STATEMENT
OF ADDITIONAL INFORMATION
Matisse
Funds
Deschutes Portfolio Strategy,
LLC dba Matisse
Capital 15350 SW Sequoia Parkway, Suite 260
Portland,
Oregon 97224 |
Matisse Discounted Closed-End Fund
Strategy Institutional Class
Shares MDCEX
|
Matisse Discounted Bond CEF
Strategy Institutional Class
Shares MDFIX
|
August
1, 2023
A
series of the
Starboard
Investment Trust
116
South Franklin Street
Rocky
Mount, North Carolina 27804
Telephone
1-800-773-3863
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This Statement of Additional Information (“SAI”) is meant to
be read in conjunction with the prospectus for the Matisse Discounted Closed-End
Fund Strategy and Matisse Discounted Bond CEF Strategy, dated August 1, 2023, as
amended or supplemented from time to time (the “Prospectus”) and is incorporated
by reference in its entirety into the Prospectus. Because this SAI is not itself
a prospectus, no investment in shares of the Funds should be made solely upon
the information contained herein. The Funds’ financial statements and
accompanying notes that appear in the Funds’ annual and semi-annual reports are
incorporated by reference into this SAI. Copies of the Prospectus, annual
report, and/or semi-annual report may be obtained at no charge by writing or
calling the Funds at the address or phone number shown above or online at
https://fundinfopages.com/MDCEX and https://fundinfopages.com/MDFIX. Capitalized
terms used but not defined herein have the same meanings as in the
Prospectus.
Starboard
Investment Trust (“Trust”) was organized on May 13, 2009, as a Delaware
statutory trust and is authorized to have multiple series or portfolios. The
Trust is registered with the U.S. Securities and Exchange Commission (“SEC”) as
an open-end management investment company under the Investment Company Act of
1940, as amended (the “1940 Act”). The Trust currently consists of 11 separate
series. This SAI relates to the Matisse Discounted Closed End Fund Strategy and
Matisse Discounted Bond CEF Strategy (the “Funds” or each a “Fund”) each of
which is a separate, diversified series of the Trust. The Fund’s
investment advisor is Deschutes Portfolio Strategy, LLC dba Matisse Capital (the
“Advisor”). The Prospectus described the Funds’ investment objectives and
principal investment strategies, as well as the principal investment risks of
the Funds.
This
SAI describes the financial history, management and operation of the Funds, as
well as the Funds’ investment objective and policies. It should be read in
conjunction with the Prospectus.
Investments
in the Funds are not:
• |
Deposits or obligations of any bank; |
• |
Guaranteed or endorsed by any bank; or |
• |
Federally insured or guaranteed by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
federal agency. |
The
Prospectus describes the Funds’ investment objective and principal investment
strategies, as well as the principal investment risks of the Funds. All
investments in securities and other financial instruments involve a risk of
financial loss. No assurance can be given that the Funds’ investment program
will be successful. Investors should carefully review the descriptions of
the Funds’ principal investments and their risks described in the Prospectus and
this SAI.
The
following descriptions and policies supplement the descriptions in the
Prospectus and include descriptions of certain types of investments that may be
made by the Funds but are not principal investment strategies of the Funds.
Unless otherwise noted, the investments described below may be made by the Funds
directly or indirectly through their investments in other investment companies.
Attached to this SAI is Appendix A, which contains descriptions of the rating
symbols used by nationally recognized statistical rating organizations for
securities in which the Funds may invest. Appendix B contains a copy of the
Advisor’s Proxy Voting Policy and Procedures.
General Investment Risks. All investments
in securities and other financial instruments involve a risk of financial
loss. No assurance can be given that the Funds’ investment program will be
successful. Investors should carefully review the descriptions of the
Funds’ principal investments and their risks described in the Prospectus and
this SAI.
Additional
Information Regarding the Fund’s Principal Strategies and Risks
Investment Companies. The Fund may invest
in the securities of other investment companies (including money market funds).
Under the 1940 Act, the Fund’s investment in investment companies is limited to,
subject to certain exceptions: (i) 3% of the total outstanding voting stock of
any one investment company, (ii) 5% of the Fund’s total assets with respect to
any one investment company, and (iii) 10% of the Fund’s total assets of
investment companies in the aggregate. Investments by the Funds in other
investment companies entail a number of risks unique to a fund of funds
structure. These risks include the following:
Multiple
Layers of Fees. By investing in other investment companies indirectly
through the Funds, prospective investors will directly bear the fees and
expenses of the Funds’ Advisor and indirectly bear the fees and expenses of
other investment companies and other investment companies’ managers as
well. As such, this multiple or duplicative layer of fees will increase
the cost of investments in the Funds.
Lack
of Transparency. The Advisor will not be able to monitor the
investment activities of the other investment companies on a continuous basis
and the other investment companies may use investment strategies that differ
from its past practices and are not fully disclosed to the Advisor and that
involve risks that are not anticipated by the Advisor. The Funds have no
control over the risks taken by the underlying investment companies in which
they invest.
Valuation
of Investment Companies. Although the Advisor will attempt to review
the valuation procedures used by other investment companies’ managers, the
Advisor will have little or no means of independently verifying valuations of
the Funds’ investments in investment companies and valuations of the underlying
securities held by other investment companies. As such, the Advisor will rely
significantly on valuations of other investment companies and the securities
underlying other investment companies that are reported by other investment
companies’ managers. In the event that such valuations prove to be
inaccurate, the net asset value (“NAV”) of the Funds could be adversely impacted
and an investor could incur a loss of investment in the Funds.
Illiquidity
of Investments by and In Other Investment Companies. Other investment
companies may invest in securities that are not registered, are subject to legal
or other restrictions on transfer, or for which no liquid market exists.
The market prices, if any, for such securities tend to be volatile and
restricted securities may sell at prices that are lower than similar securities
that are not subject to legal restrictions on resale. Further, the Funds may not
be able to redeem their interests in other investment companies’ securities that
it has purchased in a timely manner. If adverse market conditions were to
develop during any period in which the Funds are unable to redeem interests in
other investment companies, the Funds may suffer losses as a result of this
illiquidity. As such, the lack of liquidity and volatility of restricted
securities held by other investment companies could adversely affect the value
of the other investment companies. Any such losses could adversely affect
the value of the Funds’ investments and an investor could incur a loss of
investment in the Funds.
Lack
of Control. Although the Funds and the Advisor will evaluate regularly
other investment companies to determine whether their investment programs are
consistent with the Funds’ investment objective, the Advisor will not have any
control over the investments made by other investment companies. Even though
other investment companies are subject to certain constraints, the investment
advisor to each such investment company may change aspects of their investment
strategies at any time. The Advisor will not have the ability to control
or influence the composition of the investment portfolio of other investment
companies.
Lack
of Diversification. There is no requirement that the underlying
investments held by other investment companies be diversified. As such, other
investment companies’ managers may target or concentrate other investment
companies’ investments in specific markets, sectors, or types of
securities. As a result, investments made by other investment companies
are subject to greater volatility as a result of this concentration than if the
other investment companies had non-concentrated and diversified portfolios of
investments. Thus, the Funds’ portfolios (and by extension the value of an
investment in the Funds) may therefore be subject to greater risk than the
portfolio of a similar fund with investments in diversified investment
companies.
Use
of Leverage. The other investment companies may utilize leverage
(i.e., borrowing) to acquire their underlying portfolio investments. When other
investment companies borrow money or otherwise leverage their portfolio of
investments, doing so may exaggerate changes in the NAV of the shares of the
other investment companies and in the return on the other investment companies’
investments. Borrowing will also cost other investment companies interest
expense and other fees. As such, the value of the Funds’ investments in other
investment companies may be more volatile and all other risks (including the
risk of loss of an investment in other investment companies) tend to be
compounded or magnified. As a result, any losses suffered by other
investment companies as a result of their use of leverage could adversely affect
the value of the Fund’s investments and an investor could incur a loss of
investment in the Funds.
Fixed-Income Securities. The Fund will
invest indirectly in fixed-income securities, through its investments in shares
of closed-end funds. These securities may include government and corporate
bonds, mortgage bonds, convertible or preferred securities, loans, money market
instruments, high yield securities or “junk bonds” and zero-coupon bonds.
Zero-coupon bonds are purchased at a discount from their face values and accrue
interest at the applicable coupon rate over a period of time. Fixed-income
securities purchased by the closed-end funds may consist of obligations of any
rating. Fixed-income securities in the lowest investment grade categories
have speculative characteristics, with changes in the economy or other
circumstances more likely to lead to a weakened capacity of the bonds to make
principal and interest payments than would occur with bonds rated in higher
categories. High yield bonds are typically rated below “Baa” by Moody’s
Investors Service, Inc. (“Moody’s”) or below “BBB” by S&P Global
Ratings (“S&P”) or below investment grade by other recognized rating
agencies. The Fund may also invest indirectly in unrated securities
through closed-end funds that invest in unrated securities under certain
circumstances. Such bonds are subject to greater market fluctuations and
risk of loss of income and principal than higher rated bonds for a variety of
reasons, including:
Sensitivity
to Interest Rate and Economic Change. The economy and interest rates
affect high yield securities differently than other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also,
during an economic downturn or substantial period of rising interest rates,
highly leveraged issuers may experience financial stress which would adversely
affect their ability to service their principal and interest obligations, to
meet projected business goals, and to obtain additional financing. If the
issuer of a bond defaults, an underlying mutual fund may incur additional
expenses to seek recovery. In addition, periods of economic uncertainty
and changes can be expected to result in increased volatility or market prices
of high yield bonds and the fund’s asset values.
Payment
Expectations. High yield bonds present certain risks based on payment
expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining
interest rate market, the Fund or an investment company in which the Fund
invests would have to replace the security with a lower yielding security,
resulting in a decreased return for investors. Conversely, a high yield
bond’s value will decrease in a rising interest rate market, as will the value
of the Fund’s or other investment company’s assets. If the Fund or an investment
company in which the Fund invests experiences unexpected net redemptions, it may
be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the expenses of the Fund or
other investment company in which the Fund invests can be spread and possibly
reducing the rate of return of the fund or other investment company in which the
Fund invests.
Liquidity
and Valuation. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact a fund’s ability to accurately value high yield bonds and may hinder a
fund’s ability to dispose of the bonds. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield bonds, especially in a thinly traded
market.
Credit
Ratings. Credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, because
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, The Fund or an investment company in which the Fund invests
must monitor the issuers of high yield bonds in their portfolios to determine if
the issuers will have sufficient cash flow and profits to meet required
principal and interest payments, and to assure the bonds’ liquidity so the Fund
or an investment company in which the Fund invests can meet redemption
requests.
High-yield
securities are deemed speculative with respect to the issuer’s capacity to pay
interest and repay principal over a long period of time. Special tax
considerations are associated with investing in high-yield securities structured
as zero coupon or “pay-in-kind"” securities. The Fund or an investment
company in which the Fund invests will report the interest on these securities
as income even though it receives no cash interest until the security’s maturity
or payment date. The payment of principal and interest on most
fixed-income securities purchased by a fund will depend upon the ability of the
issuers to meet their obligations. An issuer’s obligations under its
fixed-income securities are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Code, and laws, if any, which may be enacted by federal or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations.
The power or ability of an issuer to meet its obligations for the payment of
interest on, and principal of, its fixed-income securities may be materially
adversely affected by litigation or other conditions.
The
ratings of S&P, Moody’s and other nationally recognized rating agencies
represent their opinions as to the quality of fixed-income securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality, and fixed-income securities with the same maturity,
interest rate, and rating may have different yields while fixed-income
securities of the same maturity and interest rate with different ratings may
have the same yield. For a more detailed description of ratings, please
see Appendix A.
Derivative Instruments. The Fund may
invest directly or indirectly in derivatives through its investment in other
investment companies that use derivative instruments. When other investment companies in which the Funds
invest, enter into short sales, options, futures,
and other forms of financial derivatives specifically described below, the
investments involve risks different from direct investments in the
underlying securities. While transactions in
derivatives may reduce certain risks, these transactions themselves entail
certain other risks. Unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in a poorer overall performance of
the funds than if they had not entered into any derivatives transactions.
Derivatives may magnify the funds gains or losses, causing it to make or lose
substantially more than it invested.
If
a fund uses derivative instruments, such fund must comply with the applicable
requirements of the 1940 Act. The Fund has no specific limit on the amount it
invests in derivatives, directly or indirectly.
When
used for hedging purposes, increases in the value of the securities a fund holds
or intends to acquire should offset any losses incurred with a derivative.
Purchasing derivatives for purposes other than hedging could expose a fund to
greater risks.
A
fund’s ability to hedge securities through derivatives depends on the degree to
which price movements in the underlying index or instrument correlate with price
movements in the relevant securities. In the case of poor correlation, the price
of the securities a fund is hedging may not move in the same amount, or even in
the same direction as the hedging instrument. A fund will try to minimize
this risk by investing only in those contracts whose behavior it expects to
resemble with the portfolio securities it is trying to hedge. However, if a
fund’s prediction of interest and currency rates, market value, volatility, or
other economic factors is incorrect, a fund may lose money, or may not make as
much money as it expected.
Derivative
prices can diverge from the prices of their underlying instruments, even if the
characteristics of the underlying instruments are very similar to the
derivative. Listed below are some of the factors that may cause such a
divergence:
• |
current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the
contract; |
• |
a
difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or trading of an instrument stops;
and |
• |
differences
between the derivatives, including different margin requirements,
different liquidity of such markets, and the participation of speculators
in such markets. |
Derivatives
based upon a narrow index of securities may present greater risk than
derivatives based on a broad index. Since narrower indices are made up of a
smaller number of securities, they are more susceptible to rapid and extreme
price fluctuations because of changes in the value of those securities.
While
currency futures and options values are expected to correlate with exchange
rates, they may not reflect other factors that affect the value of the
investments of the funds. A currency hedge should protect a yen-denominated
security from a decline in the yen but will not protect the funds against a
price decline resulting from deterioration in the issuer’s
creditworthiness. Because the value of the funds’ foreign-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the funds’ investments precisely over time.
Before
a futures contract or option is exercised or expires, the funds can terminate it
only by entering into a closing purchase or sale transaction. Moreover,
the funds may close out a futures contract only on the exchange the contract was
initially traded. If there is no secondary market for the contract, or the
market is illiquid, the funds may not be able to close out a position. In
an illiquid market, the funds may:
• |
have
to sell securities to meet its daily margin requirements at a time when it
is disadvantageous to do so; |
• |
have
to purchase or sell the instrument underlying the
contract; |
• |
not
be able to hedge its investments; and |
• |
not
be able to realize profits or limit its
losses. |
Derivatives
may become illiquid (i.e., difficult to sell at a desired time and price) under
a variety of market conditions:
• |
an
exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives, or all derivatives, which
sometimes occurs because of increased market
volatility; |
• |
unusual
or unforeseen circumstances may interrupt normal operations of an
exchange; |
• |
the
facilities of the exchange may not be adequate to handle current trading
volume; |
• |
equipment
failures, government intervention, insolvency of a brokerage firm or
clearing house, or other occurrences may disrupt normal trading activity;
or |
• |
investors
may lose interest in a particular derivative or category of
derivatives. |
If
an investment advisor incorrectly predicts securities market and interest rate
trends, the funds may lose money by investing in derivatives. If the funds
were to write a call option based on the investment advisor’s expectation that
the price of the underlying security would fall, but the price were to rise
instead, the funds could be required to sell the security upon exercise at a
price below the current market price. Similarly, if the funds were to write a
put option based on the advisor’s expectation that the price of the underlying
security would rise, but the price were to fall instead, the funds could be
required to purchase the security upon exercise at a price higher than the
current market price.
Because
of the low margin deposits required upon the opening of a derivative position,
such transactions involve an extremely high degree of leverage. Consequently, a
relatively small price movement in a derivative may result in an immediate and
substantial loss (as well as gain) to the funds and they may lose more than it
originally invested in the derivative.
If
the price of a futures contract changes adversely, the funds may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. The funds may lose margin deposits if a broker
with whom they have an open futures contract or related option becomes insolvent
or declares bankruptcy.
