ck0001402472-20231231
STATEMENT
OF ADDITIONAL INFORMATION
PROSPECTOR
CAPITAL APPRECIATION FUND (PCAFX)
PROSPECTOR
OPPORTUNITY FUND (POPFX)
EACH
A SERIES OF PROSPECTOR FUNDS, INC.
April
30, 2024
This
Statement of Additional Information (“SAI”) is intended to provide additional
information regarding the activities and operations of Prospector Funds, Inc.
(the “Company”), as well as the Prospector Capital Appreciation Fund (the
“Capital Appreciation Fund”), and the Prospector Opportunity Fund (the
“Opportunity Fund”) (each, a “Fund” and, together, the “Funds”), each a series
thereof. This SAI is not a prospectus but is incorporated by reference in its
entirety into the Prospectus. The Funds’ combined Prospectus, dated April 30,
2024, which may be amended from time to time (the “Prospectus”), contains the
basic information you should know before investing in the Funds. You should read
this SAI together with the Prospectus.
Each
Fund’s audited financial statements and notes thereto for the fiscal period
ended December 31, 2023 are contained in the Funds’ annual
report to shareholders
(the “Annual Report”) and are incorporated by reference in their entirety into
this SAI.
For
a free copy of the current Prospectus or the Annual Report, contact your
investment representative, access the Company online at www.prospectorfunds.com,
or call toll free (877) 734-7862.
CONTENTS
COMPANY
HISTORY
The
Company was organized as a corporation in Maryland on June 6, 2007, and is
registered with the Securities and Exchange Commission (“SEC”) as an open-end
management investment company. The Company’s Articles of Incorporation permit
the Company to offer separate series of shares of common stock. The Company
reserves the right to create and issue other series. Each Fund is a separate
mutual fund, and each share of each Fund represents an equal proportionate
interest in that Fund’s assets. All consideration received by the Company for
shares of any Fund and all assets of such Fund belong solely to that Fund and
would be subject to liabilities related thereto. Expenses attributable to a
specific Fund shall be payable solely out of the assets of that Fund. Expenses
not attributable to a specific Fund are allocated across all of the Funds on the
basis of relative net assets.
This
SAI relates only to the Capital Appreciation Fund and the Opportunity
Fund.
INVESTMENT
RESTRICTIONS
For
purposes of all investment policies: (1) the term “1940 Act” includes the
rules under the Investment Company Act of 1940, as amended, SEC interpretations
and any exemptive order upon which a Fund may rely and (2) the term “Code”
includes the rules under the Internal Revenue Code of 1986, as amended, IRS
interpretations and any private letter ruling or similar authority upon which a
Fund may rely.
Generally,
the policies and restrictions discussed in this SAI and in the Prospectus apply
when a Fund makes an investment. In most cases, a Fund is not required to sell a
security because circumstances change and the security no longer meets one or
more of such Fund’s policies or restrictions. If a percentage restriction or
limitation is met at the time of investment, a later increase or decrease in the
percentage due to a change in the value or liquidity of portfolio securities
will not be considered a violation of the restriction or
limitation.
If
a bankruptcy or other extraordinary event occurs concerning a particular
investment by the Fund, the Fund may receive stock, real estate, or other
investments that such Fund would not, or could not buy. If this happens, the
Fund intends to sell such investments as soon as practicable while trying to
maximize the return to shareholders.
Fundamental
Investment Policies and Restrictions
Each
Fund has adopted certain investment restrictions as fundamental policies. A
fundamental policy may only be changed if the change is approved by (i) more
than 50% of the relevant Fund’s outstanding shares or (ii) 67% or more of the
relevant Fund’s shares present at a shareholder meeting, if more than 50% of the
Fund’s outstanding shares are represented at the meeting in person or by proxy,
whichever is less.
As
a matter of fundamental policy, the Funds may not:
1.Purchase
or sell commodities, commodity contracts (except in conformity with regulations
of the Commodities Futures Trading Commission such that the Fund would not be
considered a commodity pool), or oil and gas interests or real estate.
Securities or other instruments backed by commodities are not considered
commodities or commodity contracts for purposes of this restriction. Debt or
equity securities issued by companies engaged in the oil, gas, or real estate
businesses are not considered oil or gas interests or real estate for purposes
of this restriction. First mortgage loans and other direct obligations secured
by real estate are not considered real estate for purposes of this
restriction.
2.Make
loans, except to the extent the purchase of debt obligations of any type are
considered loans and except that each Fund may lend portfolio securities to
qualified institutional investors in compliance with requirements established
from time to time by the SEC and the securities exchanges on which such
securities are traded.
3.Issue
securities senior to its stock or borrow money or utilize leverage in excess of
the maximum permitted by the 1940 Act, which is currently 33 1/3% of total
assets (including 5% for emergency or other short-term purposes).
4.Invest
more than 25% of the value of its assets in a particular industry (except that
U.S. government securities are not considered an industry).
5.Act
as an underwriter except to the extent the Fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
6.
Except as may be described in the Prospectus, purchase securities on
margin.
The
term Prospectus as referenced in restriction 6 includes this SAI.
INVESTMENT
POLICIES
General
Each
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments discussed below, see the section entitled, “Description of Permitted
Investments” in this SAI.
Investment
Techniques
Certain
words or phrases that may be used in the Prospectus or this SAI may be used in
descriptions of a Fund’s investment policies and strategies to give investors a
general sense of a Fund’s level of investment. They are broadly identified with,
but not limited to, the following percentages of a Fund’s total
assets:
|
|
|
|
| |
“small
portion” |
less
than 10% |
“portion” |
10%
to 25% |
“significant” |
25%
to 50% |
“substantial” |
50%
or more |
The
percentages above are not intended to be precise, nor are they limitations
unless specifically stated as such in the Prospectus or elsewhere in this
SAI.
The
value of your shares in a Fund will generally increase as the value of the
securities owned by such Fund increases and will decrease as the value of the
Fund’s investments decrease. In this way, you participate in any change in the
value of the securities owned by a Fund. In addition to the factors that affect
the value of any particular security that a Fund owns, the value of such Fund’s
shares may also change with movements in the stock and bond markets as a
whole.
Capital
Appreciation Fund
The
Capital Appreciation Fund’s investment objective is capital appreciation. This
goal is fundamental, and may not be changed by the Board of Directors of the
Company (the “Board” or the “Directors”) without the consent of shareholders.
There can be no assurance that the Capital Appreciation Fund will be able to
achieve its investment objective. The Capital Appreciation Fund is classified as
a “diversified” investment company under the 1940 Act. This is a fundamental
investment policy of the Fund, which may not be changed without a shareholder
vote.
A
“diversified” investment company is an investment company for which at least 75%
of its total assets is represented by cash and cash items, Government
securities, securities of other investment companies and other securities for
purposes of this calculation,
limited
in respect of any one issuer to an amount not greater in value than 5% of the
value of the company’s total assets and to no more than 10% of the outstanding
voting securities of such issuer.
The
general investment policy of the Capital Appreciation Fund is to invest in
securities using a value orientation consisting of bottom-up fundamental value
analysis with an emphasis on balance sheet strength. In pursuit of its value
oriented strategy, the Capital Appreciation Fund will invest without regard to
market capitalization.
Opportunity
Fund
The
Opportunity Fund’s investment objective is capital appreciation. This goal is
fundamental, and may not be changed by the Board without the consent of
shareholders. There can be no assurance that the Opportunity Fund will be able
to achieve its investment objective. The Opportunity Fund is classified as a
“diversified” investment company under the 1940 Act. This is a fundamental
investment policy of the Fund, which may not be changed without a shareholder
vote.
The
general investment policy of the Opportunity Fund is to invest using the same
value orientation as the Capital Appreciation Fund. In pursuit of its
value-oriented strategy, the Opportunity Fund will invest substantially in
small-to-mid capitalization companies with market capitalizations at the time of
investment in the range of between $150 million and $30 billion.
General
Description of Investments
Each
Fund will invest in equity securities. The Funds may also invest in securities
convertible into, exchangeable for, or expected to be exchanged into common
stock (including convertible preferred and convertible debt securities). There
are no limitations on the percentage of each Fund’s assets that may be invested
in equity securities, debt securities, or convertible securities. The Funds
reserve freedom of action to invest in these securities in such proportions as
the Funds’ investment manager, Prospector Partners Asset Management, LLC, (the
“Investment Manager,” or alternatively, “Prospector Partners Asset Management”)
deems advisable. The Funds may also invest in foreign securities and other
investment company securities. Each Fund may invest in any industry although it
is not the policy of a Fund to concentrate its investments in any one
industry.
The
following is a description of various types of securities in which a Fund may
invest and techniques it may use.
Equity
Securities
Equity
securities represent a proportionate share of the ownership of a company; their
value is based on the success of the company’s business and the value of its
assets, as well as general market conditions. The purchaser of an equity
security typically receives an ownership interest in the company as well as
certain voting rights. The owner of an equity security may participate in a
company’s success through the receipt of dividends, which are distributions of
earnings by the company to its owners. Equity security owners also may
participate in a company’s success or lack of success through increases or
decreases in the value of the company’s shares as traded in the public trading
market for such shares. Equity securities include common stock and preferred
stock. Preferred stockholders usually receive greater dividends but may receive
less appreciation than common stockholders and may have different voting rights.
Equity securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to buy an equity security at a
given time for a specified price.
Convertible
Securities
Convertible
securities are debt securities, or in some cases preferred stock, that have the
additional feature of converting into, exchanging or expecting to be exchanged
for, common stock of a company after certain periods of time or under certain
circumstances. Holders of convertible securities gain the benefits of being a
debt holder or preferred stockholder and receiving regular interest payments, in
the case of debt securities, or higher dividends, in the case of preferred
stock, with the possibility of becoming a common stockholder in the future. A
convertible security’s value normally reflects changes in the company’s
underlying common stock value.
As
with a straight fixed-income security, a convertible security tends to increase
in market value when interest rates decline and decrease in value when interest
rates rise. Like a common stock, the value of a convertible security also tends
to increase as the market value of the underlying stock rises, and it tends to
decrease as the market value of the underlying stock declines. Because both
interest
rate and market movements can influence its value, a convertible security may
not be as sensitive to changes in interest rates as is a similar fixed-income
security, nor as sensitive to changes in share price as is its underlying
stock.
A
convertible security tends to be senior to the issuer’s common stock, but
subordinate to other types of fixed-income securities issued by that company. A
convertible security may be subject to redemption by the issuer, but only after
a specified date and under circumstances established at the time the security is
issued. When a convertible security issued by an operating company is
“converted,” the issuer often issues new stock to the holder of the convertible
security. However, if the convertible security is redeemable and the parity
price of the convertible security is less than the call price, the issuer may
pay out cash instead of common stock.
Smaller
Companies
Each
Fund may invest in securities issued by smaller companies. Historically, smaller
company securities have been more volatile in price than larger company
securities, especially over the short term. Among the reasons for such price
volatility are the relatively less certain growth prospects of smaller
companies, lower degree of liquidity in the markets for such securities, and the
sensitivity of smaller companies to changing economic conditions.
In
addition, smaller companies may lack depth of management, may be unable to
generate funds necessary for growth or development, their products or services
may be concentrated in one area, or they may be developing or marketing new
products or services for which markets are not yet established and may never
become established.
Use
of Derivatives, Hedging and Income Transactions
Each
Fund may use derivatives and various hedging strategies for risk management
purposes and as part of its investment strategy. Hedging is a technique designed
to reduce a potential loss to a Fund as a result of certain economic or market
risks, including risks related to fluctuations in interest rates, currency
exchange rates between U.S. and foreign securities or between different foreign
currencies, and broad or specific market movements. The Funds may engage in
derivative transactions, including forward foreign currency exchange contracts,
currency futures contracts, currency swaps, options on currencies, or options on
currency futures. In addition, each Fund may engage in other types of
transactions, such as the purchase and sale of exchange-listed and OTC put and
call options on securities, equity and fixed-income indices and other financial
instruments; and, the purchase and sale of financial and other futures contracts
and options on futures contracts (collectively, all of the above are called
“Hedging Transactions”).
Some
examples of situations in which Hedging Transactions may be used are: (i) to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for a Fund’s portfolio resulting from changes in
securities markets or currency exchange rate fluctuations; (ii) to protect a
Fund’s gains in the value of portfolio securities which have not yet been sold;
(iii) to facilitate the sale of certain securities for investment purposes; and
(iv) as a temporary substitute for purchasing or selling particular
securities.
Any
combination of Hedging Transactions may be used at any time as determined by the
Investment Manager. Whether use of any Hedging Transaction will be successful is
a function of numerous variables, including market conditions and the Investment
Manager’s expertise in utilizing such techniques. The ability of a Fund to
utilize Hedging Transactions successfully cannot be assured. Hedging
Transactions involving futures and options on futures may be purchased, sold or
entered into generally for hedging, risk management or portfolio management
purposes. Each Fund will seek to comply with applicable regulatory requirements
when implementing these strategies. The SEC has adopted Rule 18f-4, which
governs the use of derivatives and certain other forms of leverage by registered
investment companies. Rule 18f-4 generally imposes limits based on
value-at-risk, or “VaR,” on the amount of derivatives and certain other forms of
leverage into which a Fund can enter and requires funds whose use of derivatives
is more than a limited specified exposure amount to establish and maintain a
comprehensive derivatives risk management program and appoint a derivatives risk
manager. Funds that use derivatives in a limited amount are not subject to the
full requirements of Rule 18f-4.
The
various techniques described above as Hedging Transactions also may be used by
each Fund for non-hedging purposes. For example, these techniques may be used to
produce income to a Fund where the Fund’s participation in the transaction
involves the payment of a premium to the Fund. Each Fund also may use a Hedging
Transaction if the Investment Manager has a view about the fluctuation of
certain indices, currencies or economic or market changes such as a reduction in
interest rates.
Regulations
affecting derivatives transactions require certain standardized derivatives,
including many types of swaps, to be subject to mandatory central clearing.
