or recommend the
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merger.
The CIC figure presented in the "ISS Transaction Summary" section of this report
is an aggregate figure that can in certain cases be a misleading indicator of
the true value transfer from shareholders to insiders.
Where
such figure appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
▪Governance
-
Will the combined company have a better or worse governance profile than the
current governance profiles of the respective parties to the transaction? If the
governance profile is to change for the worse, the burden is on the company to
prove that other issues (such as valuation) outweigh any deterioration in
governance.
Private
Placements/Warrants/Convertible Debentures
General
Recommendation: Vote
case-by-case on proposals regarding private placements, warrants, and
convertible debentures taking into consideration:
▪Dilution
to existing shareholders' position: The amount and timing of shareholder
ownership dilution should be weighed against the needs and proposed shareholder
benefits of the capital infusion. Although newly issued common stock, absent
preemptive rights, is typically dilutive to existing shareholders, share price
appreciation is often the necessary event to trigger the exercise of "out of the
money" warrants and convertible debt. In these instances from a value
standpoint, the negative impact of dilution is mitigated by the increase in the
company's stock price that must occur to trigger the dilutive
event.
▪Terms
of the offer (discount/premium in purchase price to investor, including any
fairness opinion, conversion features, termination penalties, exit
strategy):
▪The
terms of the offer should be weighed against the alternatives of the company and
in light of company's financial condition. Ideally, the conversion price for
convertible debt and the exercise price for warrants should be at a premium to
the then prevailing stock price at the time of private placement.
▪When
evaluating the magnitude of a private placement discount or premium, consider
factors that influence the discount or premium, such as, liquidity, due
diligence costs, control and monitoring costs, capital scarcity, information
asymmetry, and anticipation of future performance.
▪Financial
issues:
▪The
company's financial condition;
▪Degree
of need for capital;
▪Use
of proceeds;
▪Effect
of the financing on the company's cost of capital;
▪Current
and proposed cash burn rate;
▪Going
concern viability and the state of the capital and credit markets.
▪Management's
efforts to pursue alternatives and whether the company engaged in a process to
evaluate alternatives: A fair, unconstrained process helps to ensure the best
price for shareholders. Financing alternatives can include joint ventures,
partnership, merger, or sale of part or all of the company.
▪Control
issues:
▪Change
in management;
▪Change
in control;
▪Guaranteed
board and committee seats;
▪Standstill
provisions;
▪Voting
agreements;
▪Veto
power over certain corporate actions; and
▪Minority
versus majority ownership and corresponding minority discount or majority
control premium.
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▪Conflicts
of interest:
▪Conflicts
of interest should be viewed from the perspective of the company and the
investor.
▪Were
the terms of the transaction negotiated at arm's length? Are managerial
incentives aligned with shareholder interests?
▪Market
reaction:
▪The
market's response to the proposed deal. A negative market reaction is a cause
for concern. Market reaction may be addressed by analyzing the one-day impact on
the unaffected stock price.
Vote
for the private placement, or for the issuance of warrants and/or convertible
debentures in a private placement, if it is expected that the company will file
for bankruptcy if the transaction is not approved.
Reorganization/Restructuring
Plan (Bankruptcy)
General
Recommendation: Vote
case-by-case on proposals to common shareholders on bankruptcy plans of
reorganization, considering the following factors including, but not limited
to:
▪Estimated
value and financial prospects of the reorganized company;
▪Percentage
ownership of current shareholders in the reorganized company;
▪Whether
shareholders are adequately represented in the reorganization process
(particularly through the existence of an Official Equity
Committee);
▪The
cause(s) of the bankruptcy filing, and the extent to which the plan of
reorganization addresses the cause(s);
▪Existence
of a superior alternative to the plan of reorganization; and
▪Governance
of the reorganized company.
Special
Purpose Acquisition Corporations (SPACs)
General
Recommendation: Vote
case-by-case on SPAC mergers and acquisitions taking into account the
following:
▪Valuation
-
Is the value being paid by the SPAC reasonable? SPACs generally lack an
independent fairness opinion and the financials on the target may be limited.
Compare the conversion price with the intrinsic value of the target company
provided in the fairness opinion. Also, evaluate the proportionate value of the
combined entity attributable to the SPAC IPO shareholders versus the pre-merger
value of SPAC. Additionally, a private company discount may be applied to the
target if it is a private entity.
▪Market
reaction -
How has the market responded to the proposed deal? A negative market reaction
may be a cause for concern. Market reaction may be addressed by analyzing the
one-day impact on the unaffected stock price.
▪Deal
timing -
A main driver for most transactions is that the SPAC charter typically requires
the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated.
Evaluate the valuation, market reaction, and potential conflicts of interest for
deals that are announced close to the liquidation date.
▪Negotiations
and process -
What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of
the sponsors.
▪Conflicts
of interest -
How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders
to qualify the deal rather than a third party or if management is encouraged to
pay a higher price for the target because of an 80 percent rule (the charter
requires that the fair market value of the target is at least equal to 80
percent of net assets of the SPAC). Also, there may be sense of urgency by the
management team of the SPAC to close the deal since its charter typically
requires a transaction to be completed within the 18-24-month
timeframe.
▪Voting
agreements -
Are the sponsors entering into enter into any voting agreements/tender offers
with shareholders who are likely to vote against the proposed merger or exercise
conversion rights?
▪Governance
-
What is the impact of having the SPAC CEO or founder on key committees following
the proposed merger?
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Special
Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
General
Recommendation: Vote
case-by-case on SPAC extension proposals taking into account the length of the
requested extension, the status of any pending transaction(s) or progression of
the acquisition process, any added incentive for non-redeeming shareholders, and
any prior extension requests.
▪Length
of request:
Typically, extension requests range from two to six months, depending on the
progression of the SPAC's acquisition process.
▪Pending
transaction(s) or
progression
of the acquisition process: Sometimes
an initial business combination was already put to a shareholder vote, but, for
varying reasons, the transaction could not be consummated by the termination
date and the SPAC is requesting an extension. Other times, the SPAC has entered
into a definitive transaction agreement, but needs additional time to consummate
or hold the shareholder meeting.
▪Added
incentive for non-redeeming shareholders:
Sometimes the SPAC sponsor (or other insiders) will contribute, typically as a
loan to the company, additional funds that will be added to the redemption value
of each public share as long as such shares are not redeemed in connection with
the extension request. The purpose of the "equity kicker" is to incentivize
shareholders to hold their shares through the end of the requested extension or
until the time the transaction is put to a shareholder vote, rather than
electing redemption at the extension proposal meeting.
▪Prior
extension requests:
Some SPACs request additional time beyond the extension period sought in prior
extension requests.
Spin-offs
General
Recommendation: Vote
case-by-case on spin-offs, considering:
▪Tax
and regulatory advantages;
▪Planned
use of the sale proceeds;
▪Valuation
of spinoff;
▪Fairness
opinion;
▪Benefits
to the parent company;
▪Conflicts
of interest;
▪Managerial
incentives;
▪Corporate
governance changes;
▪Changes
in the capital structure.
Value
Maximization Shareholder Proposals
General
Recommendation: Vote
case-by-case on shareholder proposals seeking to maximize shareholder value
by:
▪Hiring
a financial advisor to explore strategic alternatives;
▪Selling
the company; or
▪Liquidating
the company and distributing the proceeds to shareholders.
These
proposals should be evaluated based on the following factors:
▪Prolonged
poor performance with no turnaround in sight;
▪Signs
of entrenched board and management (such as the adoption of takeover
defenses);
▪Strategic
plan in place for improving value;
▪Likelihood
of receiving reasonable value in a sale or dissolution; and
▪The
company actively exploring its strategic options, including retaining a
financial advisor.
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5.C
o m p e n s a t i o n
Executive
Pay Evaluation
Underlying
all evaluations are five global principles that most investors expect
corporations to adhere to in designing and administering executive and director
compensation programs:
1.Maintain
appropriate pay-for-performance alignment, with emphasis on long-term
shareholder value: This principle encompasses overall executive pay practices,
which must be designed to attract, retain, and appropriately motivate the key
employees who drive shareholder value creation over the long term. It will take
into consideration, among other factors, the link between pay and performance;
the mix between fixed and variable pay; performance goals; and equity-based plan
costs;
2.Avoid
arrangements that risk “pay for failure”: This principle addresses the
appropriateness of long or
indefinite
contracts, excessive severance packages, and guaranteed
compensation;
3.Maintain
an independent and effective compensation committee: This principle promotes
oversight of executive pay programs by directors with appropriate skills,
knowledge, experience, and a sound process for compensation decision-making
(e.g.,
including access to independent expertise and advice when needed);
4.Provide
shareholders with clear, comprehensive compensation disclosures: This principle
underscores the importance of informative and timely disclosures that enable
shareholders to evaluate executive pay practices fully and fairly;
5.Avoid
inappropriate pay to non-executive directors: This principle recognizes the
interests of shareholders in ensuring that compensation to outside directors is
reasonable and does not compromise their independence and ability to make
appropriate judgments in overseeing managers’ pay and performance. At the market
level, it may incorporate a variety of generally accepted best
practices.
Advisory
Votes on Executive Compensation—Management Proposals (Say-on-Pay)
General
Recommendation: Vote
case-by-case on ballot items related to executive pay and practices, as well as
certain aspects of outside director compensation.
Vote
against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”)
if:
▪There
is an unmitigated misalignment between CEO pay and company performance (pay for
performance);
▪The
company maintains significant problematic pay practices;
▪The
board exhibits a significant level of poor
communication and responsiveness to
shareholders.
Vote
against or withhold from the members of the Compensation Committee and
potentially the full board if:
▪There
is no SOP on the ballot, and an against vote on an SOP would otherwise be
warranted due to pay-for- performance misalignment, problematic pay practices,
or the lack of adequate responsiveness on compensation issues raised previously,
or a combination thereof;
▪The
board fails to respond adequately to a previous SOP proposal that received less
than 70 percent support of votes cast;
▪The
company has recently practiced or approved problematic pay practices, such as
option repricing or option backdating; or
▪The
situation is egregious.