The
prices of derivatives are volatile (i.e., they may change rapidly,
substantially, and unpredictably) and are influenced by a variety of factors,
including:
• |
actual
and anticipated changes in interest rates; |
• |
fiscal
and monetary policies; and |
• |
national
and international political events. |
Most
exchanges limit the amount by which the price of a derivative can change during
a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, the funds may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices
have occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
Government
Regulation of Derivatives. It is possible that government regulation of
various types of derivative instruments, including futures and swap agreements,
may limit or prevent a fund from using such instruments as a part of its
investment strategy, and could ultimately prevent a fund from being able to
achieve its investment objective. It is impossible to predict fully the effects
of legislation and regulation in this area, but the effects could be substantial
and adverse.
The
futures markets are subject to comprehensive statutes, regulations, and margin
requirements. The SEC, the Commodities Futures Trading Commission, and the
exchanges are authorized to take extraordinary actions in the event of a market
emergency, including, for example, the implementation or reduction of
speculative position limits, the implementation of higher margin requirements,
the establishment of daily price limits, and the suspension of trading.
The
regulation of swaps and futures transactions in the U.S., the European Union,
and other jurisdictions is a rapidly changing area of law and is subject to
modification by government and judicial action. There is a possibility of future
regulatory changes altering, perhaps to a material extent, the nature of an
investment in a fund or the ability of a fund to continue to implement its
investment strategies.
Under
recently adopted rules and regulations, transactions in some types of swaps
(including interest rate swaps and credit default swaps on North American and
European indices) are required to be centrally cleared, and additional types of
swaps may be required to be centrally cleared in the future. In a transaction
involving those swaps (“cleared derivatives”), a fund’s counterparty is a
clearing house, rather than a bank or broker. In cleared derivatives
transactions, a fund will make payments (including margin payments) to and
receive payments from a clearing house through its accounts at clearing members.
Clearing members guarantee performance of their clients’ obligations to the
clearing house.
In
addition, U.S. regulators, the European Union, and certain other jurisdictions
have adopted minimum margin and capital requirements for uncleared
over-the-counter (“OTC”) derivatives transactions. It is expected that these
regulations will have a material impact on a fund’s use of uncleared
derivatives. These rules will impose minimum margin requirements on derivatives
transactions between a fund and its swap counterparties and may increase the
amount of margin a fund is required to provide. They will impose regulatory
requirements on the timing of transferring margin, which may accelerate a fund’s
current margin process. They will also effectively require changes to typical
derivatives margin documentation. It is expected that a fund will become subject
to variation margin requirements under such rules in 2017 and initial margin
requirements under such rules in 2020. Such requirements could increase the
amount of margin a fund needs to provide in connection with uncleared
derivatives transactions and, therefore, make such transactions more
expensive.
Funds
investing in derivatives must comply with Rule 18f-4 under the 1940 Act, which
provides for the regulation of a registered investment company’s use of
derivatives and certain related instruments. Among other things, Rule 18f-4
limits a fund’s derivatives exposure through a value-at-risk test and requires
the adoption and implementation of a derivatives risk management program for
certain derivatives users. Subject to certain conditions, limited derivatives
users (as defined in Rule 18f-4), however, would not be subject to the full
requirements of Rule 18f-4. Rule 18f-4 could restrict the Fund’s abilities to
engage in certain derivatives transactions and/or increase the costs of such
derivatives transactions.
Money Market Instruments. Money market
instruments include U.S. Government obligations or corporate debt obligations
(including those subject to repurchase agreements). Money market instruments
also may include banker’s acceptances and certificates of deposit of domestic
branches of U.S. banks, commercial paper, and variable amount demand master
notes (“Master Notes”). Banker’s acceptances are time drafts drawn on and
“accepted” by a bank. When a bank “accepts” such a time draft, it assumes
liability for its payment. When an investment company acquires a banker’s
acceptance, the bank that “accepted” the time draft is liable for payment of
interest and principal when due. The banker’s acceptance carries the full faith
and credit of such bank. A certificate of deposit (“CD”) is an unsecured,
interest bearing debt obligation of a bank. Commercial paper is an unsecured,
short-term debt obligation of a bank, corporation, or other borrower. Commercial
paper maturity generally ranges from two to 270 days and is usually sold on a
discounted basis rather than as an interest-bearing instrument. Master Notes are
unsecured obligations which are redeemable upon demand of the holder and which
permit the investment of fluctuating amounts at varying rates of interest.
Foreign Investment Risk. Foreign
securities and foreign currency contracts involve investment risks different
from those associated with domestic securities. Changes in foreign
economies and political climates are more likely to affect the Funds than a
mutual fund that invests exclusively in domestic securities. The value of
foreign currency denominated securities or foreign currency contracts is
affected by the value of the local currency relative to the U.S. dollar.
There may be less government supervision of foreign markets, resulting in
non-uniform accounting practices and less publicly available information about
issuers of foreign currency denominated securities. The value of foreign
investments may be affected by changes in exchange control regulations,
application of foreign tax laws (including withholding tax), changes in
governmental administration or economic or monetary policy (in this country or
abroad) or changed circumstances in dealings between nations. In addition,
foreign brokerage commissions, custody fees, and other costs of investing in
foreign securities are generally higher than in the United States.
Investments in foreign issues could be affected by other factors not present in
the United States, including expropriation, armed conflict, confiscatory
taxation, and potential difficulties in enforcing contractual obligations.
Uncertainties
surrounding the sovereign debt of a number of European Union (EU) countries and
the viability of the EU have disrupted and may in the future disrupt markets in
the United States and around the world. If one or more countries leave the EU or
the EU dissolves, the world’s securities markets likely will be significantly
disrupted. In June 2016, the United Kingdom approved a referendum to leave the
EU, commonly referred to as “Brexit.” There is significant market uncertainty
regarding Brexit’s ramifications, and the range and potential implications of
possible political, regulatory, economic, and market outcomes are difficult to
predict. Political and military events, including the military crises in Ukraine
and the Middle East, and nationalist unrest in Europe, also may cause market
disruptions.
U.S. Government Securities. Closed-end
funds owned by the Fund may invest in U.S. Government securities, defined to be
(i) U.S. Treasury notes, U.S. Treasury bonds, U.S. Treasury bills, and other
U.S. Government obligations; (ii) obligations of the Government National
Mortgage Association (GNMA) and other U.S. Government sponsored entities that
are guaranteed by the U.S. Government; and (iii) obligations of the Federal
National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC), Federal Housing Administration (FHA), Federal Farm Credit Bank (FFCB),
Federal Home Loan Bank (FHLB), Student Loan Marketing Association (SLMA), The
Tennessee Valley Authority (TVA) and other U.S. Government authorities,
agencies, and instrumentalities. While obligations of some U.S. Government
sponsored entities are supported by the full faith and credit of the U.S.
Government (e.g. GNMA), others are not. No assurance can be given that the
U.S. Government will provide financial support to U.S. Government agencies or
instrumentalities in the future since it is not obligated to do so by law.
The guarantee of the U.S. Government does not extend to the yield or value of
the Fund’s shares.
Debentures. A debenture is long-term,
unsecured debt instrument backed only by the integrity of the borrower, not by
collateral, and documented by an indenture. Governments often issue
debentures, in part because they generally cannot guarantee debt with assets
(government assets are public property). The primary risk with this type
of investment is that the issuer will default or go into bankruptcy. As an
unsecured creditor, in the event of default or bankruptcy, the holder of a
debenture does not have a claim against any specific assets of the issuing firm,
so the investor will only be paid from the issuer’s assets after the secured
creditors have been paid. A closed-end fund owned by the Fund may invest
in all types of debentures, including corporate and government debentures.
Borrowing. The Funds may borrow money for
investment purposes, which is a form of leveraging. Leveraging investments, by
purchasing securities with borrowed money, is a speculative technique that
increases investment risk while increasing investment opportunity. Such
borrowing may make the Funds’ NAV more volatile than funds that do not borrow
for investment purposes because leverage magnifies changes in the Fund’s NAV and
on the Fund’s investments. Although the principal of borrowings will be
fixed, the Funds’ assets may change in value during the time the borrowing is
outstanding. Leverage also creates interest expenses for the Fund.
To the extent the income derived from securities purchased with borrowed funds
exceeds the interest the Funds will have to pay, the Funds’ net income will be
greater than it would be if leverage were not used. Conversely, if the income
from the assets obtained with borrowed funds is not sufficient to cover the cost
of leveraging, the net income of the Funds will be less than it would be if
leverage were not used, and therefore the amount available for distribution to
shareholders as dividends will be reduced. The use of derivatives in
connection with leverage creates the potential for significant loss. Any
leveraging will comply with the applicable requirements of the 1940 Act.
The
Funds may also borrow money to meet redemptions or for other emergency
purposes. Such borrowings may be on a secured or unsecured basis at fixed
or variable rates of interest. The 1940 Act requires the Funds to maintain
continuous asset coverage of not less than 300% with respect to all
borrowings. If such asset coverage should decline to less than 300% due to
market fluctuations or other reasons, the Funds may be required to dispose of
some of its portfolio holdings within three days in order to reduce the Funds’
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to dispose of assets at that time. The Funds
also may be required to maintain minimum average balances in connection with
such 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.
Portfolio Turnover. Portfolio turnover is
a ratio that indicates how often the securities in a mutual fund’s portfolio
change during a year’s time. Higher numbers indicate a greater number of
changes, and lower numbers indicate a smaller number of changes. The Funds may
sell portfolio securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities or changing
market conditions. Since portfolio turnover may involve paying brokerage
commissions and other transaction costs, there could be additional expenses for
the Funds. High rates of portfolio turnover could lower performance of the
Funds due to increased costs and may also result in the realization of capital
gains. If the Funds realizes capital gains when they sell portfolio investments,
they must generally distribute those gains to shareholders, increasing their
taxable distributions.
Temporary Defensive Positions. The Fund
may, from time to time, take temporary defensive positions that are inconsistent
with the Fund’s principal investment strategies in an attempt to respond to
adverse market, economic, political, or other conditions. During such an
unusual set of circumstances, the Fund may hold up to 100% of its portfolios in
cash or cash equivalent positions (e.g., money market securities, U.S.
Government securities, and/or similar securities). When the Fund takes a
temporary defensive position, the Fund may not be able to achieve its investment
objective.
Information
Regarding the Fund’s Non-Principal Strategies and Risks
Exchange Traded Funds. ETFs are traded on
a securities exchange based on their market value. An investment in an ETF
generally presents the same primary risks as an investment in a conventional
registered investment company (i.e., one that is not exchange traded). In
addition, all ETFs will have costs and expenses that will be passed on to the
Funds, which will in turn increase the Funds’ expenses. ETFs are also subject to
the following risks that often do not apply to conventional investment
companies: (i) the market price of the ETF’s shares may trade at a discount to
the ETF’s net asset value, and as a result, ETFs may experience more price
volatility than other types of portfolio investments and which could negatively
impact the Funds’ net asset values; (ii) an active trading market for an ETF’s
shares may not develop or be maintained at a sufficient volume; (iii) trading of
an ETF’s shares may be halted if the listing exchange deems such action
appropriate; and (iv) ETF shares may be delisted from the exchange on which they
trade, or “circuit breakers” (which are tied to large decreases in stock prices
used by the exchange) may temporarily halt trading in the ETF’s stock.
ETFs are also subject to the risks of the underlying securities the ETF
holds. Finally, there may be legal limitations and other conditions
imposed by rules of the SEC on the amount of the ETF shares that the Funds may
acquire.
Equity Securities. The equity portion of the
Funds’ portfolio may be comprised of common stocks traded on domestic securities
exchanges or on the over-the-counter market. In addition to common stocks,
the equity portion of the Funds’ portfolio may also include preferred stocks,
convertible preferred stocks, and convertible bonds. Prices of equity
securities in which the Funds invest (either directly or indirectly through the
Funds’ investment in shares of other investment companies) may fluctuate in
response to many factors, including, but not limited to, the activities of the
individual companies whose securities the Funds own, general market and economic
conditions, interest rates, and specific industry changes. Such price
fluctuations subject the Funds to potential losses. In addition,
regardless of any one company’s prospects, a declining stock market may produce
a decline in prices for all equity securities, which could also result in losses
for the Funds. Market declines may continue for an indefinite period, and
investors should understand that during temporary or extended bear markets, the
value of equity securities will decline.
Options. While the Funds generally hold
put and call options indirectly through the holdings of the funds in which they
invest, the Fund may also purchase and write put and call options on securities
directly. The purchase and writing of options involves certain risks.
During the option period, a call writer that holds the underlying security has,
in return for the premium on the option, given up the opportunity to profit from
a price increase in the underlying securities above the exercise price, but, as
long as its obligation as a writer continues, has retained the risk of loss
should the price of the underlying security decline. The writer of an option has
no control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise
notice, it cannot affect a closing purchase transaction in order to terminate
its obligation under the option and must deliver the underlying securities at
the exercise price. If a put or call option purchased by a fund is not sold when
it has remaining value, and if the market price of the underlying security, in
the case of a put, remains equal to or greater than the exercise price or, in
the case of a call, remains less than or equal to the exercise price, a fund
will lose its entire investment in the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements in
a related security, the price of the put or call option may move more or less
than the price of the related security. There can be no assurance that a
liquid market will exist when a fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
market, a fund may be unable to close out a position.
To
the extent that a fund invests in options,
such fund will comply with the applicable requirements of the 1940 Act and the
guidance of no-action letters issued by the SEC, including Investment Company
Act Release No. 10666 (Apr. 18, 1979).
Futures Contracts. While the Funds do not
intend to invest in futures directly, they may indirectly hold futures through
the holdings of the funds in which they invests. A futures contract is a bilateral
agreement to buy or sell a security (or deliver a cash settlement price, in the
case of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contracts) for a set price in the
future. Futures contracts are designated by boards of trade that have been
designated “contracts markets” by the Commodities Futures Trading Commission
(CFTC). No purchase price is paid or received when the contract is entered
into. Instead, a fund, upon entering into a futures contract (and to
maintain a fund’s open positions in futures contracts), would be required to
deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. Government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as “initial
margin.” The margin required for a particular futures contract is set by
the exchange on which the contract is traded and may be significantly modified
from time to time by the exchange during the term of the contract. Futures
contracts are customarily purchased and sold on margin that may range upward
from less than 5% of the value of the contract being traded. By using
futures contracts as a risk management technique, given the greater liquidity in
the futures market than in the cash market, it may be possible to accomplish
certain results more quickly and with lower transaction costs.
If
the price of an open futures contract changes (by increase in the case of a sale
or by decrease in the case of a purchase) such that the loss on the futures
contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin. However, if the
value of a position increases because of favorable price changes in the futures
contract such that the margin deposit exceeds the required margin, the broker
will pay the excess to a fund. These subsequent payments, called “variation
margin,” to and from the futures broker, are made on a daily basis as the price
of the underlying assets fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as “marking to the
market.” A fund is expected to earn interest income on initial and
variation margin deposits.
A
fund will incur brokerage fees when it purchases and sells futures contracts.
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required but are instead liquidated through offsetting
transactions that may result in a gain or a loss. While futures positions
taken by a fund will usually be liquidated in this manner, a fund may instead
make or take delivery of underlying securities whenever it appears economically
advantageous for a fund to do so. A clearing organization associated with
the exchange on which futures are traded assumes responsibility for closing out
transactions and guarantees that as between the clearing members of an exchange,
the sale and purchase obligations will be performed with regard to all positions
that remain open at the termination of the contract.
In
addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of Funds pursuant to requirements imposed
by the SEC. Under those requirements, where a fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on
deposit). However, segregation of assets is not required if a fund
“covers” a long position. For a short position in futures or forward contracts
held by a fund, those requirements may mandate the establishment of a segregated
account (not with a futures commission merchant or broker) with cash or certain
liquid assets that, when added to the amounts deposited as margin, equal the
market value of the instruments underlying the futures contracts (but are not
less than the price at which the short positions were established).