Under these requirements, a central clearing organization is substituted as the
counterparty to each side of the derivatives transaction. Each party to a
derivatives transaction covered by the regulations is required to maintain its
positions with a clearing organization through one or more clearing brokers.
Central clearing is intended to reduce, but not eliminate, counterparty risk. To
the extent that a Fund uses such derivatives, the Fund will be subject to the
risk that its clearing member or clearing organization will itself be unable to
perform its obligations. Various U.S. Government entities, including the
Commodity Futures Trading Commission (“CFTC”) and the SEC, are in the process of
adopting and implementing additional regulations governing derivatives markets
required by, among other things, the Dodd–Frank Wall Street Reform and Consumer
Protection Act (commonly referred to as the Dodd-Frank Act).
Currently,
each Fund’s use of Hedging Transactions may involve the following types of
risks, which differ from and, in certain cases, may be greater than, the risks
presented by more traditional investments: (i) market risk, which is the general
risk attendant to all investments that the value of a particular investment will
change in a way detrimental to a Fund’s interest; (ii) management risk, which is
the risk that because these instruments may be highly specialized and require
risk analyses that differ from those associated with stocks and bonds, it may be
difficult to correctly forecast price, interest rate or currency exchange rate
movements; (iii) credit risk and counterparty risk, which involve the risk that
a counterparty to a derivative contract may fail to comply with the contract’s
terms, potentially causing the Fund to incur a loss; (iv) liquidity risk, which
exists when a particular instrument is difficult to purchase or sell; (v)
leverage risk, which is the risk that, to the extent that an instrument has a
leverage component, adverse changes in the value or level of the underlying
asset, rate or index can result in a loss substantially greater than the amount
invested in the derivative itself; (vi) improper valuation or mispricing risk,
which is the risk that because these instruments are often valued subjectively,
an incorrect valuation can result in increased cash payment requirements to
counterparties or a loss of value to a Fund; and (vii) regulatory risk, which
involves the risk that additional regulations governing derivative markets
could, among other things, restrict a Fund’s ability to engage in derivatives
transactions, require additional reporting and/or increase the cost of such
transactions.
Rule
18f-4 under the 1940 Act permits the Funds to enter into “derivatives
transactions” and certain other transactions notwithstanding the restrictions on
the issuance of “senior securities” under Section 18 of the 1940 Act.
“Derivatives transactions” include: (1) any swap, security-based swap, futures
contract, forward contract, option, any combination of the foregoing, or any
similar instrument, under which the Fund is or may be required to make any
payment or delivery of cash or other assets during the life of the instrument or
at maturity or early termination, whether as margin or settlement payment or
otherwise; (2) any short sale borrowing; (3) reverse repurchase agreements and
similar financing transactions, if a Fund treats these transactions as
derivatives transactions under Rule 18f-4; and (4) when-issued or
forward-settling securities and non-standard settlement cycle investments,
unless the Fund intends to physically settle the transaction and the transaction
will settle within 35 days of its trade date.
Rule
18f-4 permits a fund to enter into derivatives transactions, provided that the
fund either: (1) adopts and implements a derivatives risk management program
(“DRMP”), adheres to a limit on leverage risk based on VaR and complies with
board oversight and reporting requirements or (2) satisfies the conditions of
the limited derivatives user exception. A fund that is a limited derivatives
user is not required to adopt a DRMP, adhere to the VaR limit or comply with the
board oversight and reporting requirements. To rely on the limited derivatives
user exception, a fund must adopt and implement policies and procedures
reasonably designed to manage its derivatives risks and limit its derivatives
exposure to 10% of its net assets.
Each
Fund is classified as a limited derivatives user under Rule 18f-4 of the 1940
Act. As a limited derivatives user, a Fund’s derivatives exposure, excluding
certain currency and interest rate hedging transactions, may not exceed 10% of
its net assets.
Swaps
Each
Fund may enter into swaps, including currency swaps. A swap is an agreement that
obligates two parties to exchange a series of cash flows at specified intervals
(payment dates) based upon or calculated by reference to changes in specified
prices or rates (e.g.,
currency exchange rates in the case of currency swaps) for a specified amount of
an underlying asset. A currency swap involves the exchange by a fund with
another party of a series of payments in specified currencies. Currency swaps
may be bilateral and privately negotiated, with a fund expecting to achieve an
acceptable degree of correlation between its portfolio investments and its
currency swaps positions. Most swaps are entered into on a net basis (i.e., the
two payment streams are netted out, with a fund receiving or paying, as the case
may be, only the net amount of the two payments).
The
use of swap transactions is a highly specialized activity, which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. Risks may arise as a result of, among other
things, the failure of the counterparty to a bilateral swap contract to comply
with the terms of the swap contract, and from unanticipated movements in
interest rates or in the value of the underlying securities. Each Fund risks the
loss of the accrued but unpaid amount under a swap agreement, which could be
substantial, in the event of default by or insolvency or bankruptcy of a swap
counterparty. If a swap transaction is particularly large or if the relevant
market is illiquid, the Fund may not be able to establish or liquidate a
position at an advantageous time or price, which may result in significant
losses. Whether a Fund will be successful in using swap agreements to achieve
its investment objective depends on the ability of the Investment Manager
correctly to predict which types of investments are likely to produce greater
returns.
Options
Each
Fund is authorized to purchase and sell exchange-listed options and
over-the-counter options (“OTC options”). A put option gives the purchaser of
the option, upon payment of a premium, the right to sell, and the seller of the
option, the obligation to buy, the underlying security, commodity, index,
currency or other instrument at the exercise price. A call option, upon payment
of a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price.
Each
Fund may purchase and sell call options on securities, including U.S. Treasury
and agency securities, mortgage-backed securities, corporate debt securities,
equity securities (including convertible securities) and Eurodollar instruments,
that are traded on U.S. and foreign securities exchanges and in the OTC markets
and on securities indices, currencies and futures contracts. Each Fund may also
purchase and sell put options on securities, including U.S. Treasury and agency
securities, mortgage-backed securities, corporate debt securities, equity
securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio) and on
securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities.
A
call option sold by a Fund exposes the Fund, during the term of the option, to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold. In selling put options, there is
a risk that a Fund may be required to buy the underlying security at a
disadvantageous price above the market price. The use of options involves
additional risks, including (i) the risk that a Fund may be unable ability to
close out its position as a purchaser or seller of an OCC-issued or
exchange-listed put or call option due to, among other things, insufficient
trading interest in certain options, restrictions on transactions imposed by an
exchange, trading halts, suspensions or other restrictions imposed with respect
to particular classes or series of options or underlying securities; (ii) the
hours of trading for listed options may not coincide with the hours during which
the underlying financial instruments are traded, and to the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets; and (iii)
unless the parties provide for it, there may be no central clearing or guaranty
function in an OTC option and, as a result, if the counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the
transaction.
Futures
and Options on Futures
Each
Fund may enter into financial and other futures contracts or purchase or sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for risk
management purposes. The sale of a futures contract creates an obligation by a
fund, as seller, to deliver to the buyer the specific type of financial
instrument or other asset called for in the contract at a specific future time
for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount).
To
the extent that a Fund uses futures and/or options on futures, it intends to
enter into such a transaction for hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option on a futures contract, would require a
fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets (initial margin). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark-to-market value of the contract fluctuates. If a fund
exercises an option on a futures contract, it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
positions just as it would
for
any position. There can be no assurance that a position taken by a Fund can be
offset prior to settlement at an advantageous price or that delivery will
occur.
A
Fund’s use of derivatives may not always be an effective means of, and sometimes
could be counterproductive to, furthering the Fund’s investment objective.
Although the use of futures and options transactions for hedging is intended to
minimize the risk of loss due to a decline in the value of the hedged position,
these transactions also tend to limit any potential gain which might result from
an increase in value of the position taken. As compared to options contracts,
futures contracts create greater ongoing potential financial risks to a Fund
because the Fund is required to make ongoing monetary deposits with futures
brokers. Losses resulting from the use of Hedging Transactions can reduce the
net asset value (“NAV”) of the Fund, and any losses can be greater than if the
Hedging Transactions had not been utilized. The cost of entering into Hedging
Transactions also may reduce a Fund’s total return to investors. Certain
transactions, such as many Hedging Transactions, other derivatives transactions,
forward commitments, reverse repurchase agreements and short sales, involve
leverage and may expose a fund to potential losses that, in some cases, may
exceed the amount originally invested by a fund.
When
conducted outside the U.S., Hedging Transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by
various factors, including: (i) other complex foreign political, legal and
economic factors, (ii) lesser availability than in the U.S. of data on which to
make trading decisions, (iii) delays in a Fund’s ability to act upon economic
events occurring in foreign markets during non-business hours in the U.S., (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the U.S., and (v) lower trading volume and
liquidity.
A
Fund may purchase and sell derivative instruments only to the extent that such
activities are consistent with the requirements of the Commodity Exchange Act
(“CEA”) and the rules adopted by the CFTC thereunder. Under CFTC rules, a
registered investment company that conducts more than a certain amount of
trading in futures contracts, commodity options, certain swaps and other
commodity interests is a commodity pool and its adviser must register as a
commodity pool operator (“CPO”). Under such rules, registered investment
companies that are commodity pools are subject to additional recordkeeping,
reporting and disclosure requirements. The Investment Manager, with respect to
each Fund, has claimed an exclusion from the definition of CPO under CFTC Rule
4.5 under the CEA and the Funds are not currently subject to these
recordkeeping, reporting and disclosure requirements under the CEA.
Foreign
Securities
Each
Fund may purchase securities of non-U.S. issuers whose values are quoted and
traded in any currency in addition to the U.S. dollar. Such investments involve
certain risks not ordinarily associated with investments in securities of U.S.
issuers. Such risks include: fluctuations in the value of the currency in which
the security is traded or quoted as compared to the U.S. dollar; unpredictable
political, social and economic developments in the foreign country where the
security is issued or where the issuer of the security is located, including
regional and global conflicts; and the possible imposition by a foreign
government of limits on the ability of a Fund to obtain a foreign currency or to
convert a foreign currency into U.S. dollars; or the imposition of other foreign
laws or restrictions.
Since
each Fund may invest in securities issued, traded or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates will affect the
value of securities in a Fund’s portfolio. When deemed advantageous to a Fund,
the Investment Manager may attempt, from time to time, to reduce such risk,
known as “currency risk,” by “hedging,” which attempts to reduce or eliminate
changes in a security’s value resulting from changing currency exchange rates.
Hedging is further described above.
In
addition, in certain countries, the possibility of expropriation of assets,
confiscatory taxation, or diplomatic developments could adversely affect
investments in those countries. Expropriation of assets refers to the
possibility that a country’s laws will prohibit the return to the U.S. of any
monies which a Fund has invested in the country. Confiscatory taxation refers to
the possibility that a foreign country will adopt a tax law which has the effect
of requiring a Fund to pay significant amounts, if not all of the value of the
Fund’s investment, to the foreign country’s taxing authority. Diplomatic
developments means that because of certain actions occurring within a foreign
country, such as significant civil rights violations or because of actions by
the U.S. during a time of crisis in the particular country, all communications
and other official governmental relations between the country and the U.S. could
be severed. This could
result
in the abandonment of any U.S. investors’, such as a Fund’s, money in the
particular country, with no ability to have the money returned to the
U.S.
There
may be less publicly available information about a foreign company than about a
U.S. company. Foreign issuers may not be subject to accounting, auditing and
financial reporting standards and requirements comparable to, or as uniform as,
those of U.S. issuers. The number of securities traded, and the frequency of
such trading, in non-U.S. securities markets, may be substantially less than in
U.S. markets. As a result, securities of many foreign issuers tend to be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. Further, non-U.S. securities markets are generally not as developed or
efficient as those in the United States and may close for extended periods or
for local holidays. Transaction costs, the costs associated with buying and
selling securities, on non-U.S. securities markets may be higher than in the
U.S. There is generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. A Fund’s foreign investments may
include both voting and non-voting securities, sovereign debt and participations
in foreign government deals. A Fund may have greater difficulty taking
appropriate legal action with respect to foreign investments in non-U.S. courts
than with respect to domestic issuers in U.S. courts.
The
United Kingdom (the “UK”) formally withdrew from the European Union (the “EU”)
on January 31, 2020. The UK and the EU negotiated an agreement governing their
future trading and security relationships. This agreement became effective on a
provisional basis on January 1, 2021 and entered into full force on May 1, 2021.
The UK and the EU also negotiated a Memorandum of Understanding (“MoU”), which
creates a framework for voluntary regulatory cooperation in financial services
between the UK and the EU. The impact on the UK and European economies and the
broader global economy of the uncertainties associated with implementing the
agreement and MoU are significant and could have an adverse effect on the value
of a Fund’s investments and its net asset value. These uncertainties include an
increase in the regulatory and customs requirements imposed on cross-border
trade between the UK and the EU, the negotiation and implementation of
additional arrangements between the UK and the EU affecting important parts of
the economy (such as financial services), volatility and illiquidity in markets,
currency fluctuations, the renegotiation of other existing trading and
cross-border cooperation arrangements (whether economic, tax, fiscal, legal,
regulatory or otherwise) of the UK and the EU, and potentially lower growth for
companies in the UK, Europe and globally.
In
addition, there is ongoing armed conflict between Russia and Ukraine in Europe
and Hamas and Israel in the Middle East. The extent, duration and impact of
these conflicts, related sanctions and retaliatory actions are difficult to
ascertain, but could be significant and have severe adverse effects on the
region, including significant adverse effects on the regional or global
economies and the markets for certain securities and commodities, such as oil
and natural gas. These impacts could negatively affect a Fund’s investments in
securities and instruments that are economically tied to the applicable region,
and include (but are not limited to) declines in value and reductions in
liquidity.
Illiquid
Investments
A
Fund may not purchase an illiquid investment if, at the time of purchase, the
Fund would have more than 15% of its net assets invested in illiquid
investments. An illiquid investment is any investment 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.