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Primary
Evaluation Factors for Executive Pay
Pay-for-Performance
Evaluation
ISS
annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period. With
respect to companies in the S&P1500, Russell 3000, or Russell 3000E
Indices16,
this analysis considers the following:
1.Peer
Group17
Alignment:
▪The
degree of alignment between the company's annualized TSR rank and the CEO's
annualized total pay rank within a peer group, each measured over a three-year
period.
▪The
rankings of CEO total pay and company financial performance within a peer group,
each measured over a three-year period.
▪The
multiple of the CEO's total pay relative to the peer group median in the most
recent fiscal year.
2.Absolute
Alignment18
– the absolute alignment between the trend in CEO pay and company TSR over the
prior five fiscal years – i.e., the difference between the trend in annual pay
changes and the trend in annualized TSR during the period.
If
the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of companies outside the Russell
indices, a misalignment between pay and performance is otherwise suggested, our
analysis may include any of the following qualitative factors, as relevant to an
evaluation of how various pay elements may work to encourage or to undermine
long-term value creation and alignment with shareholder interests:
▪The
ratio of performance- to time-based incentive awards;
▪The
overall ratio of performance-based compensation to fixed or discretionary
pay;
▪The
rigor of performance goals;
▪The
complexity and risks around pay program design;
▪The
transparency and clarity of disclosure;
▪The
company's peer group benchmarking practices;
▪Financial/operational
results, both absolute and relative to peers;
▪Special
circumstances related to, for example, a new CEO in the prior FY or anomalous
equity grant practices (e.g., bi-annual awards);
▪Realizable
pay19
compared to grant pay; and
▪Any
other factors deemed relevant.
Problematic
Pay Practices
The
focus is on executive compensation practices that contravene the global pay
principles, including:
▪Problematic
practices related to non-performance-based compensation elements;
16
The Russell
3000E Index
includes approximately 4,000 of the largest U.S. equity securities.
17
The
revised peer group is generally comprised of 14-24 companies that are selected
using market cap, revenue (or assets for certain financial firms), GICS industry
group, and company's selected peers' GICS industry group, with size constraints,
via a process designed to select peers that are comparable to the subject
company in terms of revenue/assets and industry, and also within a market-cap
bucket that is reflective of the company's market cap. For Oil, Gas &
Consumable Fuels companies, market cap is the only size
determinant.
18
Only
Russell 3000 Index companies are subject to the Absolute Alignment
analysis.
19
ISS
research reports include realizable pay for S&P1500 companies.
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▪Incentives
that may motivate excessive risk-taking or present a windfall risk;
and
▪Pay
decisions that circumvent pay-for-performance, such as options backdating or
waiving performance requirements.
Problematic
Pay Practices related to Non-Performance-Based Compensation
Elements
Pay
elements that are not directly based on performance are generally evaluated
case-by-case considering the context of a company's overall pay program and
demonstrated pay-for-performance philosophy. Please refer to ISS' U.S.
Compensation Policies FAQ document
for detail on specific pay practices that have been identified as potentially
problematic and may lead to negative recommendations if they are deemed to be
inappropriate or unjustified relative to executive pay best practices. The list
below highlights the problematic practices that carry significant weight in this
overall consideration and may result in adverse vote
recommendations:
▪Repricing
or replacing of underwater stock options/SARs without prior shareholder approval
(including cash buyouts and voluntary surrender of underwater
options);
▪Extraordinary
perquisites or tax gross-ups;
▪New
or materially amended agreements that provide for:
▪Excessive
termination or CIC severance payments (generally exceeding 3 times base salary
and average/target/most recent bonus);
▪CIC
severance payments without involuntary job loss or substantial diminution of
duties ("single" or "modified single" triggers) or in connection with a
problematic Good Reason definition;
▪CIC
excise tax gross-up entitlements (including "modified" gross-ups);
▪Multi-year
guaranteed awards that are not at risk due to rigorous performance
conditions;
▪Liberal
CIC definition combined with any single-trigger CIC benefits;
▪Insufficient
executive compensation disclosure by externally-managed issuers (EMIs) such that
a reasonable assessment of pay programs and practices applicable to the EMI's
executives is not possible;
▪Any
other provision or practice deemed to be egregious and present a significant
risk to investors.
Options
Backdating
The
following factors should be examined case-by-case to allow for distinctions to
be made between “sloppy” plan
administration
versus deliberate action or fraud:
▪Reason
and motive for the options backdating issue, such as inadvertent vs. deliberate
grant date changes;
▪Duration
of options backdating;
▪Size
of restatement due to options backdating;
▪Corrective
actions taken by the board or compensation committee, such as canceling or
re-pricing backdated options, the recouping of option gains on backdated grants;
and
▪Adoption
of a grant policy that prohibits backdating and creates a fixed grant schedule
or window period for equity grants in the future.
Compensation
Committee Communications and Responsiveness
Consider
the following factors case-by-case when evaluating ballot items related to
executive pay on the board’s
responsiveness
to investor input and engagement on compensation issues:
▪Failure
to respond to majority-supported shareholder proposals on executive pay topics;
or
▪Failure
to adequately respond to the company's previous say-on-pay proposal that
received the support of less than 70 percent of votes cast, taking into
account:
▪Disclosure
of engagement efforts with major institutional investors, including the
frequency and timing of engagements and the company participants (including
whether independent directors participated);
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▪Disclosure
of the specific concerns voiced by dissenting shareholders that led to the
say-on-pay opposition;
▪Disclosure
of specific and meaningful actions taken to address shareholders'
concerns;
▪Other
recent compensation actions taken by the company;
▪Whether
the issues raised are recurring or isolated;
▪The
company's ownership structure; and
▪Whether
the support level was less than 50 percent, which would warrant the highest
degree of responsiveness.
Frequency
of Advisory Vote on Executive Compensation ("Say When on Pay")
General
Recommendation: Vote
for annual advisory votes on compensation, which provide the most consistent and
clear communication channel for shareholder concerns about companies' executive
pay programs.
Voting
on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed
Sale
General
Recommendation: Vote
case-by-case on say on Golden Parachute proposals, including consideration of
existing change-in-control arrangements maintained with named executive officers
but also considering new or extended arrangements.
Features
that may result in an “against” recommendation include one or more of the
following, depending on the number, magnitude, and/or timing of
issue(s):
▪Single-
or modified-single-trigger cash severance;
▪Single-trigger
acceleration of unvested equity awards;
▪Full
acceleration of equity awards granted shortly before the change in
control;
▪Acceleration
of performance awards above the target level of performance without compelling
rationale;
▪Excessive
cash severance (generally >3x base salary and bonus);
▪Excise
tax gross-ups triggered and payable;
▪Excessive
golden parachute payments (on an absolute basis or as a percentage of
transaction equity value); or
▪Recent
amendments that incorporate any problematic features (such as those above) or
recent actions (such as extraordinary equity grants) that may make packages so
attractive as to influence merger agreements that may not be in the best
interests of shareholders; or
▪The
company's assertion that a proposed transaction is conditioned on shareholder
approval of the golden parachute advisory vote.
Recent
amendment(s) that incorporate problematic features will tend to carry more
weight on the overall analysis. However, the presence of multiple legacy
problematic features will also be closely scrutinized.
In
cases where the golden parachute vote is incorporated into a company's advisory
vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay
proposal in accordance with these guidelines, which may give higher weight to
that component of the overall evaluation.
Equity-Based
and Other Incentive Plans
Please
refer to ISS' U.S.
Equity Compensation Plans FAQ document
for additional details on the Equity Plan Scorecard policy.
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General
Recommendation: Vote
case-by-case on certain equity-based compensation plans20
depending on a combination of certain plan features and equity grant practices,
where positive factors may counterbalance negative factors, and vice versa, as
evaluated using an "Equity Plan Scorecard" (EPSC) approach with three
pillars:
▪Plan
Cost: The
total estimated cost of the company’s equity plans relative to industry/market
cap peers, measured by the company's estimated Shareholder Value Transfer (SVT)
in relation to peers and considering both:
▪SVT
based on new shares requested plus shares remaining for future grants, plus
outstanding unvested/unexercised grants; and
▪SVT
based only on new shares requested plus shares remaining for future
grants.
▪Plan
Features:
▪Quality
of disclosure around vesting upon a change in control (CIC);
▪Discretionary
vesting authority;
▪Liberal
share recycling on various award types;
▪Lack
of minimum vesting period for grants made under the plan;
▪Dividends
payable prior to award vesting.
▪Grant
Practices:
▪The
company’s three-year burn rate relative to its industry/market cap
peers;
▪Vesting
requirements in CEO's recent equity grants (3-year look-back);
▪The
estimated duration of the plan (based on the sum of shares remaining available
and the new shares requested, divided by the average annual shares granted in
the prior three years);
▪The
proportion of the CEO's most recent equity grants/awards subject to performance
conditions;
▪Whether
the company maintains a sufficient claw-back policy;
▪Whether
the company maintains sufficient post-exercise/vesting share-holding
requirements.
Generally
vote against the plan proposal if the combination of above factors indicates
that the plan is not, overall, in shareholders' interests, or if any of the
following egregious factors ("overriding factors") apply:
▪Awards
may vest in connection with a liberal change-of-control definition;
▪The
plan would permit repricing or cash buyout of underwater options without
shareholder approval (either by expressly permitting it – for NYSE and Nasdaq
listed companies – or by not prohibiting it when the company has a history of
repricing – for non-listed companies);
▪The
plan is a vehicle for problematic pay practices or a significant
pay-for-performance disconnect under certain circumstances;
▪The
plan is excessively dilutive to shareholders' holdings;
▪The
plan contains an evergreen (automatic share replenishment) feature;
or
▪Any
other plan features are determined to have a significant negative impact on
shareholder interests.
Further
Information on certain EPSC Factors:
Shareholder
Value Transfer (SVT)
The
cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which
is measured using a binomial option pricing model that assesses the amount of
shareholders’ equity flowing out of the company to employees and directors. SVT
is expressed as both a dollar amount and as a percentage of market value, and
includes the new
20
Proposals evaluated under the EPSC policy generally include those to approve or
amend (1) stock option plans for employees and/or employees and directors, (2)
restricted stock plans for employees and/or employees and directors, and (3)
omnibus stock incentive plans for employees and/or employees and directors;
amended plans will be further evaluated case-by-case.