Short Sales. While the Funds do not
intend to engage in short sales directly, the funds in which they invest may
engage in short sales. A short sale is a transaction in which a party
sells a security it does not own or have the right to acquire (or that it owns
but does not wish to deliver) in anticipation that the market price of that
security will decline. When a party makes a short sale, the broker-dealer
through which the short sale is made must borrow the security sold short and
deliver it to the party purchasing the security. The party is required to
make a margin deposit in connection with such short sales; the party may have to
pay a fee to borrow particular securities and will often be obligated to pay
over any dividends and accrued interest on borrowed securities.
If
the price of the security sold short increases between the time of the short
sale and the time the party covers the short position, the party will incur a
loss; conversely, if the price declines, the party will realize a capital
gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. The successful use of short selling may
be adversely affected by imperfect correlation between movements in the price of
the security sold short and the securities being hedged.
If
a party does sell “short”, the party will comply with current guidance from the
staff of the SEC regarding asset coverage requirements, including Investment
Company Act Release No. 10666 (Apr. 18, 1979). In particular, the party
will take measures to ensure its obligation to purchase the security in the
future will be met, including (i) holding the security sold short; (ii) holding
an offsetting call option (one with a strike price that is the same or lower
than the price at which the security was sold short); or (iii) segregating
liquid assets (which can be cash, U.S. Government securities, and other liquid
debt or equity securities) on the party’s books or in a segregated account at
the party’s custodian in an amount sufficient to cover the current value of the
securities to be replaced as well as any dividends, interest, and transaction
costs due to the broker-dealer lender. In determining the amount to be
segregated, any securities that have been sold short by the party will be marked
to market daily. To the extent the market price of the securities sold
short increases and more assets are required to meet the party’s short sale
obligations, additional assets will be segregated to ensure adequate coverage of
the party’s short position obligations. If the party does not have the
assets to cover a short sale, then the party’s potential losses on the short
will be unlimited because the security’s price may appreciate
indefinitely.
Swaps. While the Funds do not intend to invest
in swaps directly, they may indirectly hold swaps through the holdings of the
funds in which they invest. Swaps may include currency, equity, interest rate,
index and other swaps, which involve the exchange by an investor with another
party of their respective commitments, in an attempt to obtain a particular
return when it is considered desirable to do so, possibly at a lower cost than
if a fund had invested directly in the asset that yielded the desired
return. In the case of interest rate swaps, an investor may exchange with
another party their respective commitments to pay or receive interest, such as
an exchange of fixed rate payments for floating rate payments. Use of swaps
subjects the investor to risk of default by the counterparties. If there is a
default by the counterparty to such a transaction, there may be contractual
remedies pursuant to the agreements related to the transaction although
contractual remedies may not be sufficient in the event that the counterparty to
the transaction is insolvent. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid in comparison with the markets for
other similar instruments which are traded in the interbank market. An
investor may also enter into currency swaps or other swaps which are similar to
interest rate swaps but may be surrogates for other instruments such as currency
forwards or options.
Forward Commitment and When-Issued
Securities. While the Funds do not intend to purchase securities on
a when-issued basis for settlement at a future date directly, they may
indirectly engage in such transactions through the holdings of the funds in
which they invest. A Fund may purchase securities on a when-issued basis or for
settlement at a future date if a fund holds sufficient assets to meet the
purchase price. In such purchase transactions, a Fund will not accrue
interest on the purchased security until the actual settlement. Similarly, if a
security is sold for a forward date, a fund will accrue the interest until the
settlement of the sale. When-issued security purchases and forward commitments
have a higher degree of risk of price movement before settlement due to the
extended time period between the execution and settlement of the purchase or
sale. As a result, the exposure to the counterparty of the purchase or
sale is increased. Although a Fund would generally purchase securities on
a forward commitment or when-issued basis with the intention of taking delivery,
a Fund may sell such a security prior to the settlement date if the Advisor
feels such action is appropriate. In such a case, a fund could incur a
short-term gain or loss.
Repurchase Agreements. While the Funds do
not intend to enter into repurchase agreements directly, they may indirectly
engage in such transactions through the holdings of the funds in which they
invest. A repurchase transaction occurs when an investor purchases a security
(normally a U.S. Treasury obligation), and then resells it to the vendor
(normally a member bank of the Federal Reserve or a registered government
securities dealer) and is required to deliver the security (and/or securities
substituted for them under the repurchase agreement) to the vendor on an agreed
upon date in the future. The repurchase price exceeds the purchase price
by an amount which reflects an agreed upon market interest rate effective for
the period of time during which the repurchase agreement is in effect.
Delivery pursuant to the resale normally will occur within one to seven days of
the purchase. Repurchase agreements are considered “loans” under the 1940 Act,
collateralized by the underlying security. The Trust has implemented procedures
to monitor on a continuous basis the value of the collateral serving as security
for repurchase obligations. The Advisor will consider the creditworthiness of
the vendor. If the vendor fails to pay the agreed upon resale price on the
delivery date, a fund will retain or attempt to dispose of the collateral.
A fund’s risk is that such default may include any decline in value of the
collateral to an amount which is less than 100% of the repurchase price, any
costs of disposing of such collateral, and any loss resulting from any delay in
foreclosing on the collateral. Repurchase
agreements that do not provide for payment within seven days will be treated as
illiquid securities.
Illiquid Investments. The Funds may
invest up to 15% of net assets in illiquid securities, which are investments
that the Fund reasonably expects cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or disposition
significantly changing the market value of the investment. This
restriction is not limited to the time of purchase. Under the supervision
of the Board of Trustees of the Trust (the “Board” or “Trustees”), the Advisor
determines the liquidity of the Funds’ investments, and through reports from the
Advisor, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Funds’ investments, the Advisor may consider
various factors including (i) the frequency of trades and quotations; (ii) the
number of dealers and prospective purchasers in the marketplace; (iii) dealer
undertakings to make a market; (iv) the nature of the security (including any
demand or tender features); and (v) the nature of the marketplace for trades
(including the ability to assign or offset the Funds’ rights and obligations
relating to the investment). If through a change in values, net assets, or other
circumstances, the Funds were in a position where more than 15% of their net
assets were invested in illiquid securities, they would seek to take appropriate
steps to protect liquidity. Investment in illiquid securities poses risks of
potential delays in resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and the Funds may be unable to dispose of illiquid securities promptly or at
reasonable prices.
Restricted Securities. Within its
limitation on investment in illiquid securities, the Funds may purchase
restricted securities that generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the federal
securities laws, or in a registered public offering. Where registration is
required, the Funds may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Funds may be permitted to sell a security under an
effective registration statement. If during such a period adverse market
conditions were to develop, the Funds might obtain a less favorable price than
prevailed when it decided to seek registration of the security. Restricted
securities that can be offered and sold to qualified institutional buyers under
Rule 144A of the Securities Act of 1933 and are determined to be liquid under
guidelines adopted by and subject to the supervision of the Trustees are not
subject to the limitations on illiquid securities.
Lending of Portfolio Securities. In order
to generate additional income, the Funds may lend portfolio securities in an
amount up to 33% of total fund assets to broker-dealers, major banks, or other
recognized domestic institutional borrowers of securities which the Advisor has
determined are creditworthy under guidelines established by the Board of
Trustees. In determining whether the Funds will lend securities, the
Advisor will consider all relevant facts and circumstances. The Funds may not
lend securities to any company affiliated with the Advisor. Each loan of
securities will be collateralized by cash, U.S. Government securities, or
standby letters of credit not issued by the Funds’ bank lending agent. The Funds
might experience a loss if the borrower defaults on the loan.
The
borrower at all times during the loan must maintain with the Funds cash or cash
equivalent collateral. While the loan is outstanding, the borrower will pay the
Funds any interest paid on the loaned securities, and the Funds may invest the
cash collateral to earn additional income. Alternatively, the Funds may receive
an agreed-upon amount of interest income from the borrower who has delivered
equivalent collateral. It is anticipated that the Funds may share with the
borrower some of the income received on the collateral for the loan or the Funds
will be paid a premium for the loan. Voting rights for loaned securities
will typically pass to the borrower, but the Funds will retain the right to call
any security in anticipation of a vote that the Advisor deems material to the
security on loan. Loans are subject to termination at the option of the Funds or
the borrower at any time. The Funds may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
income earned on the cash to the borrower or placing broker. As with other
extensions of credit, there are risks of delay in recovery or even loss of
rights in the collateral should the borrower fail financially.
Securities
lending involves counterparty risk, including the risk that the loaned
securities may not be returned or returned in a timely manner and/or a loss of
rights in the collateral if the borrower or the lending agent defaults or fails
financially. This risk will be increased if a continuation of the current
downturn in the economic conditions in the United States and around the world,
particularly the recent failures of several major financial services firms,
causes further declines in the securities markets and/or causes further
financial instability in the borrowers or lending agents. This risk is increased
when the Funds’ loans are concentrated with a single or limited number of
borrowers. There are no limits on the number of borrowers the Funds may
use, and the Funds may lend securities to only one or a small group of
borrowers. Mutual funds participating in securities lending bear the risk of
loss in connection with investments of the cash collateral received from the
borrowers, which do not trigger additional collateral requirements from the
borrower.
Temporary Defensive Positions. The Funds
may, from time to time, take temporary defensive positions that are inconsistent
with the Funds’ principal investment strategies in an attempt to respond to
adverse market, economic, political, or other conditions. During such an unusual
set of circumstances, the Funds may hold up to 100% of its portfolios in cash or
cash equivalent positions (e.g., money market securities, U.S. Government
securities, and/or similar securities). When the Funds take a temporary
defensive position, the Funds may not be able to achieve their investment
objective.
Fundamental Investment Restrictions. The
following investment restrictions have been adopted by the Board with respect to
the Funds. Except as otherwise stated, these investment restrictions are
fundamental policies, which cannot be changed without the approval of the
holders of a majority of the outstanding voting securities of the Fund. A
vote of a majority of the outstanding voting securities of the Funds is defined
in the 1940 Act as the lesser of (i) 67% or more of the voting securities
present at a shareholder meeting if the holder or more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (ii) more than 50% of the outstanding voting securities of the Funds.
As
a matter of fundamental policy, the Funds may not:
(1) |
Issue
senior securities, except as permitted by the 1940
Act; |
(2) |
Borrow
money, except to the extent permitted under the 1940 Act (including,
without limitation, borrowing to meet redemptions). For purposes of
this investment restriction, the entry into options, forward contracts,
futures contracts, including those relating to indices, and options on
futures contracts or indices shall not constitute
borrowing; |
(3) |
Pledge,
mortgage, or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the deposit of
assets in escrow in connection with writing covered put and call options
and the purchase of securities on a when-issued or forward commitment
basis and collateral and initial or variation margin arrangements with
respect to options, forward contracts, futures contracts, including those
relating to indices, and options on futures contracts or
indices; |
(4) |
Act
as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter under certain federal securities
laws; |
(5) |
Purchase
or sell real estate or direct interests in real estate; provided, however,
that the Funds may purchase and sell securities which are secured by real
estate and securities of companies that invest or deal in real estate
(including, without limitation, investments in real estate investment
trusts (“REITs”), mortgage-backed securities, and privately-held real
estate funds); |
(6) |
Invest
in commodities, except that the Funds may purchase and sell securities of
companies that invest in commodities, options, forward contracts, futures
contracts, including those relating to indices and currencies, and options
on futures contracts, indices or
currencies; |
(7) |
Make
investments for the purpose of exercising control or management over a
portfolio company; |
(8) |
Make
loans, provided that the Funds may lend its portfolio securities in an
amount up to 33% of total fund assets, and provided further that, for
purposes of this restriction, investment in U.S. Government obligations,
short-term commercial paper, certificates of deposit, and bankers’
acceptances; |
(9) |
Concentrate
its investments. The Funds’ concentration policy limits the aggregate
value of holdings of a single industry or group of industries (except U.S.
Government and cash items) to less than 25% of a Fund’s total assets;
or |
(10) |
With
respect to 75% of its total assets: (i) purchase 10% or more of the
outstanding voting securities of any one issuer; or (ii) purchase
securities of any issuer if, as a result, 5% or more of a Fund’s total
assets would be invested in that issuer’s securities. This
limitation does not apply to investments in (i) cash and cash items; (ii)
securities of other registered investment companies; and (iii) obligations
of the United States Government, its agencies, or
instrumentalities. |
Senior
securities may include any obligation or instrument issued by a fund evidencing
indebtedness. The 1940 Act generally prohibits funds from issuing senior
securities, although it does not treat certain transactions as senior securities
(“Permitted Senior Securities”), such as certain borrowings, short sales, firm
commitment agreements, and standby commitments, with appropriate earmarking or
segregation of assets to cover such obligations.
The
Funds are allowed to pledge, mortgage, or hypothecate assets up to the amounts
allowable under the 1940 Act, which presently allows the Funds to borrow from
any bank (including pledging, mortgaging or hypothecating assets) in an amount
up to 33 1/3% of its total assets (not including temporary borrowings not in
excess of 5% of its total assets).
For
purposes of the Funds’ concentration policy, if a Fund invests in one or more
investment companies, that Fund will examine the holdings of such investment
companies to ensure that a Fund is not indirectly concentrating its investments
in a particular industry. In determining the exposure of a Fund to a particular
industry for purposes of the fundamental investment restriction on
concentration, tat Fund currently uses Standard & Poor’s Global Industry
Classification Standard (GICS) in order to classify industries.
With
respect to the fundamental investment restrictions above (other than those
involving Permitted Senior Securities and borrowings), if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction (i.e., percentage limitations are determined
at the time of purchase).
The
Funds principally invests in unaffiliated closed-end investment companies.
Neither the Funds nor the Advisor will have control or influence over the
activities of such investment companies. While other investment companies
are subject to certain constraints of the 1940 Act, the investment limitations
of the other investment companies in which the Funds invest, with the exception
of policies on concentration, may differ from those of the Funds.
Non-Fundamental Policies. The following
investment policies are not fundamental and may be changed without shareholder
approval.
The
Matisse Discounted Closed-End Fund Strategy has adopted a non-fundamental
investment policy in accordance with Rule 35d-1 under the 1940 Act to invest,
under normal circumstances, at least 80% of the value of its net assets, plus
the amount of any borrowings for investment purposes, in discounted closed-end
funds.
The
Matisse Discounted Bond CEF Strategy has adopted a non-fundamental investment
policy in accordance with Rule 35d-1 under the 1940 Act to invest, under normal
circumstances, at least 80% of the value of its net assets, plus the amount of
any borrowings for investment purposes, in discounted closed-end funds that
primarily invest in bonds.
The
Funds will look to the underlying closed-end funds’ investment objective and
principal investment strategies to determine compliance with Rule 35d-1. If,
subsequent to an investment, the 80% requirement is no longer met, a Fund’s
future investments will be made in a manner that will bring the Fund into
compliance with this policy.
Each
Fund may invest up to 15% of net assets in illiquid investments, which are
investments that the Fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or less without the sale or
disposition significantly changing the market value of the investment. This
restriction is not limited to the time of purchase.
Subject
to the policies established by the Board, the Advisor makes decisions with
respect to, and places orders for all purchases and sales of portfolio
securities for the Funds. The Advisor shall manage the Funds’ portfolios in
accordance with the terms of the investment advisory agreements by and between
the Advisor and the Trust on behalf of the Funds (“Advisory Agreements”), which
is described in detail under “Management and Other Service Providers –
Investment Advisor.” The Advisor serves as investment advisor for a number
of client accounts, including the Funds. Investment decisions for the Fund
are made independently from those for any other series of the Trust, if any, and
for any other investment companies and accounts advised or managed by the
Advisor.