Rule
144A Securities
Each
Fund may invest in unregistered securities which may be sold under Rule 144A
under the Securities Act of 1933 (“144A Securities”). 144A Securities are
restricted, which generally means that a legend has been placed on the share
certificates representing the securities which states that the securities were
not registered with the SEC when they were initially sold and may not be resold
except under certain circumstances. In spite of the legend, certain securities
may be sold to other qualified institutional buyers provided that the conditions
of Rule 144A are met. In the event that there is an active secondary
institutional market for 144A Securities, the 144A Securities may be treated as
liquid. As permitted by the federal securities laws, the Board has adopted a
liquidity risk management program pursuant to Rule 22e-4 under the 1940 Act (the
“Liquidity Rule”) and related procedures to categorize each Fund's investments,
including 144A Securities, and identify illiquid investments. Due to changing
markets, an insufficient number of qualified institutional buyers interested in
purchasing the 144A Securities, or other factors, 144A Securities may be subject
to a greater possibility of becoming illiquid than securities that have been
registered with the SEC for sale. If the limitation on illiquid investments is
exceeded, the condition will be reported to the Board and, when required by the
Liquidity Rule, to the SEC.
Borrowing
Each
Fund is permitted to borrow under certain circumstances, as described under
“Fundamental Investment Policies” above. Under no circumstances will either Fund
make additional investments while any amounts borrowed exceed 5% of the Fund’s
total assets.
Cash
Equivalent Investments
Cash
equivalent investments are investments in certain types of short-term debt
securities. A Fund making a cash equivalent investment expects to earn interest
at prevailing market rates on the amount invested and there is little, if any,
risk of loss of the original amount invested. A Fund’s cash equivalent
investments are typically made in obligations issued or guaranteed by the U.S.
or other governments, their agencies or instrumentalities and high-quality
commercial paper issued by banks, corporations or others. Commercial paper
consists of short-term debt securities which carry fixed or floating interest
rates. A fixed interest rate means that interest is paid on the investment at
the same rate for the life of the security. A floating interest rate means that
the interest rate varies as interest rates on newly issued securities in the
marketplace vary.
Debt
Securities
A
debt security typically has a fixed payment schedule which obligates the company
to pay interest to the lender and to return the lender’s money over a certain
time period. A company typically meets its payment obligations associated with
its outstanding debt securities before it declares and pays any dividends to
holders of its equity securities. While most debt securities are used as an
investment to produce income to an investor as a result of the fixed payment
schedule, debt securities also may increase or decrease in value.
The
market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in a Fund’s NAV. These increases or decreases are more significant for longer
duration debt securities.
Each
Fund may invest in a variety of debt securities, including bonds and notes
issued by domestic or foreign corporations and the U.S. or foreign governments
and their agencies and instrumentalities. Bonds and notes differ in the length
of the issuer’s repayment schedule. Bonds typically have a longer payment
schedule than notes. Typically, debt securities with a shorter repayment
schedule pay interest at a lower rate than debt securities with a longer
repayment schedule.
The
debt securities which each Fund may purchase may either be unrated, or rated in
any rating category established by one or more independent rating organizations,
such as S&P Global Ratings (“S&P”) or Moody’s Investors Service
(“Moody’s”). Securities are given ratings by independent rating organizations,
which grade the company issuing the securities based upon its financial
soundness. Each Fund may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody’s. Generally, lower rated and
unrated debt securities are riskier investments. Debt securities rated BB or
lower by S&P or Ba or lower by Moody’s are considered to be high yield, high
risk debt securities below investment grade, commonly known as “junk bonds.” The
lowest rating category established by Moody’s is “C” and by S&P is “D.” Debt
securities with these ratings are typically in default as to the payment of
principal and interest, which means that the issuer does not have the financial
soundness to meet its interest payments or its repayment schedule to security
holders. These ratings represent the opinions of the rating services with
respect to the issuer’s ability to pay interest and repay principal. They do not
purport to reflect the risk of fluctuations in market value and are not absolute
standards of quality.
If
the rating on an issue held in a Fund’s portfolio is changed by the rating
service or the security goes into default, this event will be considered by the
Investment Manager in its evaluation of the overall investment merits of that
security, but will not generally result in an automatic sale of the
security.
Each
Fund generally will invest in debt securities under circumstances similar to
those under which they will invest in equity securities; namely, when, in the
Investment Manager’s opinion, such debt securities are available at prices less
than their intrinsic value. Investing in fixed-income securities under these
circumstances may lead to the potential for capital appreciation. Consequently,
when investing in debt securities, a debt security’s rating is given less
emphasis in the Investment Manager’s investment decision-making process. Each
Fund may invest in debt securities issued by domestic or foreign companies that
are, or are
about
to be, involved in reorganizations, financial restructurings or bankruptcy
(“Distressed Companies”), because such securities often are available at less
than their intrinsic value. Debt securities of such companies typically are
unrated, lower rated, in default or close to default. While posing a greater
risk than higher rated securities with respect to payment of interest and
repayment of principal at the price at which the debt security was originally
issued, a Fund will generally purchase these debt securities at discounts to the
original principal amount. Such debt typically ranks senior to the equity
securities of Distressed Companies and may offer the potential for capital
appreciation and additional investment opportunities.
Medium
and Lower Rated Corporate Debt Securities
Each
Fund may invest in securities of Distressed Companies when the intrinsic values
of such securities, in the opinion of the Investment Manager, warrant such
investment. Each Fund may invest in securities that are rated in the medium to
lowest rating categories by S&P and Moody’s, some of which may be so-called
“junk bonds.” Corporate debt securities rated Baa are regarded by Moody’s as
medium-grade and subject to moderate credit risk and, as such, may possess
certain speculative characteristics. Corporate debt securities rated BBB are
regarded by S&P as exhibiting adequate capacity to meet financial
commitments, although adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for securities in this rating category than in higher rated categories.
Companies issuing lower rated, higher yielding debt securities are deemed by the
rating agencies to be not as strong financially as those with higher credit
ratings. These companies are more likely to encounter financial difficulties and
are more vulnerable to changes in the economy, such as a recession or a
sustained period of rising interest rates that could prevent them from making
interest and principal payments. If an issuer is not paying or stops paying
interest and/or principal on its securities, payments on the securities may
never resume.
Corporate
debt securities that are rated Ba1, Ba2, Ba3 are regarded by Moody’s to have
speculative elements and be subject to substantial credit risk, and debt
securities that are rated B1, B2 or B3 are regarded by Moody’s to be speculative
and subject to high credit risk. Corporate debt securities rated BB, B, CCC, CC
and C are regarded by S&P to have significant speculative characteristics,
generally referring to debt securities in which the issuer currently has the
ability to repay but faces significant uncertainties, such as adverse business
or financial circumstances that could affect credit risk.
Each
Fund may also invest in unrated securities.
The
ratings of the various nationally recognized statistical rating organizations
(“NRSROs”), such as Moody’s, S&P, and Fitch Ratings (“Fitch”), generally
represent the opinions of those organizations as to the quality of the
securities that they rate. Such ratings, however, are relative and subjective,
are not absolute standards of quality, evaluate only the safety of principal and
interest payments and do not evaluate the market risk of the securities.
Additionally, because the creditworthiness of an issuer may change more rapidly
than is able to be timely reflected in changes in credit ratings, the Investment
Manager monitors the issuers of corporate debt securities held in a Fund’s
portfolios. Each Fund will rely on the Investment Manager’s judgment, analysis
and experience in evaluating debt securities. In this evaluation, the Investment
Manager will take into consideration, among other things, the issuer’s financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer’s management and regulatory matters as well
as the price of the security. The credit rating assigned to a security is a
factor considered by the Investment Manager in selecting a security for a Fund,
but the intrinsic value in comparison to market price and the Investment
Manager’s analysis of the fundamental values underlying the issuer are generally
of greater significance. Because of the nature of medium and lower rated
corporate debt securities, achievement by a Fund of its investment objective
when investing in such securities is dependent on the credit analysis of the
Investment Manager.
A
general economic downturn or a significant increase in interest rates could
severely disrupt the market for medium and lower grade corporate debt securities
and adversely affect the market value of such securities. Securities in default
are relatively unaffected by such events or by changes in prevailing interest
rates. In addition, in such circumstances, the ability of issuers of medium and
lower grade corporate debt securities to repay principal and to pay interest, to
meet projected business goals and to obtain additional financing may be
adversely affected. Such consequences could lead to an increased incidence of
default for such securities and adversely affect the value of the corporate debt
securities in a Fund’s portfolio. The secondary market prices of medium and
lower grade corporate debt securities are less sensitive to changes in interest
rates than are higher rated debt securities, but are more sensitive to adverse
economic changes or individual corporate developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, also may affect
the value and liquidity of medium and lower grade corporate debt securities,
although such factors also present investment opportunities when prices fall
below intrinsic values. Yields on debt securities in a Fund’s portfolio that are
interest rate sensitive can be expected to fluctuate over time. In addition,
periods of economic uncertainty and changes in interest rates
can
be expected to result in increased volatility of market price of any medium to
lower grade corporate debt securities in a Fund’s portfolio and thus could have
an effect on the NAV of the Fund if other types of securities did not show
offsetting changes in values. The prices of high yield debt securities fluctuate
more than higher-quality securities. Prices are often closely linked with the
company’s stock prices and typically rise and fall in response to factors that
affect stock prices. In addition, the entire high yield securities market can
experience sudden and sharp price swings due to changes in economic conditions,
stock market activity, large sustained sales by major investors, a high-profile
default, or other factors. If a Fund purchased primarily higher rated debt
securities, such risks would be reduced.
High
yield securities are also generally less liquid than higher-quality bonds. Many
of these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than previously quoted market prices. At
times, it may be difficult to sell these securities promptly at an acceptable
price, which may limit a Fund’s ability to sell securities in response to
specific economic events or to meet redemption requests. The secondary market
value of corporate debt securities structured as zero coupon securities or
payment in kind securities may be more volatile in response to changes in
interest rates than debt securities which pay interest periodically in cash.
Because such securities do not pay current interest, but rather, income is
accreted, to the extent that a Fund does not have available cash to meet
distribution requirements with respect to such income, it could be required to
dispose of portfolio securities that it otherwise would not. Such disposition
could be at a disadvantageous price. Failure to satisfy distribution
requirements could result in a Fund failing to qualify as a pass-through entity
under the Internal Revenue Code of 1986, as amended (the “Code”). Investment in
such securities also involves certain other tax considerations.
The
Investment Manager values each Fund’s assets pursuant to policies and procedures
approved and periodically reviewed by the Board. To the extent that there is no
established retail market for some of the medium or lower grade or unrated
corporate debt securities in which a Fund may invest, there may be thin or no
trading in such securities and the ability of the Investment Manager to
accurately value such securities may be adversely affected. Further, it may be
more difficult for a Fund to sell such securities in a timely manner and at
their stated value than would be the case for securities for which an
established retail market did exist. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
and unrated corporate debt securities held in a Fund’s portfolio, the
responsibility of the Investment Manager to value the Fund’s securities becomes
more difficult and the Investment Manager’s judgment may play a greater role in
the valuation of the Fund’s securities due to a reduced availability of reliable
objective data.
Depositary
Receipts
Each
Fund may invest in securities commonly known as American Depositary Receipts
(“ADRs”), European Depositary Receipts (“EDRs”) or Global Depositary Receipts
(“GDRs”) of non-U.S. issuers. Such depositary receipts are interests in a
non-U.S. company’s securities which have been deposited with a bank or trust
company. The bank or trust company then sells interests to investors in the form
of depositary receipts. Depositary receipts can be unsponsored or sponsored by
the issuer of the underlying securities or by the issuing bank or trust company.
ADRs are certificates issued by a U.S. bank or trust company and represent the
right to receive securities of a foreign issuer deposited in a domestic bank or
foreign branch of a U.S. bank and traded on a U.S. exchange or in an OTC market.
EDRs are receipts issued in Europe generally by a non-U.S. bank or trust company
that evidence ownership of non-U.S. or domestic securities. Generally, ADRs are
in registered form and EDRs are in bearer form. There are no fees imposed on the
purchase or sale of ADRs or EDRs although the issuing bank or trust company may
impose charges for the collection of dividends and the conversion of ADRs and
EDRs into the underlying securities. Investment in ADRs may have certain
advantages over direct investment in the underlying non-U.S. securities, since:
(i) ADRs are U.S. dollar denominated investments which are often easily
transferable and for which market quotations are generally readily available and
(ii) issuers whose securities are represented by ADRs are subject to the same
auditing, accounting and financial reporting standards as domestic issuers. EDRs
are not necessarily denominated in the currency of the underlying
security.
Depositary
receipts of non-U.S. issuers may have certain risks, including trading for a
lower price, having less liquidity than their underlying securities and risks
relating to the issuing bank or trust company. Holders of unsponsored depositary
receipts have a greater risk that receipt of corporate information and proxy
disclosure will be untimely, information may be incomplete and costs may be
higher.
Emerging
Markets Investments
Investments
in companies domiciled in emerging market countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less economic stability; (ii) political and social uncertainty (for
example, regional conflicts and risk of war); (iii) pervasiveness of corruption
and crime; (iv) the small current size of the markets for such securities and
the currently low or nonexistent volume of trading, which result in a lack of
liquidity and in greater price volatility; (v) delays in settling portfolio
transactions; (vi) risk of loss arising out of the system of share registration
and custody; (vii) certain national policies that may restrict a Fund’s
investment opportunities, including imposition of capital controls limiting a
Fund's ability to repatriate investment income and capital and restrictions on
investment in issuers or industries deemed sensitive to national interests;
(viii) foreign taxation; (ix) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (x) the absence of a capital market structure or
market-oriented economy; and (xi) the possibility that recent favorable economic
developments may be slowed or reversed by unanticipated political or social
events.
In
addition, many countries in which a Fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency, and balance of payments
position.