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shares
proposed, shares available under existing plans, and shares granted but
unexercised (using two measures, in the case of plans subject to the Equity Plan
Scorecard evaluation, as noted above). All award types are valued. For omnibus
plans, unless limitations are placed on the most expensive types of awards (for
example, full-value awards), the assumption is made that all awards to be
granted will be the most expensive types.
For
proposals that are not subject to the Equity Plan Scorecard evaluation,
Shareholder Value Transfer is reasonable if it falls below a company-specific
benchmark. The benchmark is determined as follows: The top quartile performers
in each industry group (using the Global Industry Classification Standard: GICS)
are identified. Benchmark SVT levels for each industry are established based on
these top performers’ historic SVT. Regression analyses are run on each industry
group to identify the variables most strongly correlated to SVT. The benchmark
industry SVT level is then adjusted upwards or downwards for the specific
company by plugging the company- specific performance measures, size, and cash
compensation into the industry cap equations to arrive at the
company’s
benchmark.21
Three-Year
Burn Rate
For
meetings held prior to February 1, 2023, burn-rate benchmarks (utilized in
Equity Plan Scorecard evaluations) are calculated as the greater of: (1) the
mean (μ) plus one standard deviation (σ) of the company's GICS group segmented
by S&P 500, Russell 3000 index (less the S&P500), and non-Russell 3000
index; and (2) two percent of weighted common shares outstanding. In
addition, year-over-year burn-rate benchmark changes will be limited to a
maximum of two (2) percentage points plus or minus the prior year's burn-rate
benchmark. See the U.S.
Equity Compensation Plans FAQ for
the benchmarks.
For
meetings held prior to February 1, 2023, a company's adjusted burn rate is
calculated as follows:
Burn
Rate = (# of appreciation awards granted + # of full value awards granted *
Volatility Multiplier) / Weighted average common shares outstanding
The
Volatility Multiplier is used to provide more equivalent valuation between stock
options and full value shares, based on the company's historical stock price
volatility.
Effective
for meetings held on or after February 1, 2023, a "Value-Adjusted Burn Rate"
will instead be used for stock plan evaluations. Value-Adjusted Burn Rate
benchmarks will be calculated as the greater of: (1) an industry- specific
threshold based on three-year burn rates within the company's GICS group
segmented by S&P 500, Russell 3000 index (less the S&P 500) and
non-Russell 3000 index; and (2) a de minimis threshold established separately
for each of the S&P 500, the Russell 3000 index less the S&P 500, and
the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be
limited to a predetermined range above or below the prior year's burn-rate
benchmark.
The
Value-Adjusted Burn Rate will be calculated as follows:
Value-Adjusted
Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model)
+ (# of full-value awards * stock price)) / (Weighted average common shares *
stock price).
21
For plans evaluated under the Equity Plan Scorecard policy, the company's SVT
benchmark is considered along with other factors.
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Egregious
Factors
Liberal
Change in Control Definition
Generally
vote against equity plans if the plan has a liberal definition of change in
control and the equity awards could vest upon such liberal definition of change
in control, even though an actual change in control may not occur. Examples of
such a definition include, but are not limited to, announcement or commencement
of a tender offer, provisions for acceleration upon a “potential” takeover,
shareholder approval of a merger or other transactions, or similar
language.
Repricing
Provisions
Vote
against plans that expressly permit the repricing or exchange of underwater
stock options/stock appreciate rights (SARs) without prior shareholder approval.
"Repricing" typically includes the ability to do any of the
following:
▪Amend
the terms of outstanding options or SARs to reduce the exercise price of such
outstanding options or SARs;
▪Cancel
outstanding options or SARs in exchange for options or SARs with an exercise
price that is less than the exercise price of the original options or
SARs;
▪Cancel
underwater options in exchange for stock awards; or
▪Provide
cash buyouts of underwater options.
While
the above cover most types of repricing, ISS may view other provisions as akin
to repricing depending on the facts and circumstances.
Also,
vote against or withhold from members of the Compensation Committee who approved
repricing (as defined above or otherwise determined by ISS), without prior
shareholder approval, even if such repricings are allowed in their equity
plan.
Vote
against plans that do not expressly prohibit repricing or cash buyout of
underwater options without shareholder approval if the company has a history of
repricing/buyouts without shareholder approval, and the applicable listing
standards would not preclude them from doing so.
Problematic
Pay Practices or Significant Pay-for-Performance Disconnect
If
the equity plan on the ballot is a vehicle for problematic
pay practices,
vote against the plan.
ISS
may recommend a vote against the equity plan if the plan is determined to be a
vehicle for pay-for- performance misalignment. Considerations in voting against
the equity plan may include, but are not limited to:
▪Severity
of the pay-for-performance misalignment;
▪Whether
problematic equity grant practices are driving the misalignment;
and/or
▪Whether
equity plan awards have been heavily concentrated to the CEO and/or the other
NEOs.
Amending
Cash and Equity Plans (including Approval for Tax Deductibility
(162(m))
General
Recommendation: Vote
case-by-case on amendments to cash and equity incentive plans.
Generally
vote for proposals to amend executive cash, stock, or cash and stock incentive
plans if the proposal:
▪Addresses
administrative features only; or
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▪Seeks
approval for Section 162(m) purposes only, and the plan administering committee
consists entirely of independent directors, per ISS’
Classification of Directors.
Note that if the company is presenting the plan to shareholders for the first
time for any reason (including after the company’s initial public offering), or
if the proposal is bundled with other material plan amendments, then the
recommendation will be case-by-case (see below).
Vote
against proposals to amend executive cash, stock, or cash and stock incentive
plans if the proposal:
▪Seeks
approval for Section 162(m) purposes only, and the plan administering committee
does not consist entirely of independent directors, per ISS’
Classification of Directors.
Vote
case-by-case on all other proposals to amend cash incentive plans. This includes
plans presented to shareholders for the first time after the company's IPO
and/or proposals that bundle material amendment(s) other than those for Section
162(m) purposes.
Vote
case-by-case on all other proposals to amend equity incentive plans, considering
the following:
▪If
the proposal requests additional shares and/or the amendments include a term
extension or addition of full value awards as an award type, the recommendation
will be based on the Equity Plan Scorecard evaluation as well as an analysis of
the overall impact of the amendments.
▪If
the plan is being presented to shareholders for the first time (including after
the company's IPO), whether or not additional shares are being requested, the
recommendation will be based on the Equity Plan Scorecard evaluation as well as
an analysis of the overall impact of any amendments.
▪If
there is no request for additional shares and the amendments do not include a
term extension or addition of full value awards as an award type, then the
recommendation will be based entirely on an analysis of the overall impact of
the amendments, and the EPSC evaluation will be shown only for informational
purposes.
In
the first two case-by-case evaluation scenarios, the EPSC evaluation/score is
the more heavily weighted consideration.
Specific
Treatment of Certain Award Types in Equity Plan Evaluations
Dividend
Equivalent Rights
Options
that have Dividend Equivalent Rights (DERs) associated with them will have a
higher calculated award value than those without DERs under the binomial model,
based on the value of these dividend streams. The higher value will be applied
to new shares, shares available under existing plans, and shares awarded but not
exercised per the plan specifications. DERS transfer more shareholder equity to
employees and non-employee directors and this cost should be
captured.
Operating
Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts
(REITs)
For
Real Estate Investment Trusts (REITS), include the common shares issuable upon
conversion of outstanding Operating Partnership (OP) units in the share count
for the purposes of determining: (1) market capitalization in the Shareholder
Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate
analysis.
Other
Compensation Plans
401(k)
Employee Benefit Plans
General
Recommendation: Vote
for proposals to implement a 401(k) savings plan for employees.
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Employee
Stock Ownership Plans (ESOPs)
General
Recommendation: Vote
for proposals to implement an ESOP or increase authorized shares for existing
ESOPs, unless the number of shares allocated to the ESOP is excessive (more than
five percent of outstanding shares).
Employee
Stock Purchase Plans—Qualified Plans
General
Recommendation: Vote
case-by-case on qualified employee stock purchase plans. Vote for employee stock
purchase plans where all of the following apply:
▪Purchase
price is at least 85 percent of fair market value;
▪Offering
period is 27 months or less; and
▪The
number of shares allocated to the plan is 10 percent or less of the outstanding
shares.
Vote
against qualified employee stock purchase plans where when the plan features do
not meet all of the above criteria.
Employee
Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: Vote
case-by-case on nonqualified employee stock purchase plans. Vote for
nonqualified employee stock purchase plans with all the following
features:
▪Broad-based
participation;
▪Limits
on employee contribution, which may be a fixed dollar amount or expressed as a
percent of base salary;
▪Company
matching contribution up to 25 percent of employee’s contribution, which is
effectively a discount
of
20 percent from market value; and
▪No
discount on the stock price on the date of purchase when there is a company
matching contribution.
Vote
against nonqualified employee stock purchase plans when the plan features do not
meet all of the above criteria. If the matching contribution or effective
discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of
the assessment.
Option
Exchange Programs/Repricing Options
General
Recommendation: Vote
case-by-case on management proposals seeking approval to exchange/reprice
options taking into consideration:
▪Historic
trading patterns--the stock price should not be so volatile that the options are
likely to be back “in- the-money” over the near term;
▪Rationale
for the re-pricing--was the stock price decline beyond management's
control?;
▪Is
this a value-for-value exchange?;
▪Are
surrendered stock options added back to the plan reserve?;
▪Timing--repricing
should occur at least one year out from any precipitous drop in company's stock
price;
▪Option
vesting--does the new option vest immediately or is there a black-out
period?;
▪Term
of the option--the term should remain the same as that of the replaced
option;
▪Exercise
price--should be set at fair market or a premium to market;
▪Participants--executive
officers and directors must be excluded.
If
the surrendered options are added back to the equity plans for re-issuance, then
also take into consideration the company’s total cost of equity plans and its
three-year average burn rate.