Brokerage Selection. The Board has adopted, and
the Trustees have approved, policies and procedures relating to the direction of
mutual fund portfolio securities transactions to broker-dealers. The Advisor may
not give consideration to sales of shares of the Funds as a factor in selecting
broker-dealers to execute portfolio securities transactions. The Advisor may,
however, place portfolio transactions with broker-dealers that promote or sell
the Funds’ shares so long as such transactions are done in accordance with the
policies and procedures established by the Trustees that are designed to ensure
that the selection is based on the quality of the broker’s execution and not on
its sales efforts. In selecting brokers to be used in portfolio transactions,
the Advisor’s general guiding principle is to obtain the best overall execution
for each trade, which is a combination of price and execution. With respect to
execution, the Advisor considers a number of discretionary factors, including,
without limitation, the actual handling of the order, the ability of the broker
to settle the trade promptly and accurately, the financial standing of the
broker, the ability of the broker to position stock to facilitate execution, the
Advisor’s past experience with similar trades, and other factors that may be
unique to a particular order. Recognizing the value of these discretionary
factors, the Advisor may select brokers who charge a brokerage commission that
is higher than the lowest commission that might otherwise be available for any
given trade.
Under
Section 28(e) of the Securities Exchange Act of 1934 and the Advisory Agreement,
the Advisor is authorized to pay a brokerage commission in excess of that which
another broker might have charged for effecting the same transaction, in
recognition of the value of brokerage and/or research services provided by the
broker. The research received by the Advisor may include, without
limitation: information on the United States and other world economies;
information on specific industries, groups of securities, individual companies,
and political and other relevant news developments affecting markets and
specific securities; technical and quantitative information about markets;
analysis of proxy proposals affecting specific companies; accounting and
performance systems that allow the Advisor to determine and track investment
results; and trading systems that allow the Advisor to interface electronically
with brokerage firms, custodians, and other providers. Research is received in
the form of written reports, telephone contacts, personal meetings, research
seminars, software programs, and access to computer databases. In some
instances, research products or services received by the Advisor may also be
used by the Advisor for functions that are not research related (i.e. not
related to the making of investment decisions). Where a research product
or service has a mixed use, the Advisor will make a reasonable allocation
according to the use and will pay for the non-research function in cash using
its own funds.
The
research and investment information services described above make available to
the Advisor for its analysis and consideration the views and information of
individuals and research staffs of other securities firms. These services may be
useful to the Advisor in connection with advisory clients other than the Funds
and not all such services may be useful to the Advisor in connection with the
Funds. Although such information may be a useful supplement to the
Advisor’s own investment information in rendering services to the Funds, the
value of such research and services is not expected to reduce materially the
expenses of the Advisor in the performance of its services under the Advisory
Agreements and will not reduce the management fees payable to the Advisor by the
Funds.
The
Funds may invest in securities traded in the over-the-counter market. In
these cases, the Funds may initiate trades through brokers on an agency basis
and pay a commission in connection with the transaction. The Funds may also
effect these transactions by dealing directly with the dealers who make a market
in the securities involved, in which case the costs of such transactions would
involve dealer spreads rather than brokerage commissions. With respect to
securities traded only in the over-the-counter market, orders will be executed
on a principal basis with primary market makers in such securities except where
better prices or executions may be obtained on an agency basis or by dealing
with those other than a primary market maker.
The
Funds’ fixed income portfolio transactions may be executed through
broker-dealers on an agency basis or be principal transactions executed in over
the counter markets on a “net” basis, which may include a dealer mark up. Where
possible, the Advisor will deal directly with the broker-dealers who make a
market in the securities involved except in those circumstances where better
prices and execution are available elsewhere. Such broker-dealers usually act as
principal for their own account.
The
Funds may participate, if and when practicable, in bidding for the purchase of
fund securities directly from an issuer in order to take advantage of the lower
purchase price available to members of a bidding group. The Funds will engage in
this practice, however, only when the Advisor, in their sole discretion, believe
such practice to be otherwise in the Funds’ interest.
The
following shows the aggregate amount of broker commissions paid by each Fund
during the three most recent fiscal years, as applicable.
Fund |
2023 |
2022 |
2021 |
Matisse
Discounted Closed-End Fund Strategy |
$31,760 |
$290,726 |
$243,087 |
Matisse
Discounted Bond CEF Strategy |
$80,843 |
$35,531 |
$28,6011 |
1.
Inception Date of the Matisse Discounted Bond CEF Strategy is April 30,
2020.
The
decrease in brokerage commission for the Matisse Discounted Closed-End Fund
Strategy for the fiscal year ended March 31, 2023, from the prior fiscal year
was due to the reduction in fund size (late 2021/early 2022 outflows) leading to
a reduction in total turnover. The increase in brokerage commission for the
Matisse Discounted Bond CEF Strategy for the fiscal year ended March 31, 2023,
from the prior fiscal year was due to an increase in attractively discounted CEF
opportunities starting in late 2022. For both funds, per-share commission rates
remained approximately the same.
Aggregated Trades. While investment decisions
for the Fund are made independently of the Advisor’s other client accounts, the
Advisor’s other client accounts may invest in the same securities as the
Funds. To the extent permitted by law, the Advisor may aggregate the
securities to be sold or purchased for the Funds with those to be sold or
purchased for other investment companies or accounts in executing
transactions. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Funds and another investment
company or account, the transaction will be averaged as to price and available
investments allocated as to amount in a manner which the Advisor believes to be
equitable to the Funds and such other investment company or account. In
some instances, this investment procedure may adversely affect the price paid or
received by the Funds or the size of the position obtained or sold by the
Funds.
Portfolio Turnover. The annualized
portfolio turnover rate for the Funds is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average value of the portfolio securities owned during the fiscal year.
The calculation excludes all securities whose maturities or expiration dates at
the time of acquisition are one year or less. Portfolio turnover of the Funds
may vary greatly from year to year as well as within a particular year and may
be affected by cash requirements for redemption of shares and by requirements
that enable the Funds to receive favorable tax treatment. Portfolio turnover
will not be a limiting factor in making fund decisions, and the Funds may engage
in short-term trading to achieve its investment objectives. High rates of
portfolio turnover could lower performance of the Funds due to increased
transaction costs and may also result in the realization of short-term capital
gains taxed at ordinary income tax rates.
The
portfolio turnover rate for each Fund over the last two years, ended March 31,
is set forth below.
Fund |
2023 |
2022 |
Matisse
Discounted Closed-End Fund Strategy |
29.50% |
33.89% |
Matisse
Discounted Bond CEF Strategy |
57.99% |
70.40% |
The
Trust, which is a statutory trust organized under Delaware law on May 13, 2009,
is an open-end management investment company. The Trust’s Declaration of Trust
(“Trust Instrument”) authorizes the Trustees to divide shares into series, each
series relating to a separate portfolio of investments, and to classify and
reclassify any unissued shares into one or more classes of shares of each such
series. The Trust currently consists of 11 series. Additional series and/or
classes may be created from time to time. The number of shares in each series of
the Trust shall be unlimited. When issued for payment as described in the Fund’s
Prospectus and this SAI, shares of the Fund will be fully paid and
non-assessable and shall have no preemptive or conversion rights. The
Trust does not issue share certificates.
In
the event of a liquidation or dissolution of the Trust or an individual series,
such as the Funds, shareholders of a particular series would be entitled to
receive the assets available for distribution belonging to such series.
Shareholders of a series are entitled to participate equally in the net
distributable assets of the particular series involved on liquidation, based on
the number of shares of the series that are held by each shareholder. If
there are any assets, income, earnings, proceeds, funds, or payments that are
not readily identifiable as belonging to any particular series, the Trustees
shall allocate them among any one or more of the series as they, in their sole
discretion, deem fair and equitable.
Shareholders
of all of the series of the Trust, including the Funds, will vote together and
not separately on a series-by-series or class-by-class basis, except as
otherwise required by law or when the Trustees determine that the matter to be
voted upon affects only the interests of the shareholders of a particular series
or class. The Trust has adopted a Rule 18f-3 Multi-class Plan for certain
series that contain the general characteristics of and conditions under which
such series may offer multiple classes of shares. Rule 18f-2 under the
1940 Act provides that any matter required to be submitted to the holders of the
outstanding voting securities of an investment company such as the Trust shall
not be deemed to have been effectively acted upon unless approved by the holders
of a majority of the outstanding shares affected by the matter. A series
or class is affected by a matter unless it is clear that the interests of each
series or class in the matter are substantially identical or that the matter
does not affect any interest of the series or class. Under Rule 18f-2, the
approval of an investment advisory agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a series only
if approved by a majority of the outstanding shares of such series.
However, the rule also provides that the ratification of the appointment of
independent accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Trust voting together, without regard to a particular series or class.
Rights of shareholders can only be modified by a majority vote.
When
used in the Prospectus or this SAI, a “majority” of shareholders means the vote
of the lesser of (i) 67% of the shares of the Trust or the applicable series or
class present at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy or (ii) more than 50% of the
outstanding shares of the Trust or the applicable series or class.
Shareholders
are entitled to one vote for each full share and a fractional vote for each
fractional share held. Shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees, and in this event, the holders of the
remaining shares voting will not be able to elect any Trustees.
The
Trustees will hold office indefinitely, except that: (i) any Trustee may resign
or retire, and (ii) any Trustee may be removed: (a) any time by written
instrument signed by at least two-thirds of the number of Trustees prior to such
removal; (b) at any meeting of shareholders of the Trust by a vote of two-thirds
of the outstanding shares of the Trust; or (c) by a written declaration signed
by shareholders holding not less than two-thirds of the outstanding shares of
the Trust. In case a vacancy on the Board of Trustees shall for any reason
exist, the vacancy shall be filled by the affirmative vote of a majority of the
remaining Trustees, subject to certain restrictions under the 1940 Act.
Otherwise, there will normally be no meeting of shareholders for the purpose of
electing Trustees, and the Trust does not expect to have an annual meeting of
shareholders.
The
Trust Instrument provides that the Trustees will not be liable in any event in
connection with the affairs of the Trust, except as such liability may arise
from a Trustee’s bad faith, willful misfeasance, gross negligence, or reckless
disregard of duties. It also provides that all third parties shall look
solely to the Trust’s property for satisfaction of claims arising in connection
with the affairs of the Trust. With the exceptions stated, the Trust
Instrument provides that a Trustee or officer is entitled to be indemnified
against all liability in connection with the affairs of the Trust.
The
Trust is governed by the Board, which is responsible for the management and
supervision of the Funds. The Trustees meet periodically throughout the
year to review contractual arrangements with companies furnish services to the
Funds; review performance of the Advisor and the Funds; and oversee activities
of the Funds. This section of the SAI provides information about the
persons who serve as Trustees and officers to the Trust as well as the entities
that provide services to the Funds.
Trustees and Officers. Following are the
Trustees and officers of the Trust, their age and address, their present
position with the Trust or the Funds, and their principal occupation during the
past five years. The Trustees in the following table who are not “interested”
persons of the Trust within the meaning of the 1940 Act (“Independent Trustees”)
are indicated as such. The address of each Trustee and officer of the Trust,
unless otherwise indicated, is 116 South Franklin Street, Rocky Mount, North
Carolina 27804.
Name and Date of Birth |
Position held with
Funds or
Trust |
Length
of Time
Served |
Principal Occupation During Past 5 Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee |
Other Directorships Held by Trustee During Past 5 Years |
Independent
Trustees |
James
H. Speed, Jr. (06/1953) |
Chairman
and Independent Trustee |
Trustee
since 7/09, Chair since 5/12 |
Retired
Executive/Private Investor |
11 |
Independent
Trustee of the Brown Capital Management Mutual Funds for all its series
from 2001 to present, Centaur Mutual Funds Trust for all its series from
2009 to present, WST Investment Trust for all its series from 2013 to
present, and Chesapeake Investment Trust for all its series from 2016 to
present (all registered investment companies), and WST Investment Trust
for all its series (all registered investment companies) from 2013 to
present. Member of Board of Directors of Communities in Schools of N.C.
from 2001 to present. Member of Board of Directors of Investors Title
Company from 2010 to present. Member of Board of Directors of AAA
Carolinas/Auto Club Group from 2011 to present. Previously, Independent
Trustee of the Hillman Capital Management Trust from 2009 to 2021.
Previously, Independent Trustee of the Leeward Investment Trust from 2018
to 2020. Previously, member of Board of Directors of M&F Bancorp
Mechanics & Farmers Bank from 2009 to 2019.
|
Name and Date of Birth |
Position held with
Funds or
Trust |
Length
of Time
Served |
Principal Occupation During Past 5 Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
by
Trustee |
Other Directorships Held by Trustee During Past 5 Years |
Theo
H. Pitt, Jr. (04/1936) |
Independent
Trustee |
Since
9/10 |
Senior
Partner, Community Financial Institutions Consulting (financial
consulting) since 1999. |
11 |
Independent
Trustee of Hillman Capital Management Investment Trust for all its series
from 2000 to present, , Chesapeake Investment Trust for all its series
from 2002 to present, World Funds Trust for all its series from 2013 to
present, ETF Opportunities Trust for all its series from 2019 to present,
and Kingdom Parallel Income Trust for all its series from 2022 to present
(all registered investment companies). Senior Partner of Community
Financial Institutions Consulting from 1997 to present. Previously,
Independent Trustee of the Leeward Investment Trust from 2011 to 2021.
Previously, Partner at Pikar Properties from 2001 to 2017. |
J.
Buckley Strandberg (03/1960) |
Independent
Trustee |
Since
7/09 |
President
of Standard Insurance and Realty since 1982. |
11 |
None. |
Name and Date of Birth |
Position held with Funds or Trust |
Length of
Time Served |
Principal Occupation During Past 5 Years |
Officers |
Katherine
M. Honey (09/1973) |
President
and Principal Executive Officer |
Since
05/15 |
President
of The Nottingham Company since 2018. EVP of The Nottingham Company from
2008 to 2018. |
Pete
McCabe
(09/1972) |
Treasurer,
Principal Accounting Officer, and Principal Financial Officer |
Since
05/23 |
Chief
Operating Officer, The Nottingham Company since 2008. |
Tracie
A. Coop (12/1976) |
Secretary |
Since
12/19 |
General
Counsel, The Nottingham Company since 2019. Formerly, Vice President and
Managing Counsel, State Street Bank and Trust Company from 2015 to 2019.
|
Andrea
M. Knoth (09/1983) |
Chief
Compliance Officer |
Since
06/2022 |
Director
of Compliance, The Nottingham Company since 2022. Formerly, Senior Fund
Compliance Administrator, Ultimus Fund Solutions from 2019 to 2022.
Formerly, Associate Director of Operational Compliance, Barings from 2018
to 2019. Formerly, Senior Fund Compliance Administrator, Gemini Fund
Services from 2012 to 2018. |
Qualification of Trustees. The Board
believes that each Trustee’s experience, qualifications, attributes or skills on
an individual basis and in combination with those of the other Trustees on the
Board lead to the conclusion that the Board possesses the requisite skills and
attributes to carry out its oversight responsibilities with respect to the
Trust. The Board believes that its Trustees’ ability to review, critically
evaluate, question, and discuss information provided to them, to interact
effectively with the Advisor, other service providers, counsel and independent
auditors, and to exercise effective business judgment in the performance of its
duties, support this conclusion. The Board also has considered the following
experience, qualifications, attributes and/or skills, among others, of its
members, as applicable, in reaching its conclusion: (i) such person’s business
and professional experience and accomplishments, including prior experience in
the financial services and investment management fields or on other boards; (ii)
such person’s ability to work effectively with the other members of the Board;
(iii) how the individual’s skills, experiences, and attributes would contribute
to an appropriate mix of relevant skills and experience on the Board; (iv) such
person’s character and integrity; (v) such person’s willingness to serve and
willingness and ability to commit the time necessary to perform the duties of a
Trustee; and (vi) as to each Trustee his status as an Independent Trustee.
In
addition, the following specific experience, qualifications, attributes and/or
skills were considered in respect of the listed Trustee.
Mr.
Pitt has experience as an investor, including his role as trustee of several
other investment companies and business experience as senior partner of a
financial consulting company, as a partner of a real estate partnership and as
an account administrator for a money management firm. Mr. Speed also has
experience as an investor as trustee of several other investment companies and
business experience as president and chief executive officer of an insurance
company and as president of a company in the business of consulting and private
investing. Mr. Strandberg also has investment experience as a former trustee of
another investment company and business experience as president of an insurance
and property management company.