Currency
Transactions
A
forward foreign currency exchange contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. Each Fund may from time to time engage in currency transactions with
securities dealers, financial institutions or other parties in order to hedge
the value of portfolio holdings denominated in particular currencies against
fluctuations in relative value between those currencies and the U.S. dollar.
Currency transactions include forward foreign currency exchange contracts,
exchange-listed currency futures, exchange-listed and OTC options on currencies,
and currency swaps.
Each
Fund may enter into currency transactions with counterparties which have
received (or the guarantors of the obligations of such counterparties have
received) a credit rating of A-1 or Prime-1 by S&P or Moody’s, respectively,
or that have an equivalent rating from an NRSRO or are determined to be of
equivalent credit quality by the Investment Manager. If there is a default by
the counterparty, the Fund may have contractual remedies pursuant to the
agreements related to the transaction.
Each
Fund intends to limit its use of forward foreign currency exchange contracts and
other currency transactions such as futures, options, options on futures and
swaps to either specific transactions or portfolio positions. Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of a fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income from
portfolio securities. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
A
Fund will not enter into a transaction to hedge currency exposure if the Fund’s
exposure, after netting all transactions intended to wholly or partially offset
other transactions, is greater than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in, or whose value is based on, that foreign
currency or currently convertible into such currency other than with respect to
proxy hedging, which is described below.
Each
Fund also may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Fund has, or in which the Fund expects to have,
portfolio exposure.
To
reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, each Fund also may engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund’s
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund’s portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund’s securities denominated in linked
currencies. Proxy hedging involves some of the same risks and considerations as
other transactions with similar instruments.
To
the extent that a Fund engages in currency transactions, the Fund may incur a
loss if the currency being hedged fluctuates in value to a degree, or in a
direction, that is not anticipated. To the extent that a Fund engages in proxy
hedging at a particular time, there is the risk that the perceived linkage
between various currencies may not be present during that time.
Purchases
and sales of currency and related instruments may be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive a specified currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs.
The
use of currency transactions also can result in a Fund incurring losses due to
the inability of foreign securities transactions to be completed with the
security being delivered to the Fund. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Currency exchange rates may
fluctuate based on factors extrinsic to that country’s economy.
Investment
Company Securities
Each
Fund may invest, from time to time, in the securities of other investment
companies, subject to applicable law which restricts such investments. Such laws
generally restrict a registered investment company’s purchase of another
investment company’s voting securities to 3% of the other investment company’s
securities, no more than 5% of a registered investment company’s assets in any
single investment company’s securities, and no more than 10% of a registered
investment company’s assets in all investment company securities, subject to
certain exceptions. Rule 12d1-4 under the 1940 Act allows funds to invest in
other investment companies in excess of some of the restrictions discussed
above, subject to certain limitations and conditions.
A
Fund’s purchase of the securities of investment companies results in layering of
expenses. This layering may occur because investors in any investment company,
such as a Fund, indirectly bear a proportionate share of the expenses of the
investment company, including operating costs, and investment advisory and
administrative fees. A Fund’s investment in other investment companies also
subjects the Fund indirectly to the underlying risks of those investment
companies.
A
Fund may invest in securities of an exchange-traded fund (“ETF”), subject to the
limitations laid out above. ETFs are pooled investment vehicles that seek to
track the performance of a specific index or implement actively-managed
investment strategies. Index ETFs will not track their underlying indices
precisely since the ETFs have expenses and may need to hold a portion of their
assets in cash, unlike the underlying indices, and the ETFs may not invest in
all of the securities in the underlying indices in the same proportion as the
indices for various reasons. Unlike index ETFs, actively-managed ETFs generally
seek to outperform a benchmark index and typically have higher expenses than
index ETFs, which expenses reduce investment returns. There are numerous types
of index ETFs and actively managed ETFs, including those offering exposure to
broad or narrow segments of the equity, fixed income, commodities and foreign
currencies markets. A fund will incur transaction costs when buying and selling
ETF shares, and indirectly bear the expenses of the ETFs.
Loans
of Portfolio Securities
To
generate additional income, each Fund may lend certain of its portfolio
securities to qualified banks and broker-dealers. These loans may not exceed 33
1/3% of the value of the relevant Fund’s total assets, measured at the time of
the most recent loan, but neither Fund presently anticipates loaning more than
20% of its portfolio securities. For each loan, the borrower must maintain with
the particular Fund’s custodian collateral (consisting of any combination of
cash, securities issued by the U.S. government and its agencies and
instrumentalities, or irrevocable letters of credit) with a value at least equal
to 100% of the current market value of the loaned securities. To the extent that
a Fund engages in securities lending, the Fund will retain all or a portion of
the interest received on investment of the cash collateral or receives a fee
from the borrower, and will receive any distributions paid on the loaned
securities. A Fund may terminate a loan at any time and obtain the return of the
securities loaned within the normal settlement period for the security
involved.
Where
voting rights with respect to the loaned securities pass with the lending of the
securities, the Investment Manager intends to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the Investment Manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the Investment
Manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in the
event of default or insolvency of the borrower. Each Fund will loan its
securities only to parties who meet creditworthiness standards approved by the
Board.
Repurchase
Agreements
Each
Fund generally will have a portion of its assets in cash or cash equivalents for
a variety of reasons, including satisfying redemption requests from
shareholders, waiting for a suitable investment opportunity or taking a
defensive position. To earn income on this portion of its assets, each Fund may
invest up to 50% of its assets in repurchase agreements. Under a repurchase
agreement, a Fund agrees to buy securities guaranteed as to payment of principal
and interest by the U.S. government or its agencies from a qualified bank or
broker-dealer and then to sell the securities back to the bank or broker-dealer
after a short period of time (generally, less than seven days) at a higher
price. The bank or broker-dealer must transfer to the Fund’s custodian
securities with an initial market value of at least 102% of the dollar amount
invested by the relevant Fund in each repurchase agreement. The Investment
Manager will monitor the value of such securities daily to determine that the
value equals or exceeds the repurchase price.
Repurchase
agreements may involve risks in the event of default or insolvency of the bank
or broker-dealer, including possible delays or restrictions upon a Fund’s
ability to sell the underlying securities. Each Fund will enter into repurchase
agreements only with parties who meet certain creditworthiness standards, i.e.,
banks or broker-dealers that the Investment Manager has determined present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
Securities
of Companies in the Financial Services Industry
Certain
provisions of the federal securities laws permit investment portfolios,
including each Fund, to invest in companies engaged in securities-related
activities (securities issuers) only if certain conditions are met. Purchases of
securities of a company that derived 15% or less of gross revenues during its
most recent fiscal year from securities-related activities (i.e., broker,
dealer, underwriting, or investment advisory activities) are subject only to the
same percentage limitations as would apply to any other security the Fund may
purchase.
Each
Fund also may purchase securities of an issuer that derived more than 15% of its
gross revenues in its most recent fiscal year from securities-related
activities, if the following conditions are met: (1) immediately after the
purchase of any securities issuer’s equity and debt securities, the purchase
cannot cause more than 5% of the relevant Fund’s total assets to be invested in
securities of that securities issuer; (2) immediately after a purchase of equity
securities of a securities issuer, the relevant Fund may not own more than 5% of
the outstanding securities of that class of the securities issuer’s equity
securities; and (3) immediately after a purchase of debt securities of a
securities issuer, the relevant Fund may not own more than 10% of the
outstanding principal amount of the securities issuer’s debt
securities.
In
applying the gross revenue test, an issuer’s gross revenues from its own
securities-related activities should be combined with its ratable share of the
securities-related activities of enterprises of which it owns a 20% or greater
voting or equity interest. All of the above percentage limitations are
applicable at the time of purchase as well as the issuer’s gross revenue test.
With respect to warrants, rights, and convertible securities, a determination of
compliance with the above limitations must be made as though such warrant,
right, or conversion privilege had been exercised.
The
following transactions would not be deemed to be an acquisition of securities of
a securities-related business: (i) receipt of stock dividends on securities
acquired in compliance with the conditions described above; (ii) receipt of
securities arising from a stock-for-stock split on securities acquired in
compliance with the conditions described above; (iii) exercise of options,
warrants, or rights acquired in compliance with the federal securities laws;
(iv) conversion of convertible securities acquired in compliance with the
conditions described above; and (v) the acquisition of demand features or
guarantees (puts) under certain circumstances.
Neither
Fund is permitted to acquire any security issued by the Investment Manager or
any affiliated company. The purchase of a general partnership interest in a
securities-related business is also prohibited.
In
addition, each Fund is generally prohibited from purchasing or otherwise
acquiring any security (not limited to equity or debt individually) issued by
any insurance company if the Fund and any company controlled by the Fund own in
the aggregate or, as a
result
of the purchase, will own in the aggregate more than 10% of the total
outstanding voting stock of the insurance company. Certain state insurance laws
impose similar limitations.
Temporary
Investments
When
the Investment Manager believes market or economic conditions are unfavorable
for investors, or when the Investment Manager is unable to find sufficient
investment opportunities for a Fund meeting the Investment Manager’s criteria
for investment, the Investment Manager may invest up to 100% of each Fund’s
assets in a temporary defensive manner by holding all or a substantial portion
of its assets in cash, cash equivalents or other high quality short-term
investments. Unfavorable market or economic conditions may include excessive
volatility or a prolonged general decline in the securities markets, the
securities in which the particular Fund normally invests, or the economies of
the countries where the Fund invests.
Temporary
defensive investments may include short-term debt securities such as obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and high-quality commercial paper issued by banks or other U.S. and foreign
issuers, as well as money market mutual funds. The Investment Manager also may
invest in these types of securities or hold cash while looking for suitable
investment opportunities.
Portfolio
Turnover
Although
the Funds generally will not invest for short-term trading purposes, portfolio
securities may be sold without regard to the length of time they have been held
when, in the opinion of the Investment Manager, investment considerations
warrant such action. Portfolio turnover rate is calculated by dividing (1) the
lesser of purchases or sales of portfolio securities for the fiscal year by (2)
the monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in a Fund’s
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to higher transaction costs and may result in a greater number of taxable
transactions. High portfolio turnover generally results in the distribution of
short-term capital gains which are taxed at the higher ordinary income tax
rates. The following table provides the portfolio turnover rate for the past two
fiscal years.
|
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|
|
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| |
|
| |
| 2023 |
2022 |
Capital
Appreciation Fund |
41%
|
33% |
Opportunity
Fund |
32% |
44% |
Policies
and Procedures Regarding the Release of Portfolio Holdings
Information
The
Company has adopted policies and procedures relating to disclosure of each
Fund’s portfolio securities. These policies and procedures are designed to allow
disclosure of portfolio holdings information where necessary to a Fund’s
operation or useful to a Fund’s shareholders without compromising the integrity
or performance of such Fund.
The
Company’s overall policy with respect to the release of portfolio holdings
information is to release such information consistent with applicable legal
requirements and the fiduciary duties owed to shareholders. Subject to the
limited exceptions described below, the Investment Manager will not make
available to anyone non-public information with respect to a Fund’s portfolio
holdings, until such time as the information is made available to all
shareholders or the general public.
Consistent
with current law, the Investment Manager releases complete portfolio holdings
information each fiscal quarter through regulatory filings with no more than a
60-day lag. In addition, the Company makes each Fund’s complete portfolio
holdings available on or about 15 days following each month-end on the Fund’s
website. To view a Fund’s portfolio holdings, visit
www.prospectorpartners.com/funds/reports/.
Exceptions
to the portfolio holdings release policy described above will be made only when:
(1) a Fund has a legitimate business purpose for releasing portfolio holdings
information in advance of release to all shareholders or the general public; (2)
the recipient is
subject
to a duty of confidentiality pursuant to a signed non-disclosure agreement; and
(3) the release of such information would not otherwise violate the antifraud
provisions of the federal securities laws or the Company’s fiduciary
duties.
The
eligible third parties to whom portfolio holdings information may be released in
advance of general release fall into the following categories: data
consolidators (including rating agencies), fund rating/ranking services and
other data providers, service providers to the Company and municipal securities
brokers using the Investor Tools product which brings together buyers and
sellers of municipal securities in the normal operation of the municipal
securities markets (collectively, “Service Providers”). Each of these parties is
contractually and ethically prohibited from sharing the Fund’s portfolio
holdings information unless specifically authorized. The frequency with which
complete portfolio holdings may be disclosed to a Service Provider, and the
length of the lag, if any, between the date of the information and the date on
which the information is disclosed to the Service Provider, is determined based
on the facts and circumstances, including, without limitation, the nature of the
portfolio holdings information to be disclosed, the risk of harm to the
particular Fund and its shareholders, and the legitimate business purposes
served by such disclosure. The frequency of disclosure to a Service Provider
varies and may be as frequent as daily, with no lag.
In
all cases, eligible third parties are required to execute a non-disclosure
agreement. Non-disclosure agreements include the following
provisions:
•The
recipient agrees to keep confidential any portfolio holdings information
received.
•The
recipient agrees not to trade on the nonpublic information
received.
•The
recipient agrees to refresh its representation as to confidentiality and
abstention from trading upon request from the Investment Manager.
In
no case does the Company, a Fund, or the Investment Manager receive any
compensation in connection with the arrangements to release portfolio holdings
information to any of the above-described recipients of the
information.
Before
any non-public disclosure of information about a Fund’s portfolio holdings is
permitted, the Company’s President or Executive Vice President (collectively, an
“Executive Officer”) must determine that the Fund has a legitimate business
purpose for providing the portfolio holdings information, that the disclosure is
in the best interests of the Fund’s shareholders, and that the recipient agrees
or has a duty to keep the information confidential and agrees not to trade
directly or indirectly based on the information or to use the information to
form a specific recommendation about whether to invest in the Fund or any other
security.