In
addition to the above considerations, evaluate the intent, rationale, and timing
of the repricing proposal. The proposal should clearly articulate why the board
is choosing to conduct an exchange program at this point in time. Repricing
underwater options after a recent precipitous drop in the company’s stock price
demonstrates poor timing and warrants additional scrutiny. Also, consider the
terms of the surrendered options, such as the grant date, exercise price and
vesting schedule. Grant dates of surrendered options should be far enough back
(two to
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three
years) so as not to suggest that repricings are being done to take advantage of
short-term downward price movements. Similarly, the exercise price of
surrendered options should be above the 52-week high for the stock
price.
Vote
for shareholder proposals to put option repricings to a shareholder
vote.
Stock
Plans in Lieu of Cash
General
Recommendation: Vote
case-by-case on plans that provide participants with the option of taking all or
a portion of their cash compensation in the form of stock.
Vote
for non-employee director-only equity plans that provide a dollar-for-dollar
cash-for-stock exchange.
Vote
case-by-case on plans which do not provide a dollar-for-dollar cash for stock
exchange. In cases where the exchange is not dollar-for-dollar, the request for
new or additional shares for such equity program will be considered using the
binomial option pricing model. In an effort to capture the total cost of total
compensation, ISS will not make any adjustments to carve out the in-lieu-of cash
compensation.
Transfer
Stock Option (TSO) Programs
General
Recommendation: One-time
Transfers: Vote against or withhold from compensation committee members if they
fail to submit one-time transfers to shareholders for approval.
Vote
case-by-case on one-time transfers. Vote for if:
▪Executive
officers and non-employee directors are excluded from
participating;
▪Stock
options are purchased by third-party financial institutions at a discount to
their fair value using option pricing models such as Black-Scholes or a Binomial
Option Valuation or other appropriate financial models; and
▪There
is a two-year minimum holding period for sale proceeds (cash or stock) for all
participants.
Additionally,
management should provide a clear explanation of why options are being
transferred to a third-party institution and whether the events leading up to a
decline in stock price were beyond management's control. A
review
of the company's historic stock price volatility should indicate if the options
are likely to be back “in-the- money” over the near term.
Ongoing
TSO program: Vote against equity plan proposals if the details of ongoing TSO
programs are not provided to shareholders. Since TSOs will be one of the award
types under a stock plan, the ongoing TSO program, structure, and mechanics must
be disclosed to shareholders. The specific criteria to be considered in
evaluating these proposals include, but not limited, to the
following:
▪Eligibility;
▪Vesting;
▪Bid-price;
▪Term
of options;
▪Cost
of the program and impact of the TSOs on company’s total option expense;
and
▪Option
repricing policy.
Amendments
to existing plans that allow for introduction of transferability of stock
options should make clear that only options granted post-amendment shall be
transferable.
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Director
Compensation
Shareholder
Ratification of Director Pay Programs
General
Recommendation: Vote
case-by-case on management proposals seeking ratification of non-employee
director compensation, based on the following factors:
▪If
the equity plan under which non-employee director grants are made is on the
ballot, whether or not it warrants support; and
▪An
assessment of the following qualitative factors:
▪The
relative magnitude of director compensation as compared to companies of a
similar profile;
▪The
presence of problematic pay practices relating to director
compensation;
▪Director
stock ownership guidelines and holding requirements;
▪Equity
award vesting schedules;
▪The
mix of cash and equity-based compensation;
▪Meaningful
limits on director compensation;
▪The
availability of retirement benefits or perquisites; and
▪The
quality of disclosure surrounding director compensation.
Equity
Plans for Non-Employee Directors
General
Recommendation: Vote
case-by-case on compensation plans for non-employee directors, based
on:
▪The
total estimated cost of the company’s equity plans relative to industry/market
cap peers, measured by the company’s estimated Shareholder Value Transfer (SVT)
based on new shares requested plus shares remaining for future grants, plus
outstanding unvested/unexercised grants;
▪The
company’s three-year burn rate relative to its industry/market cap peers (in
certain circumstances); and
▪The
presence of any egregious plan features (such as an option repricing provision
or liberal CIC vesting risk).
On
occasion, non-employee director stock plans will exceed the plan cost or
burn-rate benchmarks when combined with employee or executive stock plans. In
such cases, vote case-by-case on the plan taking into consideration the
following qualitative factors:
▪The
relative magnitude of director compensation as compared to companies of a
similar profile;
▪The
presence of problematic pay practices relating to director
compensation;
▪Director
stock ownership guidelines and holding requirements;
▪Equity
award vesting schedules;
▪The
mix of cash and equity-based compensation;
▪Meaningful
limits on director compensation;
▪The
availability of retirement benefits or perquisites; and
▪The
quality of disclosure surrounding director compensation.
Non-Employee
Director Retirement Plans
General
Recommendation: Vote
against retirement plans for non-employee directors. Vote for shareholder
proposals to eliminate retirement plans for non-employee directors.
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Shareholder
Proposals on Compensation
Bonus
Banking/Bonus Banking “Plus”
General
Recommendation: Vote
case-by-case on proposals seeking deferral of a portion of annual bonus pay,
with ultimate payout linked to sustained results for the performance metrics on
which the bonus was earned (whether for the named executive officers or a wider
group of employees), taking into account the following factors:
▪The
company’s past practices regarding equity and cash compensation;
▪Whether
the company has a holding period or stock ownership requirements in place, such
as a meaningful retention ratio (at least 50 percent for full tenure);
and
▪Whether
the company has a rigorous claw-back policy in place.
Compensation
Consultants—Disclosure of Board or Company’s Utilization
General
Recommendation: Generally
vote for shareholder proposals seeking disclosure regarding the company, board,
or compensation committee’s use of compensation consultants, such as company
name, business relationship(s), and fees paid.
Disclosure/Setting
Levels or Types of Compensation for Executives and Directors
General
Recommendation: Generally
vote for shareholder proposals seeking additional disclosure of executive and
director pay information, provided the information requested is relevant to
shareholders' needs, would not put the company at a competitive disadvantage
relative to its industry, and is not unduly burdensome to the
company.
Generally
vote against shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation (such as
types of compensation elements or specific metrics) to be used for executive or
directors.
Generally
vote against shareholder proposals that mandate a minimum amount of stock that
directors must own in order to qualify as a director or to remain on the
board.
Vote
case-by-case on all other shareholder proposals regarding executive and director
pay, taking into account relevant factors, including but not limited to: company
performance, pay level and design versus peers, history of compensation concerns
or pay-for-performance disconnect, and/or the scope and prescriptive nature of
the proposal.
Golden
Coffins/Executive Death Benefits
General
Recommendation: Generally
vote for proposals calling for companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could
oblige the company to make
payments
or awards following the death of a senior executive in the form of unearned
salary or bonuses, accelerated vesting or the continuation in force of unvested
equity grants, perquisites and other payments or awards made in lieu of
compensation. This would not apply to any benefit programs or equity plan
proposals for which the broad-based employee population is
eligible.
Hold
Equity Past Retirement or for a Significant Period of Time
General
Recommendation: Vote
case-by-case on shareholder proposals asking companies to adopt policies
requiring senior executive officers to retain a portion of net shares acquired
through compensation plans. The following factors will be taken into
account:
▪The
percentage/ratio of net shares required to be retained;
▪The
time period required to retain the shares;
▪Whether
the company has equity retention, holding period, and/or stock ownership
requirements in place and the robustness of such requirements;
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▪Whether
the company has any other policies aimed at mitigating risk taking by
executives;
▪Executives'
actual stock ownership and the degree to which it meets or exceeds the
proponent’s suggested
holding
period/retention ratio or the company’s existing requirements; and
▪Problematic
pay practices, current and past, which may demonstrate a short-term versus
long-term focus.
Pay
Disparity
General
Recommendation: Vote
case-by-case on proposals calling for an analysis of the pay disparity between
corporate executives and other non-executive employees. The following factors
will be considered:
▪The
company’s current level of disclosure of its executive compensation setting
process, including how the company considers pay disparity;
▪If
any problematic pay practices or pay-for-performance concerns have been
identified at the company; and
▪The
level of shareholder support for the company's pay programs.
Generally
vote against proposals calling for the company to use the pay disparity analysis
or pay ratio in a specific way to set or limit executive pay.
Pay
for Performance/Performance-Based Awards
General
Recommendation: Vote
case-by-case on shareholder proposals requesting that a significant amount of
future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging
performance metrics to shareholders, based on the following analytical
steps:
▪First,
vote for shareholder proposals advocating the use of performance-based equity
awards, such as performance contingent options or restricted stock, indexed
options, or premium-priced options, unless the proposal is overly restrictive or
if the company has demonstrated that it is using a “substantial” portion of
performance-based awards for its top executives. Standard stock options and
performance-accelerated awards do not meet the criteria to be considered as
performance-based awards. Further, premium-priced options should have a
meaningful premium to be considered performance-based awards.
▪Second,
assess the rigor of the company’s performance-based equity program. If the bar
set for the performance-based program is too low based on the company’s
historical or peer group comparison, generally vote for the proposal.
Furthermore, if target performance results in an above target payout, vote for
the shareholder proposal due to program’s poor design. If the company does not
disclose the performance metric of the performance-based equity program, vote
for the shareholder proposal regardless of the outcome of the first step to the
test.
In
general, vote for the shareholder proposal if the company does not meet both of
the above two steps.
Pay
for Superior Performance
General
Recommendation: Vote
case-by-case on shareholder proposals that request the board establish a
pay-for- superior performance standard in the company's executive compensation
plan for senior executives. These proposals generally include the following
principles:
▪Set
compensation targets for the plan’s annual and long-term incentive pay
components at or below the peer group median;
▪Deliver
a majority of the plan’s target long-term compensation through
performance-vested, not simply time- vested, equity awards;
▪Provide
the strategic rationale and relative weightings of the financial and
non-financial performance metrics or criteria used in the annual and
performance-vested long-term incentive components of the plan;
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▪Establish
performance targets for each plan financial metric relative to the performance
of the company’s
peer
companies;
▪Limit
payment under the annual and performance-vested long-term incentive components
of the plan to when the company’s performance on its selected financial
performance metrics exceeds peer group median performance.
Consider
the following factors in evaluating this proposal:
▪What
aspects of the company’s annual and long-term equity incentive programs are
performance driven?