The
Board has determined that each of the Trustees’ careers and background, combined
with their interpersonal skills and general understanding of financial and other
matters, enable the Trustees to effectively participate in and contribute to the
Board’s functions and oversight of the Trust. References to the qualifications,
attributes, and skills of Trustees are pursuant to requirements of the SEC, do
not constitute holding out the Board or any Trustee as having any special
expertise or experience, and shall not impose any greater responsibility on any
such person or on the Board by reason thereof.
Board Structure. The Board currently
consists of three Trustees, all of whom are Independent. Mr. Speed, Jr., serves
as the Independent Chairman of the Board. The Board has established several
standing committees: Audit Committee, Nominating Committee, Fair Valuation
Committee, Governance Committee, and Qualified Legal Compliance Committee.
These standing committees are comprised entirely of the Independent Trustees.
Other information about these standing committees is set forth below. The Board
has determined that the Board’s structure is appropriate given the
characteristics, size, and operations of the Trust. The Board also believes that
its leadership structure, including its committees, helps facilitate effective
oversight of Trust management. The Board reviews its structure annually.
With
respect to risk oversight, the Board considers risk management issues as part of
its general oversight responsibilities throughout the year. The Board holds four
regular board meetings each year during which the Board receives risk management
reports and/or assessments from Trust management, the Funds’ advisor,
administrator, transfer agent, and distributor, and receives an annual report
from the Trust’s Chief Compliance Officer (“CCO”). The Audit Committee
also meets with the Trust’s independent registered public accounting firm on an
annual basis, to discuss among other things, the internal control structure of
the Trust’s financial reporting function. When appropriate, the Board may hold
special meeting or communicate directly with Trust management, the CCO, the
Trust’s third-party service providers, legal counsel, or independent public
accountants to address matters arising between regular board meeting or needing
special attention. In addition, the Board has adopted policies and procedures
for the Trust to help detect and prevent and, if necessary, correct violations
of federal securities laws.
The
Board met nine times during the fiscal year ended March 31, 2023.
Trustee Standing Committees. The Trustees
have established the following standing committees:
Audit
Committee. All of the Independent Trustees are members of the Audit
Committee. The Audit Committee oversees the Funds’ accounting and
financial reporting policies and practices, reviews the results of the annual
audits of the Funds’ financial statements, and interacts with the Funds’
independent auditors on behalf of all the Trustees. The Audit Committee
met ten times during the fiscal year ended March 31, 2023.
Fair
Valuation Committee. An Independent Trustee and a representative of
the advisor are members of the Fair Valuation Committee. The Fair Valuation
Committee oversees the valuation designee who has the authority to determine the
fair value of specific securities under the methods established by the adopted
Guidelines for Valuing Portfolio Securities. The Fair Valuation Committee meets
only as necessary. The Fair Valuation Committee did not meet during the fiscal
year ended March 31, 2023.
Governance
Committee. The Independent Trustees are the current members of the
Governance Committee. The Governance Committee assists the Board in
adopting fund governance practices and meeting certain fund governance
standards. The Governance Committee also nominates, selects, and appoints
Independent Trustees to fill vacancies on the Board of Trustees and to stand for
election at meetings of the shareholders of the Trust. The Governance Committee
operates pursuant to a Governance Committee Charter and normally meets annually
but may also meet as often as necessary to carry out its purpose. The
Governance Committee met twice during the fiscal year ended March 31,
2023.
Qualified
Legal Compliance Committee. The Independent Trustees are the current
members of the Qualified Legal Compliance Committee. The Qualified Legal
Compliance Committee receives, investigates, and makes recommendations as to
appropriate remedial action in connection with any report of evidence of a
material violation of securities laws or breach of fiduciary duty or similar
violation by the Trust, its officers, Trustees, or agents. The Qualified
Legal Compliance Committee meets only as necessary and met four times during the
fiscal year ended March 31, 2023.
Beneficial Equity Ownership Information.
The table below sets forth, as of December 31, 2022, the dollar range of equity
securities beneficially owned by each Trustee in the Funds, and the aggregate
dollar range of equity securities in the Fund complex.
A
= None; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; and E = over
$100,000.
Name
of Trustee |
Fund |
Dollar
Range of
Equity
Securities in
the
Fund |
Aggregate
Dollar Range
of
Equity Securities in
All
Funds Overseen or
to
be Overseen by
Trustee
in Family of
Investment
Companies |
James
H. Speed, Jr. |
Matisse
Discounted Closed-End Fund Strategy |
A |
|
Matisse
Discounted Bond CEF Strategy |
A |
|
|
|
A |
Theo
H. Pitt, Jr. |
Matisse
Discounted Closed-End Fund Strategy |
A |
|
Matisse
Discounted Bond CEF Strategy |
A |
|
|
|
A |
Michael
G. Mosley* |
Matisse
Discounted Closed-End Fund Strategy |
A |
|
Matisse
Discounted Bond CEF Strategy |
A |
|
|
|
A |
J.
Buckley Strandberg |
Matisse
Discounted Closed-End Fund Strategy |
A |
|
Matisse
Discounted Bond CEF Strategy |
A |
|
|
|
A |
*Mr.
Mosely stopped serving as an Independent Trustee effective March 9, 2023.
Ownership of Securities of Advisor, Distributor, or
Related Entities. As of December 31, 2022, none of the Independent
Trustees and/or their immediate family members own securities of the Advisor,
Capital Investment Group, Inc. (the “Distributor”), or any entity controlling,
controlled by, or under common control with the Advisor or Distributor.
Compensation. Officers of the Trust and
Trustees who are interested persons of the Trust or the Advisor will receive no
salary or fees from the Trust. Independent Trustees receive $2,400 per
series of the Trust each year, and they may receive up to an additional $500 per
meeting attended, $200 per committee meeting attended, and $1,000 per special
meeting attended. This amount may be paid pro rata in the event that a series
closes during the fiscal year. The Trust reimburses each Trustee and officers of
the Trust for his or her travel and other expenses relating to attendance at
such meetings. Prior to March 9, 2023, the Independent Trustees received $2,000
per series of the Trust each year, and they may receive up to an additional $200
per meeting attended and $500 per series of the Trust per special meeting
related to contract renewal issues. Each of the Trustees serves as a Trustee to
all series of the Trust, including the Fund. During the fiscal year ended March
31, 2023, the Trustees received the amounts set forth in the following table for
services to the Fund and the Fund Complex.
Name
of Trustee |
Aggregate
Compensation
from
Matisse
Discounted
Closed-End
Fund
Strategy |
Aggregate
Compensation
from
Matisse
Discounted
Bond
CEF Strategy |
Pension
or
Retirement
Benefits
Accrued
as Part of
Fund
Expenses |
Estimated
Annual
Benefits
Upon
Retirement |
Total
Compensation
from
Fund and
Fund
Complex Paid
to
Trustees |
Michael
G. Mosley* |
$2,180.77 |
$
2,180.77 |
None |
None |
$28,500 |
Theo
H. Pitt, Jr. |
$
2,180.77 |
$
2,180.77 |
None |
None |
$28,700 |
James
H. Speed, Jr. |
$
2,180.77 |
$
2,180.77 |
None |
None |
$28,700 |
J.
Buckley Strandberg |
$
2,180.77 |
$2,180.77 |
None |
None |
$28,700 |
*Mr. Mosley stopped serving as an Independent Trustee
effective March 9, 2023.
Codes of
Ethics. The Trust, Advisor, and Distributor each have adopted a
code of ethics, as required under Rule 17j-1 of the 1940 Act, which is designed
to prevent affiliated persons of the Trust, Advisor, and Distributor from
engaging in deceptive, manipulative, or fraudulent activities in connection with
securities held or to be acquired by the Fund (which securities may also be held
by persons subject to each such code of ethics). There can be no assurance
that the codes will be effective in preventing such activities. The codes
permit employees and officers of the Trust, Advisor, and Distributor to invest
in securities held by the Funds, subject to certain restrictions and
pre-approval requirements. In addition, the Advisor’s code requires that
portfolio managers and other investment personnel of the Advisor report their
personal securities transactions and holdings, which are reviewed for compliance
with the Trust’s and Advisor’s codes of ethics.
Anti-Money Laundering Program. The Trust
has adopted an anti-money laundering program, as required by applicable law,
which is designed to prevent the Funds from being used for money laundering or
the financing of terrorist activities. The Trust’s CCO is responsible for
implementing and monitoring the operations and internal controls of the program.
Compliance officers at certain of the Funds’ service providers are also
responsible for monitoring the program. The anti-money laundering program is
subject to the continuing oversight of the Trustees.
Proxy Voting Policies. The Trust has
adopted a proxy voting and disclosure policy that delegates to the Advisor the
authority to vote proxies for the Funds, subject to oversight by the
Board. A copy of the Advisor’s Proxy Voting Policy and Procedures is
included as Appendix B to this SAI. No later than August 31st of each
year, the Funds will file Form N-PX stating how the Funds voted proxies relating
to portfolio securities during the most recent 12-month period ended June 30th.
Information regarding how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling the Funds at 1-800-773-3863; and (ii)
on the SEC’s website at http://www.sec.gov.
Principal Holders of Voting Securities.
As of June 30, 2023, the Trustees and officers of the Trust as a group owned
beneficially (i.e., had direct or indirect voting and/or investment power) none
of the then outstanding shares of the Funds. As of June 30, 2023, to the Trust’s
knowledge, the following shareholders owned of record or beneficially 5% or more
of the outstanding shares of the Funds. Shareholders owning 25% or more of
outstanding shares may be in control and may be able to affect the outcome of
certain matters presented for a vote of Shareholders.
Matisse Discounted Closed-End Fund
Strategy Institutional Class
Shares |
Name
and Address of Owner |
Percentage
of Ownership |
Type
of Ownership |
Charles
Schwab & Co, Inc. 101 Montgomery Street San Francisco, CA
94104 |
54.82%
|
Record1 |
Matisse Discounted Bond CEF
Strategy Institutional Class
Shares |
Name
and Address of Owner |
Percentage
of Ownership |
Type
of Ownership |
Charles
Schwab & Co, Inc. 101 Montgomery Street San Francisco, CA
94104 |
72.85%
|
Record1
|
|
1. |
The
Fund believes that such entity does not have a beneficial ownership
interest in such shares. |
Investment Advisor. Deschutes Portfolio
Strategy, LLC dba Matisse Capital, located at 15350 SW Sequoia Parkway, Suite
260, Portland, OR 97224 serves as the investment advisor to the Funds pursuant
to the investment advisory agreements between the Trust, on behalf of the Funds,
and Deschutes Portfolio Strategy, LLC. The Advisor is controlled by Bryn H.
Torkelson, as trustee of The Bryn H. Torkelson and Janice A. Torkelson Revocable
Living Trust. Bryn H. Torkelson also serves as president and manager of the
Advisor. The Advisor supervises the Funds’ investments pursuant to the Advisory
Agreements. The Advisory Agreements are effective for an initial two-year period
and will be renewed thereafter only so long as such renewal and continuance is
specifically approved at least annually: (i) by the Board or by vote of a
majority of the outstanding voting securities of the Funds; and (ii) by vote of
a majority of the Independent Trustees, cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreements are terminable
without penalty by the Trust by a vote of the Board or by vote of a majority of
the outstanding voting securities upon 60 calendar days’ written notice or by
the Advisor upon 60 calendar days’ written notice. The Advisory Agreements
provide that they will terminate automatically in the event of its “assignment,”
as such term is defined in the 1940 Act.
The
Advisor manages the Funds’ investments in accordance with the stated policies of
the Funds, subject to oversight by the Board. The Advisor is responsible
for investment decisions and provides the Funds with portfolio managers who are
authorized to execute purchases and sales of securities.
Under
the Advisory Agreements, the Advisor is not liable for any error of judgment or
mistake of law or for any loss suffered by the Funds in connection with the
performance of such agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services; or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Advisor in the performance of its duties; or from its reckless
disregard of its duties and obligations under the Advisory Agreements.
For
its investment advisory services to the Funds, the Advisor is paid a management
fee by the Funds, based on a percentage of the Funds’ daily net assets, at an
annual rate set forth in the chart below.
Expense Limitation Agreement. In the interest
of limiting expenses of the Funds, the Advisor has entered into an Expense
Limitation Agreement with the Trust, pursuant to which the Advisor has agreed to
waive or limit its fees and to assume other expenses so that the total annual
operating expenses of the Funds (exclusive (i) any front-end or contingent
deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees
and expenses; (iv) fees and expenses associated with investments in other
collective investment vehicles or derivative instruments (including for example
option and swap fees and expenses); (v) borrowing costs (such as interest and
dividend expense on securities sold short); (vi) taxes; and (vii) extraordinary
expenses, such as litigation expenses (which may include indemnification of Fund
officers and Trustees and contractual indemnification of Fund service providers
(other than the Advisor)) to not more than certain percentages of the average
daily net assets of the Funds as outlined in the chart below. Net annual
operating expenses for the Funds may exceed these limits to the extent that they
incur expenses enumerated above as exclusions. The Expense Limitation Agreement
runs through July 31, 2024, and may be terminated by the Board at any time. The
Advisor cannot recoup from the Funds any amounts paid by the Advisor under the
Expense Limitation Agreement.
The
following chart shows the current advisory fee rate and operating expense limit
for each Fund as of the date of this SAI:
Operating
Expense Limit |
Fund
|
Advisory
Fee
Rate |
Expense Limit
|
Matisse
Discounted Closed-End Fund Strategy |
0.99% |
1.25% |
Matisse
Discounted Bond CEF Strategy |
0.70% |
0.99% |
The
following chart shows the total dollar amount that each Fund paid to Deschutes
Portfolio Strategy, LLC dba Matisse Capital, during the last three fiscal
years.
Fund
|
Fiscal
Year Ended
March
31, 2023 |
Fiscal
Year Ended
March
31, 2022 |
Fiscal
Year Ended
March
31, 2021 |
Advisory Fees |
Fees Waived |
Advisory Fees |
Fees Waived |
Advisory
Fees |
Fees
Waived |
Matisse
Discounted Closed-End Fund Strategy |
$383,417 |
$134,954 |
$2,738,443 |
-- |
$2,556,521 |
$9 |
Matisse
Discounted Bond CEF Strategy* |
$256,958 |
$103,067 |
$212,673 |
$117,389 |
$97,643 |
$97,463 |
*Fund’s
inception date is April 30, 2020. For the fiscal year ended March 31,
2021, the Advisor also reimbursed the Fund for $42,296 in expenses.
Portfolio Managers. The Funds’ portfolios
will be managed on a day-to-day basis by Bryn Torkelson and Eric Boughton,
CFA.
Compensation.
The compensation of each member of the portfolio management team varies with the
general success of the Advisor as a firm. Compensation consists of a fixed
annual salary, and typically additional remuneration based on the Advisor’s
assets under management. Compensation is not directly linked to the Funds’
performance, although positive performance and growth in managed assets are
factors that may contribute to the Advisor’s distributable profits and assets
under management.
Ownership
of Fund Shares. The table below shows the amount of the Funds’ equity
securities beneficially owned by each member of the portfolio management team as
of March 31, 2023, and stated as one of the following ranges: A = None; B =
$1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; E = $100,001-$500,000; F
= $500,001-$1,000,000; and G = over $1,000,000.
Portfolio
Manager |
Fund
|
Dollar Range of Equity Securities in the Fund |
Bryn
Torkelson |
Matisse
Discounted Closed-End Fund Strategy |
G |
|
Matisse
Discounted Bond CEF Strategy |
F |
Eric
Boughton |
Matisse
Discounted Closed-End Fund Strategy |
E |
|
Matisse
Discounted Bond CEF Strategy |
E |
Other
Accounts. In addition to the
Funds, the portfolio management team is responsible for the day-to-day
management of certain other accounts. The table below shows the number of,
and total assets in, such other accounts as of March 31, 2023.