The
Company has established procedures to ensure that its portfolio holdings
information is only disclosed in accordance with these policies. Only an
Executive Officer of the Company may approve the disclosure, and then only after
considering the anticipated benefits and costs to the relevant Fund and its
shareholders, the purpose of the disclosure, any conflicts of interest between
the interests of the Fund and its shareholders and the interests of the
Company’s affiliates, and whether the disclosure is consistent with the policies
and procedures governing disclosure. Only someone approved by the Executive
Officer may make approved disclosures of portfolio holdings information to
authorized recipients. The Company reserves the right to request certifications
from senior officers of authorized recipients that the recipient is using the
portfolio holdings information only in a manner consistent with the Company’s
policy and any applicable non-disclosure agreement.
The
Company’s Chief Compliance Officer (“CCO”) monitors the Company’s compliance
with this disclosure policy and annually reviews information regarding the
identity of each service provider or other authorized party that receives
information regarding a Fund’s portfolio holdings prior to public dissemination.
With exception of those Service Providers identified above, who receive
information on an ongoing or as needed basis in order to perform their
contractual or fiduciary duties to a Fund, the CCO also reviews the frequency
with which the authorized party receives such information and the business
purpose for which the disclosure is made.
In
order to help facilitate the Board’s determination that nonpublic portfolio
holdings disclosure to Service Providers prior to public dissemination is in the
best interests of a Fund’s shareholders, the CCO will make an annual report to
the Board on such disclosure and any recommended material changes to the policy.
In addition, the Board will receive any interim reports that the CCO may deem
appropriate. The Company’s portfolio holdings release policy has been reviewed
and approved by the Board and any material amendments shall also be reviewed and
approved by the Board. Any conflict of interest identified between the interests
of shareholders on the one hand, and those of the Investment Manager, Quasar
Distributors, LLC (the “Distributor”), or any affiliated person of the Company,
the Investment Manager, or the Distributor, on the other, that are not resolved
under the applicable Codes of Ethics, and that may arise as a result of the
disclosure of nonpublic portfolio holdings information, will be reported to the
Board for appropriate action.
Officers
and Directors
The
following table gives information about each Director and the senior officers of
the Company. Each Director and officer holds office until the person resigns, is
removed, or replaced. Unless otherwise noted, the persons have held their
principal occupations for more than five years. The address for all Directors
and officers is 370 Church Street, Guilford, Connecticut 06437, unless otherwise
indicated.
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Name
and Year of Birth |
Position(s)
Held
with
the
Fund |
Term
of Office and Length of Time Served |
Principal
Occupation and
Other
Relevant Experience
During
Past
5 Years^ |
Number
of Portfolios in Fund Complex Overseen by Director |
Other Directorships Served During
the Past 5 Years |
Independent
Board Members |
Harvey
D. Hirsch*
Year
of Birth: 1941
|
Director |
Indefinite;
Since September 7, 2007 |
Retired.
|
2 |
None |
|
|
|
|
| |
Joseph
Klein III*
Year
of Birth: 1961
|
Director |
Indefinite;
Since September 7, 2007 |
Managing
Director of Gauss Capital Advisors, LLC, a financial consulting and
investment advisory firm focused on biopharmaceuticals since he founded
the company in March 1998.
|
2 |
Ionis
Pharmaceuticals, Inc.; Akcea Therapeutics, Inc. |
|
|
|
|
| |
Roy
L. Nersesian*
Year
of Birth: 1939
|
Director |
Indefinite;
Since September 7, 2007 |
Professor
of the Leon Hess School of Business, Monmouth University, since September
1985.
Adjunct
Professor of the Center for Energy and Marine Transportation, Columbia
University, since September 2000. |
2 |
None |
|
|
|
|
| |
John
T. Rossello, Jr.*
Year
of Birth: 1951
|
Director |
Indefinite;
Since September 7, 2007 |
Retired.
|
2 |
None |
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| |
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| |
Name
and Year of Birth |
Position(s)
Held
with
the
Fund |
Term
of Office and Length of Time Served |
Principal
Occupation and
Other
Relevant Experience
During
Past
5 Years^ |
Number
of Portfolios in Fund Complex Overseen by Director |
Other Directorships Served During
the Past 5 Years |
Interested
Board Members and Officers |
John
D. Gillespie†*
Year
of Birth: 1959
|
Director President |
Indefinite;
Since September 7, 2007 |
Managing
member of the Investment Adviser.
Managing
member of Prospector Partners, LLC, an affiliate of the Investment
Manager, and portfolio manager of the investment funds sponsored by
Prospector Partners, LLC from 1997 through 2021. |
2 |
None |
|
|
|
|
| |
Kevin
R. O’Brien
Year
of Birth: 1963
|
Executive
Vice President |
Indefinite;
Since September 7, 2007 |
Portfolio
Manager at the Investment Manager.
Portfolio
Manager at Prospector Partners, LLC since April 2003. |
N/A |
None |
|
|
|
|
| |
Jason
A. Kish
Year
of Birth: 1973 |
Executive
Vice President |
Indefinite;
Since February, 2013 |
Portfolio
Manager at the Investment Manager.
Director
of Research since 2010.
|
N/A |
None |
|
|
|
|
| |
Steven
R. Labbe
Year
of Birth: 1972 |
Executive
Vice President |
Indefinite;
Since July, 2020 |
Portfolio
Manager at the Investment Manager.
Analyst
since 2012. |
N/A |
None |
|
|
|
|
| |
Peter
N. Perugini, Jr.
Year
of Birth: 1970
|
Secretary Treasurer |
Indefinite;
Secretary since September 7, 2007
Indefinite;
Treasurer since June 6, 2007 |
Chief
Financial Officer at Prospector Partners, LLC since 2000.
|
N/A |
None |
|
|
|
|
| |
Frederick
C. Teufel, Jr.
Year
of Birth: 1959
|
Chief
Compliance Officer |
Indefinite;
Since June 22, 2022 |
Director
at Vigilant Compliance, LLC since September 2020.
|
N/A |
None |
|
|
|
|
| |
Benjamin
Eirich
Year
of Birth: 1981
|
Assistant
Secretary |
Indefinite;
Since September 5, 2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC a mutual fund service
provider, since June 2008. |
N/A |
None |
*
Each of the Company’s directors was elected by written consent of the sole
shareholder of the Funds on September 7, 2007.
†
John D. Gillespie is an interested director of the Fund because he is also the
managing member of the Investment Manager.
^
The information reported includes the principal occupation during the last five
years for each Director and other information relating to the professional
experiences, attributes and skills relevant to each Director’s qualifications to
serve as Director.
Leadership
Structure and the Board of Directors
The
Board is responsible for managing the business affairs of the Company and the
Funds and exercising all of its powers except those reserved for shareholders.
The Board is composed of five Directors, four of whom are not “interested
persons” (as defined in the 1940 Act) of the Company (the “Independent Board
Members”). In addition to four (4) regularly scheduled meetings per year, the
Independent Board Members meet regularly in executive sessions among themselves
and with Fund counsel to consider a variety of matters affecting the Funds.
These sessions generally occur prior to, and following, scheduled Board meetings
and at such other times as the Independent Board Members may deem necessary.
Each Director attended at least 75% of the total number of meetings of the Board
in the year ending December 31, 2023. As discussed in further detail below, the
Board has established two standing committees to assist the Board in performing
its oversight responsibilities. The Board has engaged the Investment Manager to
manage the Funds and is responsible for overseeing the Investment Manager and
other service providers to the Company and the Funds in accordance with the
provisions of the 1940 Act and other applicable laws.
The
Company’s Amended and Restated By-Laws do not set forth any specific
qualifications to serve as a Director. The Nominating Committee Charter also
does not set forth any specific qualifications, but does set forth certain
factors that the Nominating Committee may take into account in evaluating
potential conflicts of interest. In evaluating a candidate for nomination or
election as a Director, the Nominating Committee will take into account the
contribution that the candidate would be expected to make to the diverse mix of
experience, qualifications, attributes and skills that the Nominating Committee
believes contributes to good governance for the Funds.
The
Chairman of the Board is not an Independent Board Member. The Funds do not have
a lead Independent Board Member. The Chairman’s role is to set the agenda at
each Board meeting, preside at all meetings of the Board and to act as a liaison
with service providers, officers, attorneys, and other Directors generally
between meetings. The Chairman may also perform other such functions as may be
provided by the Board from time to time.
Among
the attributes or skills common to all Directors is their ability to review
critically, evaluate, question and discuss information provided to them, to
interact effectively with the other Directors, Investment Manager, other service
providers, counsel and the independent registered public accounting firm, and to
exercise effective and independent business judgment in the performance of their
duties as Directors. Each Director’s ability to perform his or her duties
effectively has been attained through the Director’s business, consulting,
public service and/or academic positions and through experience from service as
a board member of the Funds, public companies or other organizations as set
forth above. Each Director’s ability to perform his or her duties effectively
also has been enhanced by his or her educational background, professional
training, and/or other life experiences.
The
Board has determined that the Board’s leadership structure is appropriate in
light of the characteristics and circumstances of the Company and each of the
Funds, including factors such as the Funds’ investment strategy and style, the
net assets of each Fund, the committee structure of the Company, and the
management, distribution and other service arrangements of each of the Funds.
The Board believes that current leadership structure permits the Board to
exercise informed and independent judgment over matters under its purview, and
it allocates areas of responsibility among service providers, committees of
Directors and the full Board in a manner that enhances effective oversight. The
Board believes that having a majority of Independent Board Members is
appropriate and in the best interest of the Funds, and that the Board leadership
by Mr. Gillespie provides the Board with valuable corporate and financial
insights that assist the Board as a whole with the decision-making process. The
leadership structure of the Board may be changed, at any time and in the
discretion of the Board including in response to changes in circumstances or the
characteristics of the Funds.
Risk
Oversight
The
Funds are subject to a number of risks, including investment, compliance,
operational, and valuation risks, among others. Day-to-day risk management
functions are subsumed within the responsibilities of the Funds’ management, the
Investment Manager and other service providers (depending on the nature of the
risk), who carry out the Funds’ investment management and business
affairs.
Risk
oversight forms part of the Board’s general oversight of the Funds and is
addressed as part of various Board and Committee activities. The Board
recognizes that it is not possible to identify all of the risks that may affect
a Fund or to develop processes and controls to eliminate or mitigate their
occurrence or effects. As part of its regular oversight of the Funds, the Board,
directly or through a Committee, interacts with and reviews reports from, among
others, Funds’ management, the Investment Manager, the Chief Compliance Officer
of the Funds, the independent registered public accounting firm for the Funds,
as appropriate, regarding risks faced by the Funds and relevant risk functions.
The Board has appointed a Chief Compliance Officer who oversees the
implementation and testing of the Funds’ compliance program and reports to the
Board regarding compliance matters for the Funds and their principal service
providers. In addition, as part of the Board’s periodic review of the Funds’
advisory and other service provider agreements, the Board may consider risk
management aspects of their operations and the functions for which they are
responsible. The Board may, at any time and in its discretion, change the manner
in which it conducts its risk oversight role.
Committee
Structure
The
Board maintains two standing committees: the Audit Committee and the Nominating
Committee. The Audit Committee is generally responsible for recommending the
selection of the Company’s independent registered public accounting firm
(“auditors”), including evaluating their independence and meeting with such
auditors to consider and review matters relating to the Company’s financial
reports and internal accounting. During the fiscal year ended December 31, 2023,
the Audit Committee met 4 times with respect to the Funds.
The
Nominating Committee is generally responsible for nominating candidates for
Independent Board Member positions and presenting such nominations to the Board.
When vacancies arise or elections are held, the Nominating Committee shall
review candidates for, and make nominations of directors and committee members
to the Board. The Nominating Committee Charter does not contemplate the
acceptance of candidates from shareholders. During the fiscal year ended
December 31, 2023, the Nominating Committee did not have reason to meet with
respect to the Funds.
|
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| |
Committee |
Members |
Audit
Committee |
Harvey
D. Hirsch Roy L. Nersesian John T. Rossello, Jr. Joseph Klein
III |
| |
Nominating
Committee |
Harvey
D. Hirsch Joseph Klein III Roy L. Nersesian John T. Rossello,
Jr. |
Compensation
The
Company pays each Independent Board Member $15,000 per year. In addition,
Directors are reimbursed by the Company for expenses incurred in connection with
attending board meetings. For its fiscal year ended December 31, 2023, the
Funds paid the following compensation to its Independent Board
Members:
|
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|
| |
Name
of Person and Position |
Aggregate Compensation from
Capital Appreciation Fund |
Aggregate Compensation from
Opportunity Fund |
Pension
or Retirement Benefits Accrued as Part of
Fund Expenses |
Estimated Annual Benefits
upon Retirement |
Total Compensation from
Fund and Fund Complex Paid to Directors |
Harvey
D. Hirsch, Independent Board Member |
$1,725 |
$13,275 |
$0 |
$0 |
$15,000 |
Joseph
Klein III, Independent Board Member |
$1,725 |
$13,275 |
$0 |
$0 |
$15,000 |
Roy
L. Nersesian, Independent Board Member |
$1,725 |
$13,275 |
$0 |
$0 |
$15,000 |
John
T. Rossello, Jr., Independent Board Member |
$1,725 |
$13,275 |
$0 |
$0 |
$15,000 |
Fund
Shares Owned by Board Members
As
of December 31, 2023, the Directors owned shares of the Funds in the following
dollar ranges, as indicated below:
|
|
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|
| |
Amount
Invested Key |
| |
A. |
$1
- $10,000 |
B. |
$10,001
- $50,000 |
C. |
$50,001
- $100,000 |
D. |
Over
$100,000 |
|
|
|
|
|
|
|
|
|
|
| |
Independent
Board Member |
Dollar
Range of Equity Securities in the Capital Appreciation
Fund |
Dollar
Range of Equity Securities in the Opportunity Fund |
Aggregate
Dollar Range of Equity Securities in all Registered Investment Companies
Overseen by Director in Family of Investment Companies |
Harvey
D. Hirsch |
D |
D |
D
|
Joseph
Klein III |
D
|
D
|
D |
Roy
L. Nersesian |
B |
B |
C |
John
T. Rossello, Jr. |
D |
D
|
D |
Interested
Director |
|
| |
John
D. Gillespie |
D
|
D |
D |
As
of December 31, 2023, no Independent Board Members, or members of
their immediate families, owned securities beneficially or of record in the
Investment Manager, the Distributor, or an affiliate of the Investment Manager
or Distributor.