▪If
the annual and long-term equity incentive programs are performance driven, are
the performance criteria and hurdle rates disclosed to shareholders or are they
benchmarked against a disclosed peer group?
▪Can
shareholders assess the correlation between pay and performance based on the
current disclosure?
▪What
type of industry and stage of business cycle does the company belong
to?
Pre-Arranged
Trading Plans (10b5-1 Plans)
General
Recommendation: Generally
vote for shareholder proposals calling for the addition of certain safeguards in
prearranged trading plans (10b5-1 plans) for executives. Safeguards may
include:
▪Adoption,
amendment, or termination of a 10b5-1 Plan must be disclosed in a Form
8-K;
▪Amendment
or early termination of a 10b5-1 Plan allowed only under extraordinary
circumstances, as determined by the board;
▪Request
that a certain number of days that must elapse between adoption or amendment of
a 10b5-1 Plan and initial trading under the plan;
▪Reports
on Form 4 must identify transactions made pursuant to a 10b5-1
Plan;
▪An
executive may not trade in company stock outside the 10b5-1 Plan;
▪Trades
under a 10b5-1 Plan must be handled by a broker who does not handle other
securities transactions for the executive.
Prohibit
Outside CEOs from Serving on Compensation Committees
General
Recommendation: Generally
vote against proposals seeking a policy to prohibit any outside CEO from serving
on a company’s compensation committee, unless the company has demonstrated
problematic pay practices that raise concerns about the performance and
composition of the committee.
Recoupment
of Incentive or Stock Compensation in Specified Circumstances
General
Recommendation: Vote
case-by-case on proposals to recoup incentive cash or stock compensation made to
senior executives if it is later determined that the figures upon which
incentive compensation is earned turn out to have been in error, or if the
senior executive has breached company policy or has engaged in misconduct that
may be significantly detrimental to the company's financial position or
reputation, or if the senior executive failed to manage or monitor risks that
subsequently led to significant financial or reputational harm to the
company.
Many
companies have adopted policies that permit recoupment in cases where an
executive's fraud, misconduct, or negligence significantly contributed to a
restatement of financial results that led to the awarding of unearned incentive
compensation. However, such policies may be narrow given that not all misconduct
or negligence may result in significant financial restatements. Misconduct,
negligence, or lack of sufficient oversight by senior executives may lead to
significant financial loss or reputational damage that may have long-lasting
impact.
In
considering whether to support such shareholder proposals, ISS will take into
consideration the following factors:
▪If
the company has adopted a formal recoupment policy;
▪The
rigor of the recoupment policy focusing on how and under what circumstances the
company may recoup incentive or stock compensation;
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▪Whether
the company has chronic restatement history or material financial
problems;
▪Whether
the company’s policy substantially addresses the concerns raised by the
proponent;
▪Disclosure
of recoupment of incentive or stock compensation from senior executives or lack
thereof; or
▪Any
other relevant factors.
Severance
Agreements for Executives/Golden Parachutes
General
Recommendation: Vote
for shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval prior
to
entering into employment contracts.
Vote
case-by-case on proposals to ratify or cancel golden parachutes. An acceptable
parachute should include, but is not limited to, the following:
▪The
triggering mechanism should be beyond the control of management;
▪The
amount should not exceed three times base amount (defined as the average annual
taxable W-2 compensation during the five years prior to the year in which the
change of control occurs);
▪Change-in-control
payments should be double-triggered, i.e., (1) after a change in control has
taken place, and
(2)
termination of the executive as a result of the change in control. Change in
control is defined as a change in the company ownership structure.
Share
Buyback Impact on Incentive Program Metrics
General
Recommendation: Vote
case-by-case on proposals requesting the company exclude the impact of share
buybacks from the calculation of incentive program metrics, considering the
following factors:
▪The
frequency and timing of the company's share buybacks;
▪The
use of per-share metrics in incentive plans;
▪The
effect of recent buybacks on incentive metric results and payouts;
and
▪Whether
there is any indication of metric result manipulation.
Supplemental
Executive Retirement Plans (SERPs)
General
Recommendation: Generally
vote for shareholder proposals requesting to put extraordinary benefits
contained in SERP agreements to a shareholder vote unless the company’s
executive pension plans do not contain excessive benefits beyond what is offered
under employee-wide plans.
Generally
vote for shareholder proposals requesting to limit the executive benefits
provided under the company’s supplemental executive retirement plan (SERP) by
limiting covered compensation to a senior executive’s annual salary or those pay
elements covered for the general employee population.
Tax
Gross-Up Proposals
General
Recommendation: Generally
vote for proposals calling for companies to adopt a policy of not providing tax
gross-up payments to executives, except in situations where gross-ups are
provided pursuant to a plan, policy, or arrangement applicable to management
employees of the company, such as a relocation or expatriate tax equalization
policy.
Termination
of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of
Unvested Equity
General
Recommendation: Vote
case-by-case on shareholder proposals seeking a policy requiring termination of
employment prior to severance payment and/or eliminating accelerated vesting of
unvested equity.
The
following factors will be considered:
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▪The
company's current treatment of equity upon employment termination and/or in
change-in-control situations (i.e., vesting is double triggered and/or pro rata,
does it allow for the assumption of equity by acquiring company, the treatment
of performance shares, etc.);
▪Current
employment agreements, including potential poor pay practices such as gross-ups
embedded in those agreements.
Generally
vote for proposals seeking a policy that prohibits automatic acceleration of the
vesting of equity awards to senior executives upon a voluntary termination of
employment or in the event of a change in control (except for pro rata vesting
considering the time elapsed and attainment of any related performance goals
between the award date and the change in control).
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6.R
o u t i n e / M i s c e l l a n e o u s
Adjourn
Meeting
General
Recommendation: Generally
vote against proposals to provide management with the authority to adjourn an
annual or special meeting absent compelling reasons to support the
proposal.
Vote
for proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote against proposals if
the wording is too vague or if the proposal includes "other
business."
Amend
Quorum Requirements
General
Recommendation: Vote
against proposals to reduce quorum requirements for shareholder meetings below a
majority of the shares outstanding unless there are compelling reasons to
support the proposal.
Amend
Minor Bylaws
General
Recommendation: Vote
for bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
Change
Company Name
General
Recommendation: Vote
for proposals to change the corporate name unless there is compelling evidence
that the change would adversely impact shareholder value.
Change
Date, Time, or Location of Annual Meeting
General
Recommendation: Vote
for management proposals to change the date, time, or location of the annual
meeting unless the proposed change is unreasonable.
Vote
against shareholder proposals to change the date, time, or location of the
annual meeting unless the current scheduling or location is
unreasonable.
Other
Business
General
Recommendation: Vote
against proposals to approve other business when it appears as a voting
item.
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7.S
o c i a l a n d En v i r o n m e n t a l I s s u e s
Global
Approach
Issues
covered under the policy include a wide range of topics, including consumer and
product safety, environment and energy, labor standards and human rights,
workplace and board diversity, and corporate political issues. While a variety
of factors goes into each analysis, the overall principle guiding all vote
recommendations focuses on how the proposal may enhance or protect shareholder
value in either the short or long term.
General
Recommendation: Generally
vote case-by-case, examining primarily whether implementation of the proposal is
likely to enhance or protect shareholder value. The following factors will be
considered:
▪If
the issues presented in the proposal are more appropriately or effectively dealt
with through legislation or government regulation;
▪If
the company has already responded in an appropriate and sufficient manner to the
issue(s) raised in the proposal;
▪Whether
the proposal's request is unduly burdensome (scope or timeframe) or overly
prescriptive;
▪The
company's approach compared with any industry standard practices for addressing
the issue(s) raised by the proposal;
▪Whether
there are significant controversies, fines, penalties, or litigation associated
with the company's environmental or social practices;
▪If
the proposal requests increased disclosure or greater transparency, whether
reasonable and sufficient information is currently available to shareholders
from the company or from other publicly available sources; and
▪If
the proposal requests increased disclosure or greater transparency, whether
implementation would reveal proprietary or confidential information that could
place the company at a competitive disadvantage.
Endorsement
of Principles
General
Recommendation: Generally
vote against proposals seeking a company's endorsement of principles that
support a particular public policy position. Endorsing a set of principles may
require a company to take a stand on an issue that is beyond its own control and
may limit its flexibility with respect to future developments.
Management
and the board should be afforded the flexibility to make decisions on specific
public policy positions based on their own assessment of the most beneficial
strategies for the company.
Animal
Welfare
Animal
Welfare Policies
General
Recommendation: Generally
vote for proposals seeking a report on a company’s animal welfare
standards,
or animal welfare-related risks, unless:
▪The
company has already published a set of animal welfare standards and monitors
compliance;
▪The
company’s standards are comparable to industry peers; and
▪There
are no recent significant fines, litigation, or controversies related to the
company’s and/or its suppliers'
treatment
of animals.
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Animal
Testing
General
Recommendation: Generally
vote against proposals to phase out the use of animals in product testing,
unless:
▪The
company is conducting animal testing programs that are unnecessary or not
required by regulation;
▪The
company is conducting animal testing when suitable alternatives are commonly
accepted and used by industry peers; or
▪There
are recent, significant fines or litigation related to the company’s treatment
of animals.
Animal
Slaughter
General
Recommendation: Generally
vote against proposals requesting the implementation of Controlled Atmosphere
Killing (CAK) methods at company and/or supplier operations unless such methods
are required by legislation or generally accepted as the industry
standard.
Vote
case-by-case on proposals requesting a report on the feasibility of implementing
CAK methods at company and/or supplier operations considering the availability
of existing research conducted by the company or industry groups on this topic
and any fines or litigation related to current animal processing procedures at
the company.
Consumer
Issues
Genetically
Modified Ingredients
General
Recommendation: Generally
vote against proposals requesting that a company voluntarily label genetically
engineered (GE) ingredients in its products. The labeling of products with GE
ingredients is best left to the appropriate regulatory authorities.
Vote
case-by-case on proposals asking for a report on the feasibility of labeling
products containing GE ingredients, taking into account:
▪The
potential impact of such labeling on the company's business;
▪The
quality of the company’s disclosure on GE product labeling, related voluntary
initiatives, and how this disclosure compares with industry peer disclosure;
and
▪Company’s
current disclosure on the feasibility of GE product labeling.