Portfolio Management Team |
Registered Investment
Companies |
Other Pooled Investment
Vehicles |
Other
Accounts |
Number
of
Accounts |
Total
Assets |
Number
of
Accounts |
Total
Assets |
Number
of
Accounts |
Total
Assets |
All
Accounts |
Bryn
Torkelson |
0 |
$0 |
1 |
$900,000 |
42 |
$294.5M |
Eric
Boughton |
0 |
$0 |
0 |
$0 |
0 |
$0 |
Accounts
with Performance-Based Advisory Fee |
Bryn
Torkelson |
0 |
$0 |
0 |
$0 |
0 |
$0 |
Eric
Boughton |
0 |
$0 |
0 |
$0 |
0 |
$0 |
Conflicts
of Interests. The management of “other accounts” by the portfolio management
team 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 consist of separately
managed private clients (“Other Accounts”). The Other Accounts might have
similar investment objectives as the Funds, be compared to the same index as the
Funds, or otherwise hold, purchase, or sell securities that are eligible to be
held, purchased, or sold by the Funds.
Knowledge
of the Timing and Size of Fund Trades: A potential conflict of
interest may arise as a result of the portfolio manager’s day-to-day management
of the Funds. The portfolio manager knows the size and timing of trades for the
Funds and the Other Accounts and may be able to predict the market impact of
fund trades. It is theoretically possible that the portfolio manager could
use this information to the advantage of Other Accounts it manages and to the
possible detriment of the Funds, or vice versa.
Investment
Opportunities: The Advisor provides investment supervisory services for a
number of investment products that have varying investment guidelines. The
portfolio manager works across different investment products. Differences
in the compensation structures of the Advisor’s investment products may give
rise to a conflict of interest by creating an incentive for the Advisor to
allocate the investment opportunities it believes might be the most profitable
to the client accounts where it might benefit the most from the investment
gains.
Administrator. The Trust has entered into the
Fund Accounting and Administration Agreement with The Nottingham Company
(“Administrator”), located at 116 South Franklin Street, Rocky Mount, North
Carolina 27804. The Administrator assists the Trust in the performance of
its administrative responsibilities to the Funds, coordinates and pays for the
services of each vendor and the operating expense to the Funds, and provides the
Funds with certain administrative, fund accounting, and compliance
services.
The
following shows the total dollar amounts that each Fund paid to the
Administrator for the last three fiscal years:
Fund |
2023 |
2022 |
2021 |
Matisse
Discounted Closed-End Fund Strategy |
$78,427 |
$245,393 |
$241,496 |
Matisse
Discounted Bond CEF Strategy |
$76,034 |
$34,765 |
$26,609* |
*Fund’s
inception date is April 30, 2020.
Transfer Agent. The Trust has entered
into a Dividend Disbursing and Transfer Agent Agreement with Nottingham
Shareholder Services, LLC (“Transfer Agent”), a North Carolina limited liability
company, to serve as transfer, dividend paying, and shareholder servicing agent
for the Funds. The address of the Transfer Agent is 116 South Franklin Street,
Post Office Box 4365, Rocky Mount, North Carolina 27803-0365.
Distributor. The Funds will conduct a
continuous offering of their securities. Capital Investment Group, Inc.
(“Distributor”), located at 100 E Six Forks Road, Suite 200, Raleigh, North
Carolina 27609, acts as the underwriter and distributor of a Fund’s shares for
the purpose of facilitating the registration of shares of the Funds under state
securities laws and assisting in sales of fund shares pursuant to a distribution
agreement (“Distribution Agreement”) between the Trust, on behalf of the Funds,
and the Distributor. In this regard, the Distributor has agreed at its own
expense to qualify as a broker-dealer under all applicable federal or state laws
in those states that the Funds shall from time to time identify to the
Distributor as states in which the Funds wish to offer their shares for sale, in
order that state registrations may be maintained for the Funds. The
Distributor is a broker-dealer registered with the SEC and a member in good
standing of the FINRA. The Distributor is entitled to receive an annual fee of
$6,500 for performing certain recordkeeping, communication, and other
administrative services for the Funds. Such administrative services shall
include, but are not limited to, the following: (i) maintaining records with
respect to submissions to the FINRA, dealer discounts and brokerage fees and
commissions, and selling agreements; (ii) maintaining an account with the
National Securities Clearing Corporation’s Fund/SERV System for the purpose of
processing account registrations, maintaining accounts, and communicating
transaction data; (iii) preparing reports for the Board as shall be reasonably
requested from time to time; and (iv) performing other services for the Trust as
agreed to by the Distributor and the Trust from time to time. The
Distributor and Trust agree that the services described above are of an
administrative nature and such services, as well as the fee provided in
connection therewith, are not, nor are they intended to be, payment for
marketing and/or distribution services related to, or the promotion of, the sale
of the Funds’ shares. The Distribution Agreement may be terminated by
either party upon 60-days’ prior written notice to the other party and will
terminate automatically in the event of its assignment. The Distributor
serves as exclusive agent for the distribution of the shares of the Funds.
The
Distributor for the Funds received the following commissions and other
compensation during the fiscal year ended March 31, 2023:
Fund
|
Net Underwriting Discounts and Commissions |
Compensation on Redemptions and Repurchases |
Brokerage Commissions
|
Other Compensation
|
Matisse
Discounted Closed-End Fund Strategy |
$0 |
$0 |
$0 |
$6,500 |
Matisse
Discounted Bond CEF Strategy |
$0 |
$0 |
$0 |
$6,500 |
Custodian. UMB Bank, n.a., with its
principal place of business located at 1010 Grand Boulevard, Kansas City,
Missouri 64106, serves as custodian for the Funds’ assets. The custodian acts as
the depository for the Funds, safekeeps its portfolio securities, collects all
income and other payments with respect to portfolio securities, disburses monies
at the Funds’ request, and maintains records in connection with its duties as
custodian. For its services, the custodian is entitled to receive a
monthly fee from the Administrator based on the average net assets of the Funds
plus additional out-of-pocket and transaction expenses as incurred by the
Funds.
Compliance Services Administrator. The Trust
has entered into a compliance services arrangement with The Nottingham
Company, located at
116 S. Franklin Street, Rocky Mount, North Carolina 27802. The Trust’s CCO will
prepare and update the Trust’s compliance manual and monitor and test compliance
with the policies and procedures under the Trust’s compliance manual.
Independent Registered Public Accounting
Firm. Cohen & Company, Ltd., located at 1835 Market Street,
Suite 310, Philadelphia, Pennsylvania, 19103, serves as the independent
registered public accounting firm for the Funds. The independent registered
public accounting firm conducts an annual audit of the Funds’ financial
statements, and prepares the Funds’ federal, state, and excise tax returns.
Shareholders will receive annual audited and semi-annual (unaudited) reports
when published and written confirmation of all transactions in their account. A
copy of the most recent annual report will accompany the SAI whenever a
shareholder or a prospective investor requests it.
Legal Counsel. Greenberg Traurig LLP
serves as legal counsel to the Trust and the Funds.
Reference
is made to “Purchasing Shares” and “Redeeming Shares” in the Prospectus for more
information concerning how to purchase and redeem shares. The following
information supplements the information regarding share purchases and share
redemptions in the Prospectus:
Purchases. Shares of the Funds are
offered and sold on a continuous basis and may be purchased through authorized
investment dealers or directly by contacting the Distributor, or the Funds
directly. Selling dealers have the responsibility of transmitting orders
promptly to the Funds. The purchase price of shares of the Funds is based on the
NAV next determined after the order is received, subject to the order being
received by the Funds in good form. NAV is normally determined at the
close of regular trading on the NYSE on days the NYSE is open for trading, as
described under “Net Asset Value”. The NAV per share of the Funds is not
calculated on days on which the NYSE is closed for holidays. An order
received prior to the close of the NYSE will be executed at the price calculated
on the date of receipt and an order received after the time regular trading
closes on the New York Stock Exchange will be executed at the price calculated
as of that time on the next business day.
The
Funds reserve the right in their sole discretion to: (i) suspend the offering of
its shares; (ii) reject purchase orders when in the judgment of management such
rejection is in the best interest of the Funds and their shareholders; and (iii)
reduce or waive the minimum for initial and subsequent investments under
circumstances where certain economies can be achieved in sales of Fund
shares.
The
minimum initial investment in the Funds is $1,000, and the minimum for
additional investments is $100 and is subject to change at any time.
Redemptions. The Funds may suspend
redemption privileges or postpone the date of payment (i) during any period that
the New York Stock Exchange is closed for other than customary weekend and
holiday closings, or that trading on the New York Stock Exchange is restricted
as determined by the SEC; (ii) during any period when an emergency exists as
defined by the rules of the SEC as a result of which it is not reasonably
practicable for the Funds to dispose of securities owned by it, or to determine
fairly the value of its assets; and (iii) for such other periods as the SEC may
permit. The Funds may also suspend or postpone the recordation of the transfer
of shares upon the occurrence of any of the foregoing conditions. Any
redemption may be more or less than the shareholder’s cost depending on the
market value of the securities held by the Funds. No charge is made by the
Funds for redemptions other than the possible charge for wiring redemption
proceeds.
Involuntary Redemptions. In addition to
the situations described in the Prospectus under “Redeeming Fund Shares,” the
Funds may redeem shares involuntarily to reimburse the Funds for any loss
sustained by reason of the failure of a shareholder to make full payment for
shares purchased by the shareholder or to collect any charge relating to a
transaction effected for the benefit of a shareholder which is applicable to
Funds’ shares as provided in the Prospectus from time to time or to close a
shareholder’s account if the Funds are unable to verify the shareholder’s
identity.
Other Information. If an investor
realizes a gain on the redemption, the reinvestment will not affect the amount
of any federal capital gains tax payable on the gain. If an investor
realizes a loss on the redemption, the reinvestment may cause some or all of the
loss to be disallowed as a tax deduction, depending on the number of shares
purchased by reinvestment and the period of time that has elapsed after the
redemption, although for tax purposes, the amount disallowed is added to the
cost of the shares acquired upon the reinvestment.
The
Fund offers the following special shareholder services:
Regular Account. The regular account allows for
voluntary investments to be made at any time. Available to individuals,
custodians, corporations, trusts, estates, corporate retirement plans, and
others, investors are free to make additions to or withdrawals from their
account. When an investor makes an initial investment in the Funds, a
shareholder account is opened in accordance with the investor’s registration
instructions. Each time there is a transaction in a shareholder account, such as
an additional investment or the reinvestment of a dividend or distribution, the
shareholder will receive a confirm-ation statement showing the current
transaction and all prior transactions in the shareholder account during the
calendar year to date, along with a summary of the status of the account as of
the transaction date. As stated in the Prospectus, share certificates are
normally not issued.
Automatic Investment Plan. The automatic
investment plan enables shareholders to make regular monthly or quarterly
investments in shares through automatic charges to their checking account. With
shareholder authorization and bank approval, the Administrator will
automatically charge the checking account for the amount specified ($100
minimum) which will be automatically invested in shares at the NAV on or about
the 21st day of the month. The shareholder may change the amount of the
investment or discontinue the plan at any time by writing to the Funds.
Systematic Withdrawal Plan. Shareholders
owning Funds’ shares with a value of $5,000 or more may establish a systematic
withdrawal plan (“Systematic Withdrawal Plan”). A shareholder may receive
monthly or quarterly payments, in amounts of not less than $100 per payment, by
authorizing the Funds to redeem the necessary number of shares periodically
(each month, or quarterly) in order to make the payments requested. The Funds
have the capability of electronically depositing the proceeds of the systematic
withdrawal directly to the shareholders personal bank account ($5,000 minimum
per bank wire). Instructions for establishing this service are included in the
Funds’ Shares Application or are available by calling the Funds. If the
shareholder prefers to receive his or her systematic withdrawal proceeds in
cash, or if such proceeds are less than the $5,000 minimum for a bank wire,
checks will be made payable to the designated recipient and mailed with-in seven
days of the valuation date. If the designated recipient is other than the
registered shareholder, the signature of each shareholder must be guaranteed on
the application (see “Redeeming Shares – Signature Guarantees” in the
Prospectus). A corporation (or partnership) must also submit a “Corporate
Resolution” (or “Certification of Partnership”) indi-cat-ing the names, titles,
and required number of signatures auth-orized to act on its behalf. The
application must be signed by a duly authori-zed officer and the corporate seal
affixed. Costs in conjunction with the administration of the plan are
borne by the Funds. Shareholders should be aware that such systematic
withdrawals may deplete or use up entirely their initial investment and may
result in real-ized long-term or short-term capital gains or losses. The
Systematic Withdrawal Plan may be terminated at any time by the Funds upon
60-days’ written notice or by a shareholder upon written notice to the Funds.
Applications and further details may be obtained by calling the Funds at
1-800-773-3863 or by writing to:
Matisse Funds
[Fund Name]
c/o
Nottingham Shareholder Services
Post
Office Box 4365
Rocky
Mount, NC 27803-0365
Purchases In Kind. The Funds may accept
securities in lieu of payment for the purchase of shares in the Funds. The
acceptance of such securities is at the sole discretion of the Advisor based
upon the suitability of the securities accepted for inclusion as a long-term
investment of the Funds, the marketability of such securities, and other factors
that the Advisor may deem appropriate. If accepted, the securities will be
valued using the same criteria and methods as described in “Purchase and
Redemption Price – Determining the Fund’s Net Asset Value” in the
Prospectus.
Redemptions In-Kind. The Funds do not intend,
under normal circumstances, to redeem their securities by payment in kind.
It is possible, however, that conditions may arise in the future which would, in
the opinion of the Trustees, make it undesirable for the Funds to pay for all
redemptions in cash. In such case the Trustees may authorize payment to be made
in readily marketable portfolio securities of the Funds. The securities will be
chosen by the Funds, may be either pro rata payment of each of the securities
held by the Funds or a representative sample of securities, and will be valued
at the same value assigned to them in computing the NAV per share. Shareholders
receiving them would incur brokerage costs when these securities are sold. An
irrevocable election has been filed under Rule 18f‑1 of the 1940 Act, wherein
the Funds committed to pay redemptions in cash, rather than in kind, to any
shareholder of record of the Funds who redeems during any 90-day period, the
lesser of (a) $250,000 or (b) one percent (1%) of the Funds’ NAV at the
beginning of such period.
Transfer of Registration. To transfer
shares to another owner, send a written request to the Funds at the address
shown above. Your request should include the following: (i) the Fund name and
existing account registration; (ii) signatures of the registered owners exactly
as the signature appear on the account registration; (iii) the new account
registration, address, social security or taxpayer identification number, and
how dividends and capital gains are to be distributed; (iv) signature guarantees
(See the Prospectus under the heading “Signature Guarantees”); and (v) any
additional documents which are required for transfer by corporations,
administrators, executors, trustees, guardians, etc. If you have any
questions about transferring shares, call or write the Funds.
Employees and Affiliates of the Fund. The
Funds have adopted initial investment minimums for the purpose of reducing the
cost to the Funds (and consequently to the shareholders) of communicating with
and servicing its shareholders. At the discretion of the Advisor, the Funds may
allow investments in the Funds with a reduced minimum initial investment from
its Trustees, officers, and employees; the Advisor and certain parties related
thereto; including clients of the Advisor or any sponsor, officer, committee
member thereof, or the immediate family of any of them. In addition, accounts
having the same mailing address may be aggregated for purposes of the minimum
investment if they consent in writing to sharing a single mailing of shareholder
reports, proxy statements (but each such shareholder would receive his/her own
proxy), and other Fund literature.
The
Board has adopted a policy that governs the disclosure of portfolio holdings.
This policy is intended to ensure that such disclosure is in the best interests
of the shareholders of the Funds and to address possible conflicts of
interest. Under the Funds’ policy, the Funds generally will not disclose
the Funds’ portfolio holdings to a third party unless such information is made
available to the public. The policy provides that the Funds may disclose
non-public portfolio holdings information as required by law and under other
limited circumstances that are set forth in more detail below.