CODE
OF ETHICS AND PROXY VOTING POLICIES AND PROCEDURES
Code
of Ethics
The
Company, the Investment Manager, and the Distributor have each adopted codes of
ethics pursuant to Rule 17j-1 under the 1940 Act (a “Rule 17j-1 Code of
Ethics”). A Rule 17j-1 Code of Ethics is intended to restrict personnel from
investing in securities that are being considered for the Funds or that are
currently held by the Funds, subject to certain conditions.
Proxy
Voting Policies and Procedures
The
Board has delegated the responsibility to vote proxies for securities held in
the Funds’ portfolios to the Investment Manager, subject to the Board’s
oversight. The Investment Manager’s proxy voting policies, attached hereto as
Appendix A, are reviewed periodically, and, accordingly are subject to change.
Each Fund’s voting record relating to portfolio securities during the most
recent twelve month period ended June 30, may be obtained upon request and
without charge by calling toll free
(877)
734-7862, on the Fund’s website at www.prospectorfunds.com, and on the SEC’s
website at https://www.sec.gov.
INVESTMENT
ADVISORY AND OTHER SERVICES
INVESTMENT
MANAGER AND SERVICES PROVIDED
The
Funds’ Investment Manager is Prospector Partners Asset Management, LLC, a
Delaware limited liability company controlled by John D. Gillespie and owned by
Prospector Partners, LLC. John D. Gillespie is the managing member of Prospector
Partners, LLC, and together with Kevin R. O’Brien, owns a majority of that
entity. Subject to the general supervision of the Directors, the Investment
Manager provides investment advisory services to each Fund pursuant to an
Advisory Agreement between the Company and the Investment Manager (the “Advisory
Agreement”). The Investment Manager, located at 370 Church Street, Guilford, CT
06437, is a registered investment adviser with the SEC. The Investment Manager
is responsible for managing the investment and reinvestment of each Fund’s
assets, subject to the direction and control of the Board.
The
Investment Manager provides investment research and portfolio management
services, and selects the securities for each Fund to buy, hold or sell. The
Investment Manager also selects the brokers who execute each Fund’s portfolio
transactions. The Investment Manager provides periodic reports to the Board,
which reviews and supervises the Investment Manager’s investment activities.
The
Advisory Agreement must be approved at least annually by the Board or by
majority vote of the shareholders, and in either case, by a majority of the
Directors who are not parties to the Advisory Agreement or interested persons of
any such party.
The
Advisory Agreement is terminable without penalty by the Board or by majority
vote of the relevant Fund’s outstanding voting securities (as defined by the
1940 Act) on 60 days’ written notice by either party and will terminate
automatically upon assignment.
Management
Fees
Under
the Advisory Agreement, the Investment Manager is eligible to receive from each
Fund a fee equal to an annual rate of 1.00% of the average daily net assets of
the Fund. The Investment Manager has contractually agreed to waive a portion of
its management fee and/or pay Fund expenses (excluding interest, organizational
expenses, brokerage commissions and extraordinary expenses) in order to limit
the ordinary operating expenses of each Fund to 1.25% of its average daily net
assets (the “Expense Cap”).
The
fee is computed at the close of business on the last business day of each month,
according to the terms of the Advisory Agreement.
The
Funds paid the following management fees to the Investment Manager for the three
most recent fiscal years shown:
|
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|
|
|
|
|
| |
| Management Fees
Accrued by Investment Manager |
Management Fees
Waived |
Management Fees
Recouped |
Net
Management Fees Paid to Investment Manager |
Fiscal
year ended December 31, 2023 |
|
|
| |
Capital
Appreciation Fund |
$287,172 |
$145,828 |
$0 |
$141,344 |
Opportunity
Fund |
$2,169,543 |
$264,247 |
$0 |
$1,905,296 |
Fiscal
year ended December 31, 2022 |
|
|
| |
Capital
Appreciation Fund |
$275,531 |
$140,905 |
$0 |
$134,626 |
Opportunity
Fund |
$2,203,176 |
$208,540 |
$0 |
$1,994,636 |
Fiscal
year ended December 31, 2021 |
|
|
| |
Capital
Appreciation Fund |
$280,368 |
$147,451 |
$0 |
$132,917 |
Opportunity
Fund |
$2,279,223 |
$202,416 |
$0 |
$2,076,807 |
Fund
Expenses
In
addition to the fees payable to the Investment Manager, each Fund pays its (i)
operating expenses, including fees of its service providers, expenses of
preparing prospectuses, proxy solicitation material (if any) and reports to
shareholders, costs of custodial services and registering its shares under
federal and state securities laws, pricing and insurance expenses, brokerage
costs, interest charges, taxes and organization expenses and (ii) other
expenses, including audit and legal expenses.
The
Expense Cap will remain in effect until at least September 30, 2025,
and may only be terminated or revised by the Board. The Investment Manager is
permitted to recoup fee waivers and/or expense payments made in the prior three
fiscal years from the date the fees were waived and/or Fund expenses were paid.
This reimbursement may be requested by the Investment Manager if the aggregate
amount actually paid by each Fund toward operating expenses for such fiscal year
(taking into account the recoupment) does not exceed the Expense Cap.
PORTFOLIO
MANAGERS
The
Capital Appreciation Fund and the Opportunity Fund are managed by a team
comprised of Kevin R. O’Brien, Jason A. Kish and Steven R. Labbe.
Other
Client Accounts
As
of December 31, 2023, the Portfolio Managers were responsible for the day-to-day
management of certain other client accounts, as follows:
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| Registered
Investment Companies |
| Other
Pooled Investment Vehicles |
| Other
Accounts |
Portfolio
Manager |
Number
of Accounts |
Total
Assets |
| Number
of Accounts |
Total
Assets |
| Number
of Accounts |
Total
Assets |
Kevin
R. O’Brien |
1 |
$161
million |
| 4* |
$329
million |
| 2
|
$94
million |
Jason
A. Kish |
1 |
$161
million |
| 4* |
$329
million |
| 2 |
$94
million |
Steven
R. Labbe |
1 |
$161
million |
| 4* |
$329
million |
| 2 |
$94
million |
* 3
of the 4 accounts listed above totaling $319 million are subject to a
performance-based advisory fee.
The
Investment Manager and its affiliates manage other institutional client
accounts, including private pooled investment funds (collectively, “Other Client
Accounts”).
The
portfolio managers that comprise each portfolio management team are responsible
for managing other accounts, including proprietary accounts, separate accounts
and other pooled investment vehicles. They manage separate accounts or other
pooled investment vehicles which may have materially higher or different fee
arrangements than the Funds and may also be subject to performance-based
fees.
The
Investment Manager may give advice and take action with respect to any of the
Other Client Accounts it manages, or for its own account, that may differ from
action taken by the Investment Manager on behalf of a Fund. Similarly, with
respect to the Funds, the Investment Manager is not obligated to recommend, buy
or sell, or to refrain from recommending, buying or selling any security that
the Investment Manager and access persons, as defined by applicable federal
securities laws, may buy or sell for its or their own account or for Other
Client Accounts. The Investment Manager is not obligated to refrain from
investing in securities held by a Fund or Other Client Accounts it
manages.
The
Company and the Investment Manager have each adopted a Rule 17j-1 Code of
Ethics, which provides certain requirements for personal securities transactions
engaged in by employees who are designated as access persons. The personal
securities transactions of access persons of the Funds and the Investment
Manager will be governed by the Rule 17j-1 Code of Ethics.
The
Investment Manager and its affiliates pay its investment professionals out of
its total revenues and other resources, including the advisory fee earned with
respect to the Funds.
Compensation
The
compensation structure of the Investment Manager and its affiliates is designed
to attract and retain high caliber investment professionals necessary to deliver
high quality investment management services to its clients. The compensation of
each of the portfolio managers includes a fixed base salary and incentive
components. It is expected that the portfolio managers will receive an incentive
payment based on the revenues earned by the Investment Manager and its
affiliates from the Funds and from Other Client Accounts. It is expected that
the incentive compensation component with respect to all portfolios managed by
the portfolio managers can, and typically will, represent a significant portion
of each portfolio manager’s overall compensation, and can vary significantly
from year to year.
Ownership
of Fund Shares
As
of December 31, 2023, the portfolio managers owned shares of the Funds in the
following dollar ranges, as indicated below:
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Amount
Invested Key |
| |
A. |
$1
- $10,000 |
B. |
$10,001
- $50,000 |
C. |
$50,001
- $100,000 |
D. |
$100,001
- $500,000 |
E. |
$500,001
- $1,000,000 |
F. |
Over
$1,000,000 |
|
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|
|
|
| |
Portfolio
Managers |
Capital
Appreciation Fund |
Opportunity
Fund |
Kevin
R. O’Brien |
F |
F |
Jason
A. Kish |
E |
E |
Steven
R. Labbe |
D |
D |
As
of December 31, 2023, the Investment Manager beneficially owns 7,031 shares of
the Capital Appreciation Fund and 8,017 shares of the Opportunity Fund, which
are reflected in the figures above.
CONFLICTS
As
an investment adviser and fiduciary, the Investment Manager owes its clients a
duty of loyalty. In recognition of the fact that conflicts of interest are
inherent in the investment management business, the Investment Manager has
adopted policies and procedures reasonably designed to identify and manage the
effects of actual or potential conflicts of interest in the areas of employee
personal
trading,
managing multiple accounts for multiple clients and allocation of investment
opportunities. All employees of the Investment Manager and its affiliates are
subject to these policies.
The
Investment Manager has adopted a Code of Ethics that is designed to detect and
prevent conflicts of interest when personnel own, buy or sell securities which
may be owned, bought or sold for clients. Personal securities transactions may
raise a potential conflict of interest when an employee owns or trades in a
security that is owned or considered for purchase or sale by a client, or
recommended for purchase or sale by a client. The Investment Manager’s personnel
are not permitted to engage in transactions for their personal accounts in any
security to be purchased or sold or considered for purchase or sale for a client
until a specified number of days after the completion of the client transaction,
except that this prohibition is not applicable to securities that were
completely sold from a client account. Subject to reporting requirements,
preclearance and other limitations in the Code of Ethics, the Investment Manager
permits its employees to engage in personal securities transactions in other
securities and to acquire shares of the Funds. The Investment Manager’s Code of
Ethics requires disclosure of all personal accounts and reporting of all
securities transactions.
The
portfolio managers manage multiple portfolios for multiple clients. These
accounts may include mutual funds, separate accounts and private pooled
investment vehicles (commonly referred to as “hedge funds”). Each portfolio
manager may have responsibility for managing the investments of multiple
accounts with a common investment strategy or several investment styles.
Accordingly, client portfolios may have investment objectives, strategies, time
horizons, tax considerations and risk profiles that differ from those of the
Funds. The portfolio managers make investment decisions for each Fund based on
the Fund’s investment objective, policies, practices, cash flows, tax and other
relevant investment considerations. Consequently, the portfolio managers may
purchase or sell securities for one client portfolio and not another client
portfolio, and the performance of securities purchased for one portfolio may
vary from the performance of securities purchased for other portfolios. In
addition, a particular security may be bought for one or more client portfolios
when one or more other client portfolios are opening a short position. The
portfolio managers may place transactions on behalf of other clients or a Fund
that are directly or indirectly contrary to investment decisions made on behalf
of the other Fund, which has the potential to adversely impact such Fund,
depending on market conditions. In addition, some of these Other Client Account
structures have fee structures, such as performance based fees, that differ (and
may be lower or higher than) the Funds. Accordingly, conflicts of interest may
arise when the Investment Manager has a particular financial incentive, such as
a performance-based fee, relating to an account.
The
Investment Manager has adopted and implemented policies and procedures intended
to address conflicts of interest relating to the management of multiple accounts
and the allocation of investment opportunities. The Investment Manager reviews
investment decisions for the purpose of ensuring that all accounts with
substantially similar investment objectives are treated equitably. The
performance of similarly managed accounts is also regularly compared to
determine whether there are any unexplained significant discrepancies. In
addition, the Investment Manager’s allocation procedures specify the factors
that are taken into account in making allocation decisions and require that, to
the extent that clients that participate in an aggregated order with the same
broker-dealer will participate at the average share price, and that the
transaction costs are shared pro rata based on each client’s participation in
the transaction. Finally, the Investment Manager’s procedures also require
objective allocation for limited opportunities (such as initial public offerings
and private placements) to ensure fair and equitable allocation among accounts.
These areas are monitored by the Investment Manager’s Chief Compliance
Officer.
DISTRIBUTOR
Pursuant
to a distribution agreement (the “Distribution Agreement”), Quasar Distributors,
LLC, Three Canal Plaza, Suite 100, Portland, Maine 04101, serves as the
principal underwriter and national distributor for the shares of each of the
Funds. The Distribution Agreement continues in effect for successive one-year
periods, provided such continuance is specifically approved at least annually by
the Board, including a majority of the Independent Directors, or vote of a
majority of outstanding shares of the Company. The offering of the Funds’ shares
is continuous. The Distribution Agreement provides that the Distributor, as
agent in connection with the distribution of the Fund shares, will use its best
efforts to distribute the Funds’ shares. The Distributor is a Delaware limited
liability company.
The
Administrator, Fund Accountant, Transfer Agent and Custodian, as defined in this
SAI, are affiliated entities under the common control of U.S.
Bancorp.
Distribution
and Service Plan
In
accordance with Rule 12b-1 under the 1940 Act, each Fund has adopted a
distribution plan (the “Plan”), which provides for the reimbursement by the Fund
of distribution expenses incurred by the Distributor on behalf of the Fund at an
annual rate of up to 0.25% of the average daily net assets of the
Fund.