Generally
vote against proposals seeking a report on the social, health, and environmental
effects of genetically modified organisms (GMOs). Studies of this sort are
better undertaken by regulators and the scientific community.
Generally
vote against proposals to eliminate GE ingredients from the company's products,
or proposals asking for reports outlining the steps necessary to eliminate GE
ingredients from the company’s products. Such decisions are more appropriately
made by management with consideration of current regulations.
Reports
on Potentially Controversial Business/Financial Practices
General
Recommendation: Vote
case-by-case on requests for reports on a company’s potentially controversial
business or financial practices or products, taking into account:
▪Whether
the company has adequately disclosed mechanisms in place to prevent
abuses;
▪Whether
the company has adequately disclosed the financial risks of the
products/practices in question;
▪Whether
the company has been subject to violations of related laws or serious
controversies; and
▪Peer
companies’ policies/practices in this area.
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Pharmaceutical
Pricing, Access to Medicines, and Prescription Drug Reimportation
General
Recommendation: Generally
vote against proposals requesting that companies implement specific price
restraints on pharmaceutical products unless the company fails to adhere to
legislative guidelines or industry norms in its product pricing
practices.
Vote
case-by-case on proposals requesting that a company report on its product
pricing or access to medicine policies, considering:
▪The
potential for reputational, market, and regulatory risk exposure;
▪Existing
disclosure of relevant policies;
▪Deviation
from established industry norms;
▪Relevant
company initiatives to provide research and/or products to disadvantaged
consumers;
▪Whether
the proposal focuses on specific products or geographic regions;
▪The
potential burden and scope of the requested report;
▪Recent
significant controversies, litigation, or fines at the company.
Generally
vote for proposals requesting that a company report on the financial and legal
impact of its prescription drug reimportation policies unless such information
is already publicly disclosed.
Generally
vote against proposals requesting that companies adopt specific policies to
encourage or constrain prescription drug reimportation. Such matters are more
appropriately the province of legislative activity and may place the company at
a competitive disadvantage relative to its peers.
Product
Safety and Toxic/Hazardous Materials
General
Recommendation: Generally
vote for proposals requesting that a company report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic/hazardous
materials or product safety in its supply chain, unless:
▪The
company already discloses similar information through existing reports such as a
supplier code of conduct and/or a sustainability report;
▪The
company has formally committed to the implementation of a toxic/hazardous
materials and/or product safety and supply chain reporting and monitoring
program based on industry norms or similar standards within a specified time
frame; and
▪The
company has not been recently involved in relevant significant controversies,
fines, or litigation.
Vote
case-by-case on resolutions requesting that companies develop a feasibility
assessment to phase-out of certain toxic/hazardous materials, or evaluate and
disclose the potential financial and legal risks associated with utilizing
certain materials, considering:
▪The
company’s current level of disclosure regarding its product safety policies,
initiatives, and oversight mechanisms;
▪Current
regulations in the markets in which the company operates; and
▪Recent
significant controversies, litigation, or fines stemming from toxic/hazardous
materials at the company.
Generally
vote against resolutions requiring that a company reformulate its
products.
Tobacco-Related
Proposals
General
Recommendation: Vote
case-by-case on resolutions regarding the advertisement of tobacco products,
considering:
▪Recent
related fines, controversies, or significant litigation;
▪Whether
the company complies with relevant laws and regulations on the marketing of
tobacco;
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▪Whether
the company’s advertising restrictions deviate from those of industry
peers;
▪Whether
the company entered into the Master Settlement Agreement, which restricts
marketing of tobacco to youth; and
▪Whether
restrictions on marketing to youth extend to foreign countries.
Vote
case-by-case on proposals regarding second-hand smoke, considering;
▪Whether
the company complies with all laws and regulations;
▪The
degree that voluntary restrictions beyond those mandated by law might hurt the
company’s
competitiveness;
and
▪The
risk of any health-related liabilities.
Generally
vote against resolutions to cease production of tobacco-related products, to
avoid selling products to tobacco companies, to spin-off tobacco-related
businesses, or prohibit investment in tobacco equities. Such business decisions
are better left to company management or portfolio managers.
Generally
vote against proposals regarding tobacco product warnings. Such decisions are
better left to public health authorities.
Climate
Change
Say
on Climate (SoC) Management Proposals
General
Recommendation: Vote
case-by-case on management proposals that request shareholders to
approve
the
company’s climate transition action plan22,
taking into account the completeness and rigor of the plan.
Information
that will be considered where available includes the following:
▪The
extent to which the company’s climate related disclosures are in line with TCFD
recommendations and meet other market standards;
▪Disclosure
of its operational and supply chain GHG emissions (Scopes 1, 2, and
3);
▪The
completeness and rigor of company’s short-, medium-, and long-term targets for
reducing operational and supply chain GHG emissions (Scopes 1, 2, and 3 if
relevant);
▪Whether
the company has sought and received third-party approval that its targets are
science-based;
▪Whether
the company has made a commitment to be “net zero” for operational and supply
chain emissions (Scopes 1, 2, and 3) by 2050;
▪Whether
the company discloses a commitment to report on the implementation of its plan
in subsequent years;
▪Whether
the company’s climate data has received third-party assurance;
▪Disclosure
of how the company’s lobbying activities and its capital expenditures align with
company strategy;
▪Whether
there are specific industry decarbonization challenges; and
▪The
company’s related commitment, disclosure, and performance compared to its
industry peers.
Say
on Climate (SoC) Shareholder Proposals
General
Recommendation: Vote
case-by-case on shareholder proposals that request the company to disclose a
report providing its GHG emissions levels and reduction targets and/or its
upcoming/approved climate transition
action
plan and provide shareholders the opportunity to express approval or disapproval
of its GHG emissions reduction plan, taking into account information such as the
following:
22
Variations
of this request also include climate transition related ambitions, or commitment
to reporting on the implementation of a climate plan.
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▪The
completeness and rigor of the company’s climate-related disclosure;
▪The
company’s actual GHG emissions performance;
▪Whether
the company has been the subject of recent, significant violations, fines,
litigation, or controversy related to its GHG emissions; and
▪Whether
the proposal’s request is unduly burdensome (scope or timeframe) or overly
prescriptive.
Climate
Change/Greenhouse Gas (GHG) Emissions
General
Recommendation: Generally
vote for resolutions requesting that a company disclose information on the
financial, physical, or regulatory risks it faces related to climate change on
its operations and investments or on how the company identifies, measures, and
manages such risks, considering:
▪Whether
the company already provides current, publicly-available information on the
impact that climate change may have on the company as well as associated company
policies and procedures to address related risks and/or
opportunities;
▪The
company's level of disclosure compared to industry peers; and
▪Whether
there are significant controversies, fines, penalties, or litigation associated
with the company's climate change-related performance.
Generally
vote for proposals requesting a report on greenhouse gas (GHG) emissions from
company operations and/or products and operations, unless:
▪The
company already discloses current, publicly-available information on the impacts
that GHG emissions may have on the company as well as associated company
policies and procedures to address related risks and/or
opportunities;
▪The
company's level of disclosure is comparable to that of industry peers;
and
▪There
are no significant, controversies, fines, penalties, or litigation associated
with the company's GHG emissions.
Vote
case-by-case on proposals that call for the adoption of GHG reduction goals from
products and operations, taking into account:
▪Whether
the company provides disclosure of year-over-year GHG emissions performance
data;
▪Whether
company disclosure lags behind industry peers;
▪The
company's actual GHG emissions performance;
▪The
company's current GHG emission policies, oversight mechanisms, and related
initiatives; and
▪Whether
the company has been the subject of recent, significant violations, fines,
litigation, or controversy related to GHG emissions.
Energy
Efficiency
General
Recommendation: Generally
vote for proposals requesting that a company report on its energy efficiency
policies, unless:
▪The
company complies with applicable energy efficiency regulations and laws, and
discloses its participation in energy efficiency policies and programs,
including disclosure of benchmark data, targets, and performance measures;
or
▪The
proponent requests adoption of specific energy efficiency goals within specific
timelines.
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Renewable
Energy
General
Recommendation: Generally
vote for requests for reports on the feasibility of developing renewable energy
resources unless the report would be duplicative of existing disclosure or
irrelevant to the company’s line of business.
Generally
vote against proposals requesting that the company invest in renewable energy
resources. Such
decisions
are best left to management’s evaluation of the feasibility and financial impact
that such programs may have on the company.
Generally
vote against proposals that call for the adoption of renewable energy goals,
taking into account:
▪The
scope and structure of the proposal;
▪The
company's current level of disclosure on renewable energy use and GHG emissions;
and
▪The
company's disclosure of policies, practices, and oversight implemented to manage
GHG emissions and mitigate climate change risks.
Diversity
Board
Diversity
General
Recommendation: Generally
vote for requests for reports on a company's efforts to diversify the board,
unless:
▪The
gender and racial minority representation of the company’s board is reasonably
inclusive in relation to
companies
of similar size and business; and
▪The
board already reports on its nominating procedures and gender and racial
minority initiatives on the board and within the company.
Vote
case-by-case on proposals asking a company to increase the gender and racial
minority representation on its board, taking into account:
▪The
degree of existing gender and racial minority diversity on the company’s board
and among its executive
officers;
▪The
level of gender and racial minority representation that exists at the company’s
industry peers;
▪The
company’s established process for addressing gender and racial minority board
representation;
▪Whether
the proposal includes an overly prescriptive request to amend nominating
committee charter language;
▪The
independence of the company’s nominating committee;
▪Whether
the company uses an outside search firm to identify potential director nominees;
and
▪Whether
the company has had recent controversies, fines, or litigation regarding equal
employment practices.
Equality
of Opportunity
General
Recommendation: Generally
vote for proposals requesting a company disclose its diversity policies or
initiatives, or proposals requesting disclosure of a company’s comprehensive
workforce diversity data, including requests for EEO-1 data,
unless:
▪The
company publicly discloses equal opportunity policies and initiatives in a
comprehensive manner;
▪The
company already publicly discloses comprehensive workforce diversity data;
and
▪The
company has no recent significant EEO-related violations or
litigation.