The
Funds will generally make portfolio holdings information available to the public
at https://fundinfopages.com/MDCEX for the Matisse Discounted Closed-End Fund
Strategy and https://fundinfopages.com/MDFIX for the Matisse Discounted Bond CEF
Strategy, including the complete portfolio holdings from the previous day as
reported on a monthly basis. This information is generally available within ten
days of the month end and will remain available until the next month’s portfolio
holdings report becomes available. You may obtain a copy of these monthly
portfolio holdings reports by calling the Funds at 1-800-773-3863. The Funds
will also file these quarterly portfolio holdings reports with the SEC on Form
N-CSR or Form N-PORT, as applicable. The Funds’ Form N-CSR and Form N-PORT are
available on the SEC’s website at http://www.sec. The first and third quarter
portfolio holdings reports will be filed with the SEC on Form N-Q and the second
and fourth fiscal quarter portfolio holdings reports will be included with the
semi-annual and annual financial statements, respectively, which are sent to
shareholders and filed with the SEC on Form N-CSR.
To
the extent that the Funds’ portfolio holdings have previously been disclosed
publicly either through a filing made with the SEC on Form N-CSR or
Form N-PORT, such holdings may also be disclosed to any third party that
requests them.
Consistent
with policies approved by the Board of Trustees, the officers of the Funds will
share non-public portfolio holdings information with the Funds’ service
providers that require such information for legitimate business and Fund
oversight purposes. Recipients of non-public portfolio holdings information have
a duty not to trade on that confidential information. The Funds have not (and
does not intend to) enter into any arrangement providing for the receipt of
compensation or other consideration in exchange for the disclosure of non-public
portfolio holdings information, other than the benefits that result to the Funds
and their shareholders from providing such information, which include the
publication of Funds’ ratings and rankings.
The
Advisor, as well as the custodian, fund accountant and Administrator, and CCO,
have full daily access to the Funds’ portfolio holdings. These service providers
are subject to obligations requiring them to keep non-public portfolio holdings
information confidential. In some, but not all, cases these confidentiality
obligations are established by written agreements. The Board of Trustees has
concluded that the confidentiality obligations in place for these parties are
adequate to safeguard the Funds from unauthorized disclosure of non-public
portfolio holdings information. In addition, the Advisor has a code of
ethics that prohibits covered persons from disclosing or trading based on
non-public portfolio holdings information.
The
Funds’ distributor, transfer agent, independent public accountants, and legal
counsel have access to the Funds’ portfolio holdings on an ad hoc, as needed
basis. The distributor and transfer agent are subject to written
agreements that establish confidentiality obligations with respect to the Funds’
portfolio holdings. The independent public accountants and legal counsel are
subject to professional obligations that require them to keep non-public
portfolio holdings information confidential. The Board has concluded that
the confidentiality obligations in place for these parties are adequate to
safeguard the Funds from unauthorized disclosure of non-public portfolio
holdings information.
Broadridge
ICS, V.G. Reed & Sons, PrintGrafix (a division of Sunbelt Graphic Systems,
Inc.), Riverside Printing, Inc., and PrinterLink Communications Group, Inc. are
financial printers the Funds may engage for, among other things, the printing
and/or distribution of regulatory and compliance documents. These service
providers are subject to written agreements that establish confidentiality
obligations with respect to the Funds’ portfolio holdings.
The
Funds and their service providers may also provide non-public portfolio holdings
information to appropriate regulatory agencies as required by applicable laws
and regulations.
The
Funds currently do not provide non-public portfolio holdings information to any
other third parties. In the future, the Advisor may establish ongoing
arrangements with other third parties if the Advisor determines that the Funds
have a legitimate business purpose for doing so, determines that the disclosure
is in the shareholders' best interest, and the recipient is subject to a duty of
confidentiality. These parties could include, by way of example, financial
data processing companies that provide automated data scanning and monitoring
services for the Fund, research companies that allow the Advisor to perform
attribution analysis for the Funds; and the Advisor’s proxy voting agent to
assess and vote proxies on behalf of the Funds. The Advisor is responsible
for determining which other third parties have a legitimate business purpose for
receiving the Fund’s portfolio holdings information.
The
Funds’ policy regarding disclosure of portfolio holdings is subject to the
continuing oversight and direction of the Board. Oversight includes: (i) review
and approval of the policy on disclosure of portfolio holdings as necessary,
including review of the parties receiving non-public portfolio holdings
information; (ii) periodic assessment of compliance in connection with a report
from the Trust’s CCO, (iii) receipt of reports on any conflicts of interest
where disclosure of information about portfolio holdings may conflict or appear
to conflict with the interests of the Funds’ investment advisor, any principal
underwriter for the Trust or an affiliated person of the Trust, and (iv) receipt
of reports on any known disclosure of the Funds’ portfolio holdings to
unauthorized third parties. The Funds and Advisor are obligated to report issues
that arise under the policy on disclosure of portfolio holdings to the CCO.
Material compliance matters must be reported to the Board of Trustees.
The
NAV of the Funds is determined at the close of regular trading on the NYSE
(normally 4:00 p.m.). The Fund’s NAV is not calculated on the days on which the
NYSE is closed. The NYSE generally recognizes the following holidays: New Year’s
Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. The days on
which these holidays are observed and any other holiday recognized by the NYSE
will be deemed a business holiday on which the NAV of the Funds will not be
calculated.
The
NAV per share of the Funds is calculated separately by adding the value of the
Funds’ securities and other assets belonging to the Funds, subtracting the
liabilities charged to the Funds, and dividing the result by the number of
outstanding shares of the Funds. “Assets belonging to” the Funds consist
of the consideration received upon the issuance of shares of the Funds together
with all net investment income, realized gains/losses and proceeds derived from
the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Trust not belonging to a
particular series of shares. Assets belonging to the Funds are charged
with the direct liabilities of the Funds and with a share of the general
liabilities of the Trust, which are normally allocated in proportion to the
number of or the relative NAVs of all of the Trust’s series at the time of
allocation or in accordance with other allocation methods approved by the
Trustees. Subject to the provisions of the Trust Instrument,
determinations by the Trustees as to the direct and allocable liabilities, and
the allocable portion of any general assets, with respect to the Funds and the
classes of the Funds are conclusive.
The
pricing and valuation of portfolio securities is determined in good faith in
accordance with procedures established by, and under the direction of, the
Trustees. Values are determined according to generally accepted accounting
practices and all laws and regulations that apply. Using methods approved
by the Trustees, the assets of the Funds are valued as follows:
• |
Securities
that are listed on a securities exchange are valued at the last quoted
sales price provided by a third-party pricing service at the time the
valuation is made. Price information on listed securities is taken
from the exchange where the security is primarily traded by the
Funds. |
• |
Securities
that are listed on an exchange and which are not traded on the valuation
date are valued at the bid price. |
• |
Unlisted
securities for which market quotations are readily available are valued at
the latest quoted sales price, if available, at the time of valuation,
otherwise, at the latest quoted bid price. |
• |
Foreign
securities listed on foreign exchanges are valued with quotations from the
primary market in which they are traded and are translated from the local
currency into U.S. dollars using current exchange
rates. |
• |
Temporary
cash investments with maturities of 60 days or less will be valued at
amortized cost, which approximates market
value. |
• |
Securities
for which no current quotations are readily available are valued at fair
value as determined in good faith using methods approved by the
Trustees. Securities may be valued on the basis of prices provided
by a pricing service when such prices are believed to reflect the fair
market value of such securities. |
The
following summarizes certain additional tax considerations generally affecting
the Funds and their shareholders that are not described in the Prospectus. No
attempt is made to present a detailed explanation of the tax treatment of the
Funds or their shareholders or any particular category of shareholders. The
discussions here and in the Prospectus are not intended as a substitute for
careful tax planning and are based on United States federal income tax laws that
are in effect on the date hereof and which may be changed by legislative,
judicial, or administrative action. In addition, no attempt is made to address
tax concerns applicable to an investor with a special tax status such as a
financial institution, REIT, insurance company, regulated investment company,
individual retirement account, other tax-exempt entity, dealer in securities or
non-U.S. investor. Furthermore, this discussion does not reflect possible
application of the alternative minimum tax. Unless otherwise noted, this
discussion assumes the common shares are held by U.S. persons and that such
shares are held as capital assets. Investors are advised to consult their tax
advisors with specific reference to their own tax situations.
The
Funds, and any other series of the Trust, will be treated as a separate
corporate entity under the Internal Revenue Code of 1986, as amended (“Code”),
and intends to qualify or remain qualified as a regulated investment company
under Subchapter M of the Code. In order to so qualify, the Funds must
elect to be a regulated investment company or have made such an election for a
previous year and must satisfy certain requirements relating to the amount of
distributions and source of its income for a taxable year. At least 90% of
the gross income of the Funds must be derived from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
stocks, securities, or foreign currencies, and other income derived with respect
to the Funds’ business of investing in such stock, securities or currencies and
net income derived from an interest in a qualified publicly traded
partnership. Any income derived by the Funds from a partnership (other
than a qualified publicly traded partnership) or trust is treated as derived
with respect to the Funds’ business of investing in stock, securities, or
currencies only to the extent that such income is attributable to items of
income that would have been qualifying income if realized by the Funds in the
same manner as by the partnership or trust.
An
investment company may not qualify as a regulated investment company for any
taxable year unless it satisfies certain requirements with respect to the
diversification of its investments at the close of each quarter of the taxable
year. In general, at least 50% of the value of its total assets must be
represented by cash, cash items, government securities, securities of other
regulated investment companies, and other securities which, with respect to any
one issuer, do not represent more than 5% of the total assets of the Funds or
more than 10% of the outstanding voting securities of such issuer. In
addition, not more than 25% of the value of the Funds’ total assets may be
invested in (i) the securities (other than government securities or the
securities of other regulated investment companies) of any one issuer; (ii) the
securities of two or more issuers (other than securities of another regulated
investment company) if the issuers are controlled by the Funds and they are,
pursuant to Internal Revenue Service Regulations, engaged in the same or similar
or related trades or businesses; or (iii) the securities of one or more publicly
traded partnerships. The Funds intend to satisfy all requirements on an
ongoing basis for continued qualification as a regulated investment
company.
Some,
but not all, of the dividends paid by the Funds may be taxable at the reduced
long-term capital gains tax rate for individual shareholders. If the Funds
designate a dividend as qualified dividend income, it generally will be taxable
to individual shareholders at the long-term capital gains tax rate, provided
certain holding period requirements are met.
Taxable
dividends paid by the Funds to corporate shareholders will be taxed at corporate
income tax rates. Corporate shareholders may be entitled to a dividends
received deduction (“DRD”) for a portion of the dividends paid and designated by
the Funds as qualifying for the DRD.
If
the Funds designate a dividend as a capital gains distribution, it generally
will be taxable to shareholders as long-term capital gains, regardless of how
long the shareholders have held their Funds’ shares or whether they received in
cash or reinvested in additional shares. All taxable dividends paid by the
Funds other than those designated as qualified dividend income or capital gains
distributions will be taxable as ordinary income to shareholders, whether
received in cash or reinvested in additional shares. To the extent the
Funds engage in increased portfolio turnover, short-term capital gains may be
realized, and any distribution resulting from such gains will be considered
ordinary income for federal tax purposes. The Funds’ net realized capital gains
from securities transactions will be distributed only after reducing such gains
by the amount of any available capital loss carryforwards. Capital losses may be
carried forward indefinitely and retain the character of the original loss.
Capital loss carryforwards are available to offset future realized capital
gains. To the extent that these carryforwards are used to offset future capital
gains it is probable that the amount offset will not be distributed to
shareholders. As of March 31, 2023, the Funds had the following capital loss
carryforwards.
Fund
|
Short-Term
Capital
Loss
Carryforward |
Long-Term
Capital
Loss
Carryforward |
Total
|
Matisse
Discounted Bond CEF Strategy |
$598,335 |
$695,361 |
$1,293,696 |
Matisse
Discounted Closed-End Fund Strategy |
$99,581 |
$138,842 |
$238,423 |
Certain
individuals, estates, and trusts must pay a 3.8% Medicare surtax on “net
investment income” including, among other things, dividends, and proceeds of
sale in respect of securities like the shares, subject to certain exceptions.
Prospective investors should consult with their own tax advisors regarding the
effect, if any, of this surtax on their ownership and disposition of the
shares.
Shareholders
who hold Fund shares in a tax-deferred account, such as a retirement plan,
generally will not have to pay tax on Fund distributions until they receive
distributions from their account.
The
Funds, and any other series of the Trust, will designate (i) any dividend of
qualified dividend income as qualified dividend income; (ii) any distribution of
long-term capital gains as a capital gain dividend; and (iii) any dividend
eligible for the corporate DRD as such in a written notice mailed to
shareholders within 60 days after the close of the Funds’ taxable year.
Shareholders should note that, upon the sale or exchange of Fund shares, if such
shares have not been held for at least six months, any loss on the sale or
exchange of those shares will be treated as long-term capital loss to the extent
of the capital gain dividends received with respect to the shares.
To
the extent that a distribution from the Funds is taxable, it is generally
included in a shareholder’s gross income for the taxable year in which the
shareholder receives the distribution. However, if the Fund declares a dividend
in October, November, or December but pays it in January, it will be taxable to
shareholders as if the dividend was received in the year it was declared.
Every year, each shareholder will receive a statement detailing the tax status
of any Fund distributions for that year.
A
4% nondeductible excise tax is imposed on regulated investment companies that
fail to currently distribute an amount equal to specified percentages of their
ordinary taxable income and capital gain net income (excess of capital gains
over capital losses). The Funds intend to make sufficient distributions or
deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
If
for any taxable year the Funds do not qualify for the special federal income tax
treatment afforded regulated investment companies, all of its taxable income
will be subject to federal income tax at regular corporate rates (without any
deduction for distributions to its shareholders) at the Fund level. In
such event, dividend distributions (whether or not derived from interest on
tax-exempt securities) would be taxable as qualified dividends to individual
shareholders, to the extent of the Funds’ current and accumulated earnings and
profits, and would be eligible for the DRD for corporations, provided in each
case that certain holding period and other requirements are met.
In
general, a shareholder who sells or redeems shares will realize a capital gain
or loss, which will be long-term or short-term, depending upon the shareholder’s
holding period for the Fund shares. An exchange of shares may be treated
as a sale and any gain may be subject to tax.
The
Funds will be required in certain cases to withhold and remit to the U.S.
Treasury a percentage of taxable dividends or of gross proceeds realized upon
sale paid to shareholders who (i) have failed to provide a correct taxpayer
identification number in the manner required; (ii) are subject to back-up
withholding by the Internal Revenue Service for failure to include properly on
their return payments of taxable interest or dividends; or (iii) have failed to
certify to the Funds that they are not subject to backup withholding when
required to do so. Back-up withholding is not an additional tax. Any
amounts withheld from payments to you may be refunded or credited against your
U.S. federal income tax liability, if any, provided that the required
information is furnished to the Internal Revenue Service.
Depending
upon the extent of the Funds’ activities in states and localities in which its
offices are maintained, in which its agents or independent contractors are
located, or in which it is otherwise deemed to be conducting business, the Funds
may be subject to the tax laws of such states or localities. In addition,
in those states and localities that have income tax laws, the treatment of the
Funds and their shareholders under such laws may differ from their treatment
under federal income tax laws.
Dividends
paid by the Funds to non-U.S. shareholders may be subject to U.S. withholding
tax unless reduced by treaty (and the shareholder files a valid Internal Revenue
Service Form W-8BEN, or other applicable form, with the Funds certifying foreign
status and treaty eligibility) or the non-U.S. shareholder files an Internal
Revenue Service Form W-8ECI, or other applicable form, with the Funds certifying
that the investment to which the distribution relates is effectively connected
to a United States trade or business of such non-U.S. shareholder (and, if
certain tax treaties apply, is attributable to a United States permanent
establishment maintained by such non-U.S. shareholder). The Funds may
elect not to withhold the applicable withholding tax on any distribution
representing a capital gain dividend to a non-U.S. shareholder. Special rules
may apply to non-U.S. shareholders with respect to the information reporting
requirements and withholding taxes and non-U.S. shareholders should consult
their tax advisors with respect to the application of such reporting
requirements and withholding taxes.
The
Funds will send shareholders information each year on the tax status of
dividends and distributions. A dividend or capital gains distribu-tion
paid shortly after shares have been purchased, although in effect a return of
investment, is subject to federal income taxa-tion. Dividends from net
investment income, along with capital gains, will be taxable to shareholders,
whether received in cash or Fund shares and no matter how long the shareholder
has held Fund shares, even if they reduce the NAV of shares below the
shareholder’s cost and thus, in effect, result in a return of a part of the
shareholder’s investment.