The
Plan provides that the Distributor may, in accordance with the terms of the
Plan, be reimbursed for expenses it incurs in connection with distribution and
other services described in the Plan on behalf of the Fund. Services for which
the Distributor may be reimbursed by the Fund include: (i) any sales, marketing
and other activities primarily intended to result in the sale of shares of the
Funds, (ii) reviewing the activity in Funds’ accounts; (iii) providing training
and supervision of the Company’s personnel; (iv) maintaining and distributing
current copies of prospectuses and shareholder reports; (v) advertising the
availability of its services and products; (vi) providing assistance and review
in designing materials to send to customers and potential customers and
developing methods of making such materials accessible to customers and
potential customers; (vii) responding to customers’ and potential customers’
questions about the Funds; and (viii) providing ongoing account services to
shareholders (including establishing and maintaining shareholder accounts,
answering shareholder inquiries, and providing other personal services to
shareholders). Expenses for such activities may include the incremental costs of
printing (excluding typesetting) and distributing prospectuses, statements of
additional information, annual reports and other periodic reports for use in
connection with the offering or sale of shares of the Funds to any prospective
investors; and the costs of preparing, printing and distributing sales
literature and advertising materials used by the Distributor or others in
connection with the offering of shares of the Funds for sale.
The
Plan requires the Funds and the Distributor to prepare and submit to the Board,
at least quarterly, and the Board to review, written reports setting forth all
amounts expended under the Plan and identifying the activities for which those
expenditures were made.
The
Plan provides that it shall continue in effect provided it is approved at least
annually by the Board, including a majority of the Independent Board Members who
have no direct or indirect financial interest in the operation of the Plan or
related agreements (“Qualified Directors”). The Plan further provides that it
may not be amended to materially increase the costs, which the Funds bear for
distribution pursuant to the Plan without shareholder approval and that other
material amendments of the Plan must be approved by the Board and a majority of
the Qualified Directors. The Plan may be terminated at any time by a majority of
the Qualified Directors or by shareholders of the Funds.
The
following tables show the dollar amounts by category allocated to the Funds for
distribution related expenses:
Capital
Appreciation Fund
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|
|
|
| |
Actual
Rule 12b-1 Expenditures Paid by the Fund During the Fiscal Year Ended
December 31, 2023 |
| |
| Total
Dollars Allocated |
Advertising
/ Marketing |
$1,305 |
Printing
/ Postage |
$0 |
Payment
to Distributor |
$4,158 |
Payment
to Dealers |
$3,832 |
Compensation
to Sales Personnel |
$0 |
Interest,
Carrying, or Other Financial Charges |
$0 |
Other |
$0 |
Total |
$9,295 |
Opportunity
Fund
|
|
|
|
| |
Actual
Rule 12b-1 Expenditures
Paid
by the Fund During the Fiscal Year Ended December 31,
2023 |
| |
| Total
Dollars Allocated |
Advertising
/ Marketing |
$10,093 |
Printing
/ Postage |
$0 |
Payment
to Distributor |
$31,497 |
Payment
to Dealers |
$151,673 |
Compensation
to Sales Personnel |
$0 |
Interest,
Carrying, or Other Financial Charges |
$0 |
Other |
$0 |
Total |
$193,263 |
CUSTODIAN
U.S.
Bank N.A. (the “Custodian”), 1555 N. Rivercenter Drive, Suite 302, Milwaukee,
Wisconsin, 53212, is custodian for the securities and cash of each Fund. Under
the Custody Agreement, the Custodian holds the Funds’ portfolio securities in
safekeeping and keeps all necessary records and documents relating to its
duties. The Custodian is compensated with an asset-based fee plus transaction
fees and is reimbursed for out-of-pocket expenses.
FUND
ACCOUNTANT AND TRANSFER AGENT
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services”), located at 615 E. Michigan Street, Milwaukee, WI 53202,
serves as fund accountant (the “Fund Accountant”) to the Funds pursuant to a
Fund Accounting Servicing Agreement between the Company and Fund Services. U.S.
Bancorp Fund Services, LLC serves as transfer agent (the “Transfer Agent”) to
the Funds pursuant to a Transfer Agent Servicing Agreement between the Company
and U.S. Bancorp Fund Services, LLC. Under the Fund Accounting Servicing
Agreement, Fund Services will provide portfolio accounting services, expense
accrual and payment services, fund valuation and financial reporting services,
tax accounting services and compliance control services. Fund Services will
receive a fund accounting fee.
Under
the Transfer Agent Servicing Agreement, U.S. Bancorp Fund Services, LLC will
provide all of the customary services of a transfer agent and dividend
disbursing agent including, but not limited to: (1) receiving and processing
orders to purchase or redeem shares; (2) mailing shareholder reports and
prospectuses to current shareholders; and (3) providing blue sky services to
monitor the number of Fund shares sold in each state. U.S. Bancorp Fund
Services, LLC will receive a transfer agent fee.
ADMINISTRATOR
Fund
Services serves as Fund Administrator (the “Administrator”) pursuant to a Fund
Administration Servicing Agreement among the Company, the Investment Manager
(with respect to the compensation section only), and Fund Services. Fund
Services provides the following services under the Fund Administration Servicing
Agreement. Fund services (i) facilitates general Fund management; (ii) monitors
Fund compliance with federal and state regulations; (iii) supervises the
maintenance of the Funds’ general ledger and prepares the Funds’ quarterly
financial statements; and (iv) prepares other specified financial and tax
reports and information.
The
table below shows the amount of administration fees paid by the Funds to Fund
Services for the fiscal years shown.
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| |
Administration
Fees Paid During Fiscal Periods Ended December 31, |
| 2023 |
2022 |
2021 |
Capital
Appreciation Fund |
$45,220 |
$36,284 |
$51,657 |
|
|
| |
Opportunity
Fund |
$235,210 |
$220,867 |
$236,528 |
|
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| |
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Ernst
& Young, LLP, 700 Nicollet Mall, Suite 500, Minneapolis, MN 55402, is the
Company’s independent registered public accounting firm. The independent
registered public accounting firm has audited the financial statements included
in the Annual Report.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
The
Investment Manager selects brokers and dealers to execute each Fund’s portfolio
transactions in accordance with criteria set forth in the Advisory Agreement and
any directions that the Board may give.
When
placing a portfolio transaction, the Investment Manager seeks to obtain “best
execution” ‑ the best combination of high quality transaction execution
services, taking into account the services and products to be provided by the
broker or dealer, and low relative commission rates with the view of maximizing
value for the Fund and the Investment Manager’s other clients. For most
transactions in equity securities, the amount of commission paid is negotiated
between the Investment Manager and the broker executing the transaction. The
determination and evaluation of the reasonableness of the brokerage commissions
paid are based to a large degree on the professional opinions of the investment
personnel of the Investment Manager responsible for placement and review of the
transactions. These opinions are based on the experience of these individuals in
the securities industry and information available to them about the level of
commissions being paid by other institutional investors. The Investment Manager
may also place orders to buy and sell equity securities on a principal rather
than agency basis if the Investment Manager believes that trading on a principal
basis will provide best execution. Purchases of portfolio securities from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include a spread between the bid
and ask price.
The
Investment Manager may cause a Fund to pay certain brokers’ commissions that are
higher than those another broker may charge, if the Investment Manager
determines in good faith that the amount paid is reasonable in relation to the
value of the brokerage and research services it receives. This may be viewed in
terms of either the particular transaction or the Investment Manager’s overall
responsibilities to client accounts over which it exercises investment
discretion. The brokerage commissions that are used to acquire services other
than brokerage are known as “soft dollars.” Research provided can be either
proprietary (created and provided by the broker-dealer, including tangible
research products as well as access to analysts and traders) or third party
(created by a third party but provided by the broker-dealer). To the extent
permitted by applicable law, the Investment Manager may use soft dollars to
acquire both proprietary and third party research.
The
research services that brokers may provide to the Investment Manager include,
among others, supplying information about particular companies, markets,
countries, or local, regional, national or transnational economies, statistical
data, quotations and other securities pricing information, access to portfolio
company management, and other information that provides lawful and appropriate
assistance to the Investment Manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the Fund. They
must, however, be of value to the Investment Manager in carrying out its overall
responsibilities to its clients.
It
is not possible to place an accurate dollar value on the special execution or on
the research services the Investment Manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to obtain
additional research services allows the Investment Manager to supplement its own
research and analysis activities and to receive the views and information of
individuals and research staffs from many securities firms. It is not
anticipated that the receipt of these products and services will reduce the
Investment Manager’s research activities in providing investment advice to the
Funds.
As
long as it is lawful and appropriate to do so, the Investment Manager and its
affiliates may use this research and data in their investment advisory
capacities with other clients. Each Fund may obtain other services from brokers
in connection with the Fund’s investment transactions with such brokers. Such
services will be limited to services that would otherwise be a Fund
expense.
If
purchases or sales of securities of a Fund and one or more other clients managed
by the Investment Manager are considered at or about the same time, transactions
in these securities will be allocated among the several clients in a manner
deemed equitable to all by the Investment Manager, taking into account the
respective sizes of the accounts and the amount of securities to be purchased or
sold. In some cases this procedure could have a detrimental effect on the price
or volume of the security so far as the Fund is concerned. In other cases it is
possible that the ability to participate in volume transactions may improve
execution and reduce transaction costs to the Funds.
Because
each Fund may, from time to time and subject to applicable law, invest in
broker-dealers, it is possible that a Fund will own more than 5% of the voting
securities of one or more broker-dealers through whom the Fund placed portfolio
brokerage transactions. In such circumstances, the broker-dealer would be
considered an affiliated person of such Fund. To the extent a Fund places
brokerage transactions through such a broker-dealer at a time when the
broker-dealer is considered to be an affiliate of the Fund, the Fund will be
required to adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the Fund to adhere to procedures
adopted by the board to ensure that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary brokerage
commissions for similar transactions.
The
following tables set forth the brokerage commissions that were paid by the Funds
during the fiscal years ended December 31, 2023, December 31, 2022 and December
31, 2021. There were no brokerage commissions paid to affiliated broker-dealers
by the Funds for the fiscal years ended December 31, 2023, December 31, 2022 and
December 31, 2021.
Capital
Appreciation Fund
|
|
|
|
|
|
|
| |
Aggregate
Brokerage Commissions Paid During Fiscal Years Ended December
31, |
2023 |
2022 |
2021 |
$13,528 |
$11,244 |
$14,149 |
Opportunity
Fund
|
|
|
|
|
|
|
| |
Aggregate
Brokerage Commissions Paid During Fiscal Years Ended December
31, |
2023 |
2022 |
2021 |
$124,114 |
$165,691 |
$133,475 |
The
Opportunity Fund and the Capital Appreciation Fund did not own securities issued
by any of the ten broker-dealers or the parent companies of such broker-dealers
with whom the Funds transacted the most business during the fiscal year ended
December 31, 2023.
TAXATION
OF THE FUNDS
Qualification
as a Regulated Investment Company
Each
Fund has elected to be treated as a regulated investment company under
Subchapter M of the Code. A regulated investment company qualifying under
Subchapter M of the Code is required to distribute to its shareholders at least
90% of its investment company taxable income (including the excess of net
short-term capital gain over net long-term capital losses) and generally is not
subject to federal income tax to the extent that it distributes annually 100% of
its investment company taxable income and net capital gain (that is, the excess
of net long-term capital gain over net short-term capital loss) in the manner
required under the Code. Each Fund intends to distribute at least annually all
of its investment company taxable income and net capital gain and therefore does
not expect to pay federal income tax, although in certain circumstances, a Fund
may determine that it is in the interest of shareholders to distribute less than
that amount.
To
be treated as a regulated investment company under Subchapter M of the Code,
each Fund must also (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to the business of investing in such securities
or currencies, or net income derived from interests in certain qualified
publicly traded partnerships, and (b) diversify its holdings so that, at the end
of each fiscal quarter, (i) at least 50% of the market value of each Fund’s
assets is represented by cash, U.S. government securities and securities of
other regulated investment companies, and other securities (for purposes of this
calculation, generally limited in respect of any one issuer, to an amount not
greater than 5% of the market value of the Fund’s assets and 10% of the
outstanding voting securities of such issuer) and (ii) not more than 25% of the
value of its assets is invested in (A) the securities of (other than U.S.
government securities or the securities of other regulated investment companies)
any one issuer or two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses, or (B) the
securities of one or more qualified publicly traded partnerships.
If
for any taxable year a Fund does not qualify as a regulated investment company,
all of its taxable income will be subject to tax at regular corporate rates
without any deduction for dividends paid to shareholders, and the dividends will
be taxable to the shareholders as ordinary income to the extent of the Fund’s
current and accumulated earnings and profits. Failure to qualify as a regulated
investment company would thus have a negative impact on a Fund’s income and
performance.
For
purposes of calculating capital gain distributions, each Fund offsets any prior
taxable year’s capital loss carryovers against the current taxable year’s
realized capital gains, if any, to the extent allowable by the Code;
accordingly, no capital gain distributions will be made by a Fund for a taxable
year until it has realized gains in that year in excess of any such loss
carryover. On December 22, 2010, the Regulated Investment Company Modernization
Act of 2010 (the “RIC Modernization Act”) was signed into law. Pursuant to the
RIC Modernization Act, capital losses incurred after December 31, 2010 may now
be carried forward indefinitely, and the loss carryover retains the character of
the original loss (i.e., as short-term or long-term). Under pre-enactment laws,
capital losses could be carried forward for eight years, and carried forward as
short-term capital loss, irrespective of the character of the original loss. As
of December 31, 2023, the Capital Appreciation Fund had a short-term capital
loss carryover of $1,305,155.