Generally
vote against proposals seeking information on the diversity efforts of suppliers
and service providers. Such requests may pose a significant burden on the
company.
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Gender
Identity, Sexual Orientation, and Domestic Partner Benefits
General
Recommendation: Generally
vote for proposals seeking to amend a company’s EEO statement or diversity
policies to prohibit discrimination based on sexual orientation and/or gender
identity, unless the change would be unduly burdensome.
Generally
vote against proposals to extend company benefits to, or eliminate benefits
from, domestic partners. Decisions regarding benefits should be left to the
discretion of the company.
Gender,
Race/Ethnicity Pay Gap
General
Recommendation: Vote
case-by-case on requests for reports on a company's pay data by gender or race/
ethnicity, or a report on a company’s policies and goals to reduce any gender or
race/ethnicity pay gaps, taking into account:
▪The
company's current policies and disclosure related to both its diversity and
inclusion policies and practices and its compensation philosophy on fair and
equitable compensation practices;
▪Whether
the company has been the subject of recent controversy, litigation, or
regulatory actions related to gender, race, or ethnicity pay gap
issues;
▪The
company’s disclosure regarding gender, race, or ethnicity pay gap policies or
initiatives compared to its industry peers; and
▪Local
laws regarding categorization of race and/or ethnicity and definitions of ethnic
and/or racial minorities.
Racial
Equity and/or Civil Rights Audit Guidelines
General
Recommendation: Vote
case-by-case on proposals asking a company to conduct an independent racial
equity and/or civil rights audit, taking into account:
▪The
company’s established process or framework for addressing racial inequity and
discrimination internally;
▪Whether
the company has issued a public statement related to its racial justice efforts
in recent years, or has committed to internal policy review;
▪Whether
the company has engaged with impacted communities, stakeholders, and civil
rights experts,
▪The
company’s track record in recent years of racial justice measures and outreach
externally;
▪Whether
the company has been the subject of recent controversy, litigation, or
regulatory actions related to racial inequity or discrimination;
and
▪Whether
the company’s actions are aligned with market norms on civil rights, and racial
or ethnic diversity.
Environment
and Sustainability
Facility
and Workplace Safety
General
Recommendation: Vote
case-by-case on requests for workplace safety reports, including reports on
accident risk reduction efforts, taking into account:
▪The
company’s current level of disclosure of its workplace health and safety
performance data, health and
safety
management policies, initiatives, and oversight mechanisms;
▪The
nature of the company’s business, specifically regarding company and employee
exposure to health and
safety
risks;
▪Recent
significant controversies, fines, or violations related to workplace health and
safety; and
▪The
company's workplace health and safety performance relative to industry
peers.
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Vote
case-by-case on resolutions requesting that a company report on safety and/or
security risks associated with its operations and/or facilities,
considering:
▪The
company’s compliance with applicable regulations and guidelines;
▪The
company’s current level of disclosure regarding its security and safety
policies, procedures, and
compliance
monitoring; and
▪The
existence of recent, significant violations, fines, or controversy regarding the
safety and security of the
company’s
operations and/or facilities.
General
Environmental Proposals and Community Impact Assessments
General
Recommendation: Vote
case-by-case on requests for reports on policies and/or the potential
(community) social and/or environmental impact of company operations,
considering:
▪Current
disclosure of applicable policies and risk assessment report(s) and risk
management procedures;
▪The
impact of regulatory non-compliance, litigation, remediation, or reputational
loss that may be associated with failure to manage the company’s operations in
question, including the management of relevant community and stakeholder
relations;
▪The
nature, purpose, and scope of the company’s operations in the specific
region(s);
▪The
degree to which company policies and procedures are consistent with industry
norms; and
▪The
scope of the resolution.
Hydraulic
Fracturing
General
Recommendation: Generally
vote for proposals requesting greater disclosure of a company's (natural gas)
hydraulic fracturing operations, including measures the company has taken to
manage and mitigate the potential community and environmental impacts of those
operations, considering:
▪The
company's current level of disclosure of relevant policies and oversight
mechanisms;
▪The
company's current level of such disclosure relative to its industry
peers;
▪Potential
relevant local, state, or national regulatory developments; and
▪Controversies,
fines, or litigation related to the company's hydraulic fracturing
operations.
Operations
in Protected Areas
General
Recommendation: Generally
vote for requests for reports on potential environmental damage as a result of
company operations in protected regions, unless:
▪Operations
in the specified regions are not permitted by current laws or
regulations;
▪The
company does not currently have operations or plans to develop operations in
these protected regions; or
▪The
company’s disclosure of its operations and environmental policies in these
regions is comparable to industry peers.
Recycling
General
Recommendation: Vote
case-by-case on proposals to report on an existing recycling program, or adopt a
new recycling program, taking into account:
▪The
nature of the company’s business;
▪The
current level of disclosure of the company's existing related
programs;
▪The
timetable and methods of program implementation prescribed by the
proposal;
▪The
company’s ability to address the issues raised in the proposal; and
▪How
the company's recycling programs compare to similar programs of its industry
peers.
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Sustainability
Reporting
General
Recommendation: Generally
vote for proposals requesting that a company report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
▪The
company already discloses similar information through existing reports or
policies such as an environment, health, and safety (EHS) report; a
comprehensive code of corporate conduct; and/or a diversity report;
or
▪The
company has formally committed to the implementation of a reporting program
based on Global Reporting Initiative (GRI) guidelines or a similar standard
within a specified time frame.
Water
Issues
General
Recommendation: Vote
case-by-case on proposals requesting a company report on, or adopt a new policy
on, water-related risks and concerns, taking into account:
▪The
company's current disclosure of relevant policies, initiatives, oversight
mechanisms, and water usage metrics;
▪Whether
or not the company's existing water-related policies and practices are
consistent with relevant internationally recognized standards and national/local
regulations;
▪The
potential financial impact or risk to the company associated with water-related
concerns or issues; and
▪Recent,
significant company controversies, fines, or litigation regarding water use by
the company and its suppliers.
General
Corporate Issues
Charitable
Contributions
General
Recommendation: Vote
against proposals restricting a company from making charitable
contributions.
Charitable
contributions are generally useful for assisting worthwhile causes and for
creating goodwill in the community. In the absence of bad faith, self-dealing,
or gross negligence, management should determine which, and if, contributions
are in the best interests of the company.
Data
Security, Privacy, and Internet Issues
General
Recommendation: Vote
case-by-case on proposals requesting the disclosure or implementation of data
security, privacy, or information access and management policies and procedures,
considering:
▪The
level of disclosure of company policies and procedures relating to data
security, privacy, freedom of speech, information access and management, and
Internet censorship;
▪Engagement
in dialogue with governments or relevant groups with respect to data security,
privacy, or the free flow of information on the Internet;
▪The
scope of business involvement and of investment in countries whose governments
censor or monitor the Internet and other telecommunications;
▪Applicable
market-specific laws or regulations that may be imposed on the company;
and
▪Controversies,
fines, or litigation related to data security, privacy, freedom of speech, or
Internet censorship.
Environmental,
Social, and Governance (ESG) Compensation-Related Proposals
General
Recommendation: Vote
case-by-case on proposals to link, or report on linking, executive compensation
to sustainability (environmental and social) criteria, considering:
▪The
scope and prescriptive nature of the proposal;
▪Whether
the company has significant and/or persistent controversies or regulatory
violations regarding social and/or environmental issues;
▪Whether
the company has management systems and oversight mechanisms in place regarding
its social and environmental performance;
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▪The
degree to which industry peers have incorporated similar non-financial
performance criteria in their executive compensation practices; and
▪The
company's current level of disclosure regarding its environmental and social
performance.
Human
Rights, Human Capital Management, and International Operations
Human
Rights Proposals
General
Recommendation: Generally
vote for proposals requesting a report on company or company supplier labor
and/or human rights standards and policies unless such information is already
publicly disclosed.
Vote
case-by-case on proposals to implement company or company supplier labor and/or
human rights standards and policies, considering:
▪The
degree to which existing relevant policies and practices are
disclosed;
▪Whether
or not existing relevant policies are consistent with internationally recognized
standards;
▪Whether
company facilities and those of its suppliers are monitored and
how;
▪Company
participation in fair labor organizations or other internationally recognized
human rights initiatives;
▪Scope
and nature of business conducted in markets known to have higher risk of
workplace labor/human rights abuse;
▪Recent,
significant company controversies, fines, or litigation regarding human rights
at the company or its suppliers;
▪The
scope of the request; and
▪Deviation
from industry sector peer company standards and practices.
Vote
case-by-case on proposals requesting that a company conduct an assessment of the
human rights risks in its operations or in its supply chain, or report on its
human rights risk assessment process, considering:
▪The
degree to which existing relevant policies and practices are disclosed,
including information on the implementation of these policies and any related
oversight mechanisms;
▪The
company’s industry and whether the company or its suppliers operate in countries
or areas where there is a history of human rights concerns;
▪Recent
significant controversies, fines, or litigation regarding human rights involving
the company or its suppliers, and whether the company has taken remedial steps;
and
▪Whether
the proposal is unduly burdensome or overly prescriptive.
Mandatory
Arbitration
General
Recommendation: Vote
case-by-case on requests for a report on a company’s use of
mandatory
arbitration
on employment-related claims, taking into account:
▪The
company's current policies and practices related to the use of mandatory
arbitration agreements on workplace claims;
▪Whether
the company has been the subject of recent controversy, litigation, or
regulatory actions related to the use of mandatory arbitration agreements on
workplace claims; and
▪The
company's disclosure of its policies and practices related to the use of
mandatory arbitration agreements compared to its peers.
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Operations
in High Risk Markets
General
Recommendation: Vote
case-by-case on requests for a report on a company’s potential financial and
reputational risks associated with operations in “high-risk” markets, such as a
terrorism-sponsoring state or politically/socially unstable region, taking into
account:
▪The
nature, purpose, and scope of the operations and business involved that could be
affected by social or political disruption;
▪Current
disclosure of applicable risk assessment(s) and risk management
procedures;
▪Compliance
with U.S. sanctions and laws;
▪Consideration
of other international policies, standards, and laws; and
▪Whether
the company has been recently involved in recent, significant controversies,
fines, or litigation related to its operations in "high-risk"
markets.