The
audited financial statements of the Funds for the fiscal year ended March 31,
2023, including the financial highlights appearing in the Annual Report to
shareholders, are incorporated by reference and made a part of this
document. You may request a copy of the Funds’ annual and semi-annual
reports at no charge by calling the Funds at 1-800-773-3863.
The
Fund may acquire from time-to-time certain securities that meet the following
minimum rating criteria (“Investment-Grade Debt Securities”) (or if not rated,
of equivalent quality as determined by the Advisor). The various ratings
used by the nationally recognized securities rating services are described
below.
A
rating by a rating service represents the service’s opinion as to the credit
quality of the security being rated. However, the ratings are general and
are not absolute standards of quality or guarantees as to the creditworthiness
of an issuer. Consequently, the Advisor believes that the quality of
Investment-Grade Debt Securities in which the Fund may invest should be
continuously reviewed and that individual analysts give different weightings to
the various factors involved in credit analysis. A rating is not a
recommendation to purchase, sell, or hold a security, because it does not take
into account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating is
evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other sources
that they consider reliable. Ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
for other reasons.
Standard & Poor’s Ratings Services.
The following summarizes the highest four ratings used by Standard & Poor’s
Ratings Services (“S&P”), a division of McGraw-Hill Companies, Inc., for
bonds which are deemed to be Investment-Grade Debt Securities by the
Advisor:
AAA
– This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity of the obligor to meet its financial
commitment on the obligation.
AA
– Debt rated AA differs from AAA issues only in a small degree. The
obligor’s capacity to meet its financial commitment on the obligation is very
strong.
A
– Debt rated A is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated
categories. However, the obligor’s capacity to meet its financial
commitment on the obligation is still strong.
BBB
– Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
To
provide more detailed indications of credit quality, the AA, A, and BBB ratings
may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Bonds
rated BB, B, CCC, CC, and C are not considered by the Advisor to be
Investment-Grade Debt Securities and are regarded as having significant
speculative characteristics. BB indicates the lowest degree of speculation
and C the highest degree of speculation. While such bonds may have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse conditions.
Commercial
paper rated A‑1 by S&P indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A‑1+. Capacity for timely payment on
commercial paper rated A‑2 is satisfactory, but the relative degree of safety is
not as high as for issues designated A‑1.
The
rating SP‑1 is the highest rating assigned by S&P to short term notes and
indicates strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service is given a plus
(+) designation. The rating SP‑2 indicates a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes. The rating SP-3 indicates a
speculative capacity to pay principal and interest.
Moody’s Investor Service, Inc. The
following summarizes the highest four ratings used by Moody’s Investors Service,
Inc. (“Moody’s”) for fixed-income obligations with an original maturity of one
year or more, which are deemed to be Investment-Grade Securities by the
Advisor:
Aaa
– Bond obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
Aa
– Bond obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A
– Bond obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa
– Bond obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Obligations
that are rated Ba, B, Caa, Ca, or C by Moody’s are not considered
“Investment-Grade Debt Securities” by the Advisor. Obligations rated Ba
are judged to have speculative elements and are subject to substantial credit
risk. Obligations rated B are considered speculative and are subject to
high credit risk. Obligations rated Caa are judged to be of poor standing
and are subject to very high credit risk.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
Short-Term
Ratings.
Moody’s
short-term ratings are opinions of the ability of issuers to honor short-term
financial obligations. Ratings may be assigned to issuers, short-term
programs, or individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted.
Moody’s
employs the following designations to indicate the relative repayment ability of
rated issuers:
P-1
– Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2
– Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3
– Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term debt obligations.
NP
– Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
Note:
Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the
senior-most long-term rating of the issuer, its guarantor, or
support-provider.
US
Municipal Short-Term Debt And Demand Obligation Ratings.
Short-Term Debt Ratings. There are three
rating categories for short-term municipal obligations that are considered
investment grade. These ratings are designated as Municipal Investment
Grade (MIG) and are divided into three levels – MIG 1 through MIG 3. In
addition, those short-term obligations that are of speculative quality are
designated SG, or speculative grade. MIG ratings expire at the maturity of
the obligation.
MIG
1 – This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG
2 – This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
MIG
3 – This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG
– This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
Demand Obligation Ratings. In the case
of variable rate demand obligations (VRDOs), a two-component rating is assigned;
a long or short-term debt rating and a demand obligation rating. The first
element represents Moody’s evaluation of the degree of risk associated with
scheduled principal and interest payments. The second element represents
Moody’s evaluation of the degree of risk associated with the ability to receive
purchase price upon demand (“demand feature”), using a variation of the MIG
rating scale, the Variable Municipal Investment Grade or VMIG rating.
When
either the long- or short-term aspect of a VRDO is not rated, that piece is
designated NR, e.g., Aaa/NR or NR/VMIG 1.
VMIG
rating expirations are a function of each issue’s specific structural or credit
features.
VMIG
1 – This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity provider
and structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG
2 – This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG
3 – This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the
liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
SG
– This designation denotes speculative-grade credit quality. Demand
features rated in this category may be supported by a liquidity provider that
does not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of purchase
price upon demand.
Fitch Ratings. The following summarizes the
highest four ratings used by Fitch, Inc. (“Fitch”):
Long-Term
Ratings.
AAA
– Highest credit quality. The rating AAA denotes that the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial commitments.
This capacity is highly unlikely to be adversely affected by foreseeable
events.
AA
– Very high credit quality. The rating AA denotes a very low expectation
of credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A
– High credit quality. The rating A denotes a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to
changes in circumstances or in economic conditions than is the case for higher
rating.
BBB
– Good credit quality. The rating BBB indicates that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair this
capacity. This is the lowest investment grade category.
Long-term
securities rated below BBB by Fitch are not considered by the Advisor to be
investment-grade securities. Securities rated BB and B are regarded as
speculative with regard to a possible credit risk developing. BB is
considered speculative and B is considered highly speculative. Securities
rated CCC, CC, and C are regarded as a high default risk. A rating CC
indicates that default of some kind appears probable, while a rating C signals
imminent default. Securities rated DDD, D, and D indicate a default has
occurred.
Short-Term
Ratings.
F1
– Highest credit quality. The rating F1 indicates the strongest capacity
for timely payment of financial commitments; may have an added (+) to denote any
exceptionally strong credit feature.
F2
– Good credit quality. The rating F2 indicates a satisfactory capacity for
timely payment of financial commitment, but the margin of safety is not as great
as in the case of the higher ratings.
F3
– Fair credit quality. The rating F3 indicates the capacity for timely
payment of financial commitments is adequate; however, near-term adverse changes
could result in a reduction to non-investment grade.
B
– Speculative. The rating B indicates minimal capacity for timely payment
of financial commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
Short-term
rates B, C, and D by Fitch are considered by the Advisor to be below
investment-grade securities. Short-term securities rated B are considered
speculative, securities rated C have a high default risk, and securities rated D
denote actual or imminent payment default.
(+)
or (-) suffixes may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to long-term ratings
“AAA” category, categories below “CCC”, or short-term ratings other than
“F1”. The suffix “NR” indicates that Fitch does not publicly rate the
issuer or issue in question.
The
following proxy voting policies are provided:
(1) |
The
Advisor’s Proxy Voting and Disclosure Policy, including a detailed
description of the Advisor’s specific proxy voting
guidelines. |
Matisse
Capital
Proxy
Voting Policies and Procedures
Background: Rule 206(4)-6 under the
Investment Advisers Act of 1940 requires a registered investment adviser to
maintain written voting policies and procedures if it exercises voting authority
with respect to client securities. These policies and procedures must be
reasonably designed to ensure that the investment adviser votes client
securities in the best interest of clients. The procedures must describe
how the investment adviser addresses material conflicts that may arise between
the interests of the adviser and those of its clients. The rule also
requires that an investment adviser describe its proxy voting policies and
procedures, furnish a copy of the policies and procedures to a requesting
client, and disclose to clients how they may obtain information about how the
investment adviser voted the client's securities.
Sections 20(c) and 20(d) of the Investment Company
Act – Prohibition on purchase of securities knowingly resulting in
cross-ownership or circular ownership. When applicable, with
respect to the Adviser’s registered investment company clients, no such
registered investment company shall purchase any voting security if, to the
knowledge of such registered company, cross-ownership or circular ownership
exists, or after such acquisition will exist, between such registered company
and the issuer of such security. Cross-ownership shall be deemed to exist
between two companies when each of such companies beneficially owns more than 3%
of the outstanding voting securities of the other company. Circular ownership
shall be deemed to exist between two companies if such companies are included
within a group of three or more companies, each of which:
• |
beneficially
owns more than 3% of the outstanding voting securities of one or more
other companies of the group; and |
• |
has
more than 3% of its own outstanding voting securities beneficially owned
by another company, or by each of two or more other companies, of the
group. |
Duty to eliminate existing cross-ownership or
circular ownership. If cross-ownership or circular ownership
between a registered investment company and any other company or companies comes
into existence upon the purchase by a registered investment company of the
securities of another company, it shall be the duty of such registered company,
within one year after it first knows of the existence of such cross-ownership or
circular ownership, to eliminate the same.
Policy: Proxy voting is an important right of
shareholders, and reasonable care and diligence must be undertaken to ensure
that such rights are properly and timely exercised. We will vote
proxies related to securities held in our clients’ portfolios for clients that
are not mutual funds or Fund of Funds (defined below), generally in the best
interest of our clients. This policy is limited solely to clients for
which we have agreed to vote such proxies. A client may reserve to itself
the right to vote proxies. Our authority to vote the proxies of certain
clients is established by advisory contracts or comparable documents.
Reflecting
a basic investment philosophy that good management is shareholder focused, proxy
votes will generally be cast in support of management on routine corporate
matters and in support of any management proposal that is plainly in the
interest of all shareholders. Specifically, proxy votes generally will be
cast in favor of proposals that:
• |
maintain
or increase shareholder rights generally. |
• |
maintain
or strengthen the shared interests of stockholders and
management; |
• |
increase
shareholder value; and |
Proxy
votes will generally be cast against proposals having the opposite effect of the
above interests. Where we perceive that a management proposal, if
approved, would tend to limit or reduce the market value of the company’s
securities, we will generally vote against it. We believe that means for
ensuring management accountability to shareholders, in the rare cases where the
means are threatened, must not be compromised.
We
generally support shareholder rights and recapitalization measures undertaken
unilaterally by boards of directors properly exercising their responsibilities
and authority, unless such measures could have the effect of reducing
shareholder rights or potential shareholder value.
We
believe that proposals addressing strictly social or political issues may not be
relevant to the goal of maximizing the return on Funds under our
management. We will generally vote against such proposals, but will
consider supporting proposals that seek to protect shareholder rights or
minimize risks to shareholder value.
We
may delegate our responsibilities under this policy to a third party, provided
that we retain final authority and fiduciary responsibility for proxy
voting. If we so delegate our responsibilities, we shall monitor the
delegate’s compliance with this policy.
Proxies for Mutual Fund Clients. If a
client is a mutual fund (other than a Fund of Funds as noted below), Matisse
Capital will vote the client’s proxies on any proposal (including the election
of directors) in a manner which Matisse Capital reasonably determines is likely
to favorably impact the discount of such investment company’s market price as
compared to its net asset value. For example:
-We
will generally vote against directors who act in their own interests, or in the
management company’s interest, as opposed to the interest of shareholders.
-We
will generally vote in favor of any proposal to liquidate or open-end a
closed-end fund holding.
-We
will generally vote in favor of any proposal to conduct tender offers or share
repurchases at discounts to NAV.
-We
will generally vote against any proposal that would have the effect of diluting
an investment company’s net asset value, even if such a proposal is deemed by
the management company to be beneficial in some other way.
Special Considerations for Fund of Funds.
Matisse Capital advises certain mutual funds i.e. Registered Investment
Companies (“RICs”), including “Fund of Funds” that invest in other RICs in
excess of the limitations of Sections 12(d)(1)(A), 12(d)(1)(B) and 12(d)(1)(C)
of the 1940 Act if such a Fund of Fund is relying on Section 12(d)(1)(F) for an
exemption from the limitations above. Section 12(d)(1)(F) provides that the
acquiring fund “shall exercise voting rights by proxy or otherwise with respect
to any security purchased or acquired pursuant to Section 12(d)(1)(F) in the
manner prescribed by Section 12(d)(1)(E).”
If
an underlying investment of a Fund of Funds has a shareholder meeting or proxy
vote, we will vote and/or advise any Fund of Funds to vote its shares of the
underlying investment in the same proportion as the votes of other shareholders
of the underlying investment (mirror voting), whenever possible, or contact its
shareholders for instructions regarding how to vote the proxy (pass through
voting). This may be achieved through direct agreements with the
administrator or investment advisor of the underlying investment, or through a
proxy intermediary. In cases where mirror voting and/or pass through
voting are not possible or impractical, we may abstain from voting.
Although rare, there is a possibility where Matisse Capital determines a need to
vote proxies using pass-through voting instead of mirror voting. However,
prior to taking such action, as required, we will seek and obtain the prior
approval of the Board of Directors of any Fund of Funds, and then seek
instruction from the shareholders of the Fund of Funds.
Proxy Voting Procedures. To implement our
proxy voting policies, we have developed the following procedures for voting
proxies:
• |
Upon
receipt of a proxy, the special or annual report and the proxy are
submitted to our designated proxy voting manager. The proxy voting manager
will then vote the proxy in accordance with this policy. For any proxy
proposal not clearly addressed by this policy, the proxy voting manager
will consult with an officer of our firm before voting the
proxy. |
• |
The
proxy voting manager shall be responsible for reviewing the special or
annual report, proxy proposals, and proxy proposal summaries. The review
shall take into consideration what vote is in the best interests of
clients and the provisions of the proxy voting policies above. The proxy
voting manager will then vote the proxies. |
• |
The
proxy voting manager shall be responsible for maintaining copies of each
annual report, proposal, proposal summary, actual vote, and any other
information required to be maintained for a proxy vote under Rule 204-2 of
the Investment Advisers Act of 1940. |
• |
With
respect to proxy votes on topics deemed, in the opinion of the proxy
voting manager, to be controversial or particularly sensitive, the proxy
voting manager will provide a written explanation for the proxy vote which
will be maintained with the record of the actual vote in our
files. |
• |
In
the event that the proxy voting manager is unavailable to vote a proxy,
then an officer of our firm shall perform the proxy voting manager’s
duties with respect to such proxy in accordance with the policies and
procedures detailed above. |
In
cases where we are aware of a conflict between the interests of a client and the
interests of our firm or an affiliated person of our firm (e.g., a portfolio
holding is a client or an affiliate of a client of our firm), we will take the
following steps:
1. |
Vote
matters that are specifically covered by this policy (e.g., matters where
the vote is strictly dictated by this policy and not in our discretion) in
accordance with this policy; |
2. |
For
other matters, either contact the client for instructions with respect to
how to vote the proxy or engage an independent third-party to determine
how the proxy should be voted. |
We
may abstain from voting a proxy if we conclude that the effect on shareholders’
economic interests or the value of the portfolio holding is indeterminable or
insignificant. For example, we will sometimes abstain from voting proxies
in an uncontested directors’ election.
Clients
may contact us in writing to obtain information about how we voted proxies with
respect to their securities and to request a copy of this policy.
Recordkeeping. We will maintain certain
records required by applicable law in connection with proxy voting activities
and shall provide proxy voting information to a client for which we are
responsible for voting proxies upon written request. We shall keep the
following records in an easily accessible place for a period of at least five
years, the first two years in our offices:
• |
Proxy
statements received regarding securities; |
• |
Records
of each vote cast on behalf of clients; |
• |
Any
documents prepared by us that were material to making a proxy voting
decision or that memorialized the basis for a voting decision;
and |
• |
Records
of client requests for proxy voting
information. |
Responsible Party: President, Portfolio Manager
and Chief Compliance Officer