Outsourcing/Offshoring
General
Recommendation: Vote
case-by-case on proposals calling for companies to report on the risks
associated with outsourcing/plant closures, considering:
▪Controversies
surrounding operations in the relevant market(s);
▪The
value of the requested report to shareholders;
▪The
company’s current level of disclosure of relevant information on outsourcing and
plant closure procedures; and
▪The
company’s existing human rights standards relative to industry
peers.
Sexual
Harassment
General
Recommendation: Vote
case-by-case on requests for a report on company actions taken to strengthen
policies and oversight to prevent workplace sexual harassment, or a report on
risks posed by a company’s failure to prevent workplace sexual harassment,
taking into account:
▪The
company's current policies, practices, oversight mechanisms related to
preventing workplace sexual harassment;
▪Whether
the company has been the subject of recent controversy, litigation, or
regulatory actions related to workplace sexual harassment issues;
and
▪The
company's disclosure regarding workplace sexual harassment policies or
initiatives compared to its industry peers.
Weapons
and Military Sales
General
Recommendation: Vote
against reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
Generally
vote against proposals asking a company to cease production or report on the
risks associated with the use of depleted uranium munitions or nuclear weapons
components and delivery systems, including disengaging from current and proposed
contracts. Such contracts are monitored by government agencies, serve multiple
military and non-military uses, and withdrawal from these contracts could have a
negative impact on the company’s business.
Political
Activities
Lobbying
General
Recommendation: Vote
case-by-case on proposals requesting information on a company’s
lobbying
(including
direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
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▪The
company’s current disclosure of relevant lobbying policies, and management and
board oversight;
▪The
company’s disclosure regarding trade associations or other groups that it
supports, or is a member of, that engage in lobbying activities;
and
▪Recent
significant controversies, fines, or litigation regarding the company’s
lobbying-related activities.
Political
Contributions
General
Recommendation: Generally
vote for proposals requesting greater disclosure of a company's political
contributions and trade association spending policies and activities,
considering:
▪The
company's policies, and management and board oversight related to its direct
political contributions and payments to trade associations or other groups that
may be used for political purposes;
▪The
company's disclosure regarding its support of, and participation in, trade
associations or other groups that may make political contributions;
and
▪Recent
significant controversies, fines, or litigation related to the company's
political contributions or political activities.
Vote
against proposals barring a company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote
against proposals to publish in newspapers and other media a company's political
contributions. Such publications could present significant cost to the company
without providing commensurate value to shareholders.
Political
Ties
General
Recommendation: Generally
vote against proposals asking a company to affirm political nonpartisanship in
the workplace, so long as:
▪There
are no recent, significant controversies, fines, or litigation regarding the
company’s political contributions or trade association spending;
and
▪The
company has procedures in place to ensure that employee contributions to
company-sponsored political action committees (PACs) are strictly voluntary and
prohibit coercion.
Vote
against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of the
company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
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8.M
u t u a l F u n d P r o x i e s
Election
of Directors
General
Recommendation: Vote
case-by-case on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.
Closed
End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General
Recommendation: For
closed-end management investment companies (CEFs), vote against or withhold from
nominating/governance committee members (or other directors on a case-by-case
basis) at CEFs that have not provided a compelling rationale for opting-in to a
Control Share Acquisition statute, nor submitted a by-law
amendment
to a shareholder vote.
Converting
Closed-end Fund to Open-end Fund
General
Recommendation: Vote
case-by-case on conversion proposals, considering the following
factors:
▪Past
performance as a closed-end fund;
▪Market
in which the fund invests;
▪Measures
taken by the board to address the discount; and
▪Past
shareholder activism, board activity, and votes on related
proposals.
Proxy
Contests
General
Recommendation: Vote
case-by-case on proxy contests, considering the following factors:
▪Past
performance relative to its peers;
▪Market
in which the fund invests;
▪Measures
taken by the board to address the issues;
▪Past
shareholder activism, board activity, and votes on related
proposals;
▪Strategy
of the incumbents versus the dissidents;
▪Independence
of directors;
▪Experience
and skills of director candidates;
▪Governance
profile of the company;
▪Evidence
of management entrenchment.
Investment
Advisory Agreements
General
Recommendation: Vote
case-by-case on investment advisory agreements, considering the following
factors:
▪Proposed
and current fee schedules;
▪Fund
category/investment objective;
▪Performance
benchmarks;
▪Share
price performance as compared with peers;
▪Resulting
fees relative to peers;
▪Assignments
(where the advisor undergoes a change of control).
Approving
New Classes or Series of Shares
General
Recommendation: Vote
for the establishment of new classes or series of shares.
Preferred
Stock Proposals
General
Recommendation: Vote
case-by-case on the authorization for or increase in preferred shares,
considering the following factors:
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▪Stated
specific financing purpose;
▪Possible
dilution for common shares;
▪Whether
the shares can be used for antitakeover purposes.
1940
Act Policies
General
Recommendation: Vote
case-by-case on policies under the Investment Advisor Act of 1940, considering
the following factors:
▪Potential
competitiveness;
▪Regulatory
developments;
▪Current
and potential returns; and
▪Current
and potential risk.
Generally
vote for these amendments as long as the proposed changes do not fundamentally
alter the investment focus of the fund and do comply with the current SEC
interpretation.
Changing
a Fundamental Restriction to a Nonfundamental Restriction
General
Recommendation: Vote
case-by-case on proposals to change a fundamental restriction to a non-
fundamental restriction, considering the following factors:
▪The
fund's target investments;
▪The
reasons given by the fund for the change; and
▪The
projected impact of the change on the portfolio.
Change
Fundamental Investment Objective to Nonfundamental
General
Recommendation: Vote
against proposals to change a fund’s fundamental investment objective to non-
fundamental.
Name
Change Proposals
General
Recommendation: Vote
case-by-case on name change proposals, considering the following
factors:
▪Political/economic
changes in the target market;
▪Consolidation
in the target market; and
▪Current
asset composition.
Change
in Fund's Subclassification
General
Recommendation: Vote
case-by-case on changes in a fund's sub-classification, considering the
following factors:
▪Potential
competitiveness;
▪Current
and potential returns;
▪Risk
of concentration;
▪Consolidation
in target industry.
Business
Development Companies—Authorization to Sell Shares of Common Stock at a Price
below Net Asset Value
General
Recommendation: Vote
for proposals authorizing the board to issue shares below Net Asset Value (NAV)
if:
▪The
proposal to allow share issuances below NAV has an expiration date no more than
one year from the date shareholders approve the underlying proposal, as required
under the Investment Company Act of 1940;
▪The
sale is deemed to be in the best interests of shareholders by (1) a majority of
the company's independent directors and (2) a majority of the company's
directors who have no financial interest in the issuance; and
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▪The
company has demonstrated responsible past use of share issuances by
either:
▪Outperforming
peers in its 8-digit GICS group as measured by one- and three-year median TSRs;
or
▪Providing
disclosure that its past share issuances were priced at levels that resulted in
only small or moderate discounts to NAV and economic dilution to existing
non-participating shareholders.
Disposition
of Assets/Termination/Liquidation
General
Recommendation: Vote
case-by-case on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
▪Strategies
employed to salvage the company;
▪The
fund’s past performance;
▪The
terms of the liquidation.
Changes
to the Charter Document
General
Recommendation: Vote
case-by-case on changes to the charter document, considering the following
factors:
▪The
degree of change implied by the proposal;
▪The
efficiencies that could result;
▪The
state of incorporation;
▪Regulatory
standards and implications.
Vote
against any of the following changes:
▪Removal
of shareholder approval requirement to reorganize or terminate the trust or any
of its series;
▪Removal
of shareholder approval requirement for amendments to the new declaration of
trust;
▪Removal
of shareholder approval requirement to amend the fund's management contract,
allowing the contract to be modified by the investment manager and the trust
management, as permitted by the 1940 Act;
▪Allow
the trustees to impose other fees in addition to sales charges on investment in
a fund, such as deferred sales charges and redemption fees that may be imposed
upon redemption of a fund's shares;
▪Removal
of shareholder approval requirement to engage in and terminate subadvisory
arrangements;
▪Removal
of shareholder approval requirement to change the domicile of the
fund.
Changing
the Domicile of a Fund
General
Recommendation: Vote
case-by-case on re-incorporations, considering the following
factors:
▪Regulations
of both states;
▪Required
fundamental policies of both states;
▪The
increased flexibility available.
Authorizing
the Board to Hire and Terminate Subadvisers Without Shareholder
Approval
General
Recommendation: Vote
against proposals authorizing the board to hire or terminate subadvisers without
shareholder approval if the investment adviser currently employs only one
subadviser.
Distribution
Agreements
General
Recommendation: Vote
case-by-case on distribution agreement proposals, considering the following
factors:
▪Fees
charged to comparably sized funds with similar objectives;
▪The
proposed distributor’s reputation and past performance;
▪The
competitiveness of the fund in the industry;
▪The
terms of the agreement.
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Master-Feeder
Structure
General
Recommendation: Vote
for the establishment of a master-feeder structure.
Mergers
General
Recommendation: Vote
case-by-case on merger proposals, considering the following
factors:
▪Resulting
fee structure;
▪Performance
of both funds;
▪Continuity
of management personnel;
▪Changes
in corporate governance and their impact on shareholder rights.
Shareholder
Proposals for Mutual Funds
Establish
Director Ownership Requirement
General
Recommendation: Generally
vote against shareholder proposals that mandate a specific minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board.
Reimburse
Shareholder for Expenses Incurred
General
Recommendation: Vote
case-by-case on shareholder proposals to reimburse proxy solicitation
expenses.
When
supporting the dissidents, vote for the reimbursement of the proxy solicitation
expenses.
Terminate
the Investment Advisor
General
Recommendation: Vote
case-by-case on proposals to terminate the investment advisor, considering the
following factors:
▪Performance
of the fund’s Net Asset Value (NAV);
▪The
fund’s history of shareholder relations;
▪The
performance of other funds under the advisor’s management.
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We
empower investors and companies to build
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E T S T A R T E D W I T H I S S S O L U T I O N S
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