Excise
Tax
Under
the Code, a nondeductible excise tax of 4% is imposed on the excess of a
regulated investment company’s “required distribution” for the calendar year
ending within the regulated investment company’s taxable year over the
“distributed amount” for such calendar year. The term “required distribution”
means the sum of (a) 98% of ordinary income (generally net investment income)
for the calendar year, (b) 98.2% of capital gain (both long-term and short-term)
for the one-year period ending on October 31 of the calendar year (or December
31 if elected by a Fund) and (c) the sum of any untaxed, undistributed net
investment income and net capital gains of the regulated investment company for
prior periods. The term “distributed amount” generally means the sum of (a)
amounts actually distributed by a Fund from its current year’s ordinary income
and capital gain net income and (b) any amount on which a Fund pays income tax
for the taxable year ending in the calendar year. Although each Fund intends to
distribute its net
investment
income and net capital gains so as to avoid excise tax liability, a Fund may
determine that it is in the interest of shareholders to distribute a lesser
amount.
Certain
Tax Rules Applicable to the Funds’ Transactions
Certain
listed options, regulated futures contracts, and forward foreign currency
contracts are considered “Section 1256 contracts” for federal income tax
purposes. Section 1256 contracts held by a Fund at the end of each taxable year
will be “marked to market” and treated for federal income tax purposes as though
sold for fair market value on the last business day of such taxable year. Gain
or loss realized by a Fund on Section 1256 contracts (other than certain foreign
currency contracts) generally will be considered 60% long-term capital gain or
loss and 40% short-term capital gain or loss.
Under
the Code, gains or losses attributable to fluctuations in exchange rates which
occur between the time a Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses from the
disposition of foreign currencies, from the disposition of debt securities
denominated in a foreign currency, or from the disposition of a forward foreign
currency contract which are attributable to fluctuations in the value of the
foreign currency between the date of acquisition of the asset and the date of
disposition also are treated as ordinary income or loss. These gains or losses,
referred to under the Code as “Section 988” gains or losses, increase or
decrease the amount of a Fund’s investment company taxable income available to
be distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of such Fund’s net capital gain.
Sale
or Redemption of Shares
In
general, you will recognize a gain or loss on the sale or redemption of shares
of a Fund in an amount equal to the difference between the proceeds of the sale
or redemption and your adjusted tax basis in the Fund shares. All or a portion
of any loss so recognized may be disallowed if you purchase (for example, by
reinvesting dividends) other shares of the Fund within 30 days before or after
the sale or redemption (a so-called “wash sale”). If disallowed, the loss will
be reflected in an upward adjustment to the basis of the shares acquired. In
general, any gain or loss arising from the sale or redemption of shares of a
Fund will be capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. Any capital loss arising from the
sale or redemption of shares held for six months or less, however, is treated as
a long-term capital loss to the extent of the amount of distributions of net
capital gain received on such shares. In determining the holding period of such
shares for this purpose, any period during which your risk of loss is offset by
means of options, short sales or similar transactions is not counted. Capital
losses in any year are deductible only to the extent of capital gains plus, in
the case of a noncorporate taxpayer, $3,000 of ordinary income.
CAPITAL
STOCK
The
Company has authorized 1,000,000,000 shares of $.001 par value common stock. All
shares are of the same class, with equal rights and privileges. Each share is
entitled to one vote and participates equally in dividends and distributions
declared. The shares are fully paid and non-assessable when issued, are
transferable, and have no preemptive, conversion, or exchange
rights.
The
Company has non-cumulative voting rights. For Board member elections, this gives
holders of more than 50% of the shares the ability to elect all of the members
of the Board. If this happens, holders of the remaining shares entitled to vote
will not be able to elect anyone to the Board.
The
Funds do not intend to hold annual shareholder meetings and are not required to.
The Funds may hold special meetings, however, for matters requiring shareholder
approval. A special meeting also may be called by the Board and certain officers
in their discretion.
CONTROL
PERSONS, PRINCIPAL HOLDERS, AND MANAGEMENT OWNERSHIP
Management
Ownership. As
of March 31, 2024, the Funds’ Officers and Board members, as a group, owned of
record and beneficially, directly or indirectly, 26.08% of the outstanding
shares of the Capital Appreciation Fund and 8.69% of the outstanding shares of
the Opportunity Fund. The Officers and Board members may own shares in other
pooled investment vehicles or management accounts managed by Prospector Partners
Asset Management LLC or its affiliates.
Control
Persons and Principal Holders. A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding shares of a Fund. A control person is one who owns,
beneficially or through one or more controlled companies, more than 25% of the
voting securities of a company or acknowledges the existence of such control.
Shareholders with a controlling interest could affect the outcome of voting or
the direction of management of the Funds.
As
of March 31, 2024, the following shareholders were considered to be either a
control person or a principal shareholder of the Funds:
Capital
Appreciation Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
Parent Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
Gillespie
Family 2000, LLC c/o Cravath Swaine & Moore 825 Eighth
Avenue New York, NY 10019-7416
|
N/A |
N/A |
29.60% |
Beneficial |
Richard
P. Howard Guilford, CT 06437-2005
|
N/A |
N/A |
13.16% |
Beneficial |
SLW
International LLC PO Box 550498 Houston, TX
77255-0498
|
N/A |
N/A |
10.00% |
Record |
John
D Gillespie 2012 Descendants Trust PO Box 1752 Wilson, WY
83014-1752
|
N/A |
N/A |
7.04% |
Beneficial |
Charles
Schwab & CO INC Special Custody A/C FBO Customers Attn Mutual
Funds 211 Main St San Francisco, CA 94105-1901 |
N/A |
N/A |
6.75% |
Record |
Juniper
Trust For the exclusive benefit of its customers Kemah, TX
77565-2537
|
N/A |
N/A |
6.41% |
Record |
Opportunity
Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
and Address |
Parent Company |
Jurisdiction |
%
Ownership |
Type
of Ownership |
National
Financial Services, LLC For the exclusive benefit of its
customers Attn: Mutual Funds Dept. 4th FL 499 Washington
Blvd Jersey City, NJ 07310-1995
|
N/A |
N/A |
37.08% |
Record |
Charles
Schwab & CO INC Special Custody A/C FBO Customers Attn: Mutual
Funds 211 Main Street San Francisco, CA 94105-1901 |
N/A |
N/A |
17.71% |
Record |
Gillespie
Family 2000, LLC c/o Cravath Swaine & Moore 825 Eighth
Avenue New York, NY 10019-7416
|
N/A |
N/A |
14.45% |
Beneficial |
Attn:
Mutual Fund Administrator For the exclusive benefit of its customers
SEI Private Trust Company One Freedom Valley Drive Oaks, PA
19456-9989
|
N/A |
N/A |
6.27% |
Record |
Brown
Brothers Harriman & Co. CUST FBO BBH Private Banking Private
Client Omnibus Acct Attn: Mutual Fund Services 140 Broadway New
York, NY 10005-1108 |
N/A |
N/A |
6.09% |
Record |
BUYING
AND SELLING SHARES
For
investors outside the U.S., the offering of Fund shares may be limited in many
jurisdictions. An investor who wishes to buy shares of a Fund should determine,
or have a broker-dealer determine, the applicable laws and regulations of the
relevant jurisdiction. Investors are responsible for compliance with tax,
currency exchange or other regulations applicable to redemption and purchase
transactions in any jurisdiction to which they may be subject. Investors should
consult appropriate tax and legal advisors to obtain information on the rules
applicable to these transactions. The Funds may reject any order to buy shares
placed by an investor outside the U.S., in their discretion.
All
checks, drafts, wires and other payment mediums used to buy or sell shares of a
Fund must be denominated in U.S. dollars. The Company may, in its sole
discretion, either (a) reject any order to buy or sell shares denominated in any
other currency or (b) honor the transaction or make adjustments to your account
for the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank. We may deduct any applicable banking charges
imposed by the bank from your account.
If
you buy shares through the reinvestment of dividends, the shares will be
purchased at the NAV determined on the business day following the dividend
record date (sometimes known as the “ex-dividend date”). The processing date for
the reinvestment of dividends may vary and does not affect the amount or value
of the shares acquired.
Investment
by Asset Allocators
Each
Fund permits investment in the Funds by certain asset allocators (“Asset
Allocators”) who make investment decisions on behalf of underlying clients. The
Asset Allocators typically make asset allocation decisions across similarly
situated underlying accounts that are invested in the Funds. As a result of
adjustments in such asset allocation decisions, the Funds may experience
relatively large purchases and redemptions when the Asset Allocators implement
their asset allocation adjustment decisions. The Company, based on monitoring of
the trading activity of such Asset Allocator accounts, reserves the right to
treat such Asset Allocators as market timers. In such circumstances, the Company
may restrict or reject trading activity by Asset Allocators if, in the judgment
of the Investment Manager, such trading may interfere with the efficient
management of a Fund’s portfolio, may materially increase a Fund’s transaction
costs or taxes, or may otherwise be detrimental to the interests of a Fund and
its shareholders. None of the Company, the Funds, the Investment Manager or any
other affiliated party receives any compensation or other consideration in
return for permitting investments by Asset Allocators.
Other
Payments
From
time to time, the Investment Manager, at its expense, may provide additional
compensation to dealers which sell or arrange for the sale of shares of a Fund.
Such compensation may include financial assistance to dealers that enable the
Investment Manager to participate in and/or present at conferences or seminars,
sales or training programs for invited registered representatives and other
employees, client and investor events and other dealer-sponsored events. These
payments may vary depending upon the nature of the event.
Other
compensation may be offered to the extent not prohibited by state laws or any
self-regulatory agency, such as the Financial Industry Regulatory
Authority. The Investment Manager makes payments for events it deems
appropriate, subject to the Investment Manager’s guidelines and applicable
law.
You
can ask your dealer for information about any payments it receives from
Prospector Partners Asset Management and any services provided.
Redemptions
in Kind
In
the case of redemption requests, each Fund reserves the right to make payments
in whole or in part in securities or other assets of the Fund, in case of an
emergency, or if the payment of such a redemption in cash would be detrimental
to the existing shareholders of the Fund. In these circumstances, the securities
distributed would be valued at the price used to compute the Fund’s net assets
and you may incur brokerage fees in converting the securities to cash. The
Company does not intend to redeem illiquid securities in kind. If this happens,
however, you may not be able to recover your investment in a timely
manner.
The
Funds have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to
which the relevant Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder.
Share
Certificates
We
will credit your shares to your Fund account. We do not issue share
certificates. This eliminates the costly problem of replacing lost, stolen or
destroyed certificates.
General
Information
The
proceeds from distributions will be either paid in cash or reinvested in
additional shares at NAV. If you do not make an election as to the form in which
you wish to receive distributions, distribution proceeds will be reinvested in
additional shares at NAV.
Interest
or income earned on redemption checks sent to you during the time the checks
remain uncashed will be retained by U.S. Bancorp Fund Services, LLC. The Company
and the Funds will not be liable for any loss caused by your failure to cash
such checks. The Funds are not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In
most cases, if mail is returned as undeliverable we are required to take certain
steps to try to find you free of charge. If these attempts are unsuccessful,
however, we may deduct the costs of any additional efforts to find you from your
account. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for its location
services.
Sending
redemption proceeds by wire or electronic funds transfer (“ACH”) is a special
service that we make available whenever possible. By offering this service to
you, the Company is not bound to meet any redemption request in less than the
seven-day period prescribed by law. None of the Funds, the Company or any of
their respective agents shall be liable to you or any other person if, for any
reason, a redemption request by wire or ACH is not processed as described in the
Prospectus.
If
you buy or sell shares of a Fund through your securities dealer, the NAV next
calculated after your securities dealer receives your request and is received by
the Fund, will be used. If you sell shares through your securities dealer, it is
your dealer’s responsibility to transmit the order to the Fund in a timely
fashion. Your redemption proceeds will not earn interest between the time we
receive the order from your dealer and the time the Fund receives any required
documents. Any loss to you resulting from your dealer’s failure to transmit your
redemption order to the Fund in a timely fashion must be settled between you and
your securities dealer.
Certain
shareholder servicing agents may be authorized to accept your transaction
request. If you purchase or redeem shares of a Fund through one or more
financial intermediaries, the Fund will be deemed to have received such purchase
or redemption order when the financial intermediary, or its authorized designee,
receives the order.
For
institutional and bank trust accounts, there may be additional methods of buying
or selling Fund shares than those described in this SAI or in the Prospectus.
Institutional and bank trust accounts include accounts opened by or in the name
of a person (includes a legal entity or an individual) that has signed an
Institutional Account Application or Bank Trust Account Application accepted by
Prospector Partners Asset Management or entered into a selling agreement and/or
servicing agreement with Prospector Partners Asset Management or U.S. Bancorp
Fund Services, LLC. For example, the Company permits the owner of an
institutional account to make a same day wire purchase if a good order purchase
request is received (a) before the close of the New York Stock Exchange (“NYSE”)
or (b) through the National Securities Clearing Corporation’s automated system
for processing purchase orders, even though funds are delivered by wire after
the close of the NYSE. If funds to be wired are not received as scheduled, the
purchase order may be cancelled or reversed and the institutional account owner
could be liable for any losses or fees the Company, Prospector Partners Asset
Management and/or U.S. Bancorp Fund Services, LLC may incur.
In
the event of disputes involving conflicting claims of ownership or authority to
control your shares, the Company has the right (but has no obligation) to: (i)
restrict the shares and require the written agreement of all persons deemed by
the Company to have a potential interest in the shares before executing
instructions regarding the shares; or (ii) interplead disputed shares or the
proceeds from the court-ordered sale thereof with a court of competent
jurisdiction.
Should
the Company be required to defend against joint or multiple shareholders in any
action relating to an ownership dispute, you expressly grant the Company the
right to obtain reimbursement for costs and expenses including, but not limited
to, attorneys’ fees and court costs, by unilaterally redeeming shares from your
account.
The
Company may be required (i) pursuant to a validly issued levy, to turn your
shares over to a levying officer who may, in turn, sell your shares at a public
sale; or (ii) pursuant to a final order of forfeiture to sell your shares and
remit the proceeds to the U.S. or state government as directed.
Certain
clients of financial advisors whose firms have a selling agreement with
Prospector Partners Asset Management may be eligible for the Valued Investor
Program which offers enhanced service and transaction capabilities. Please call
Shareholder Services toll free at (877) 734-7862 for additional information on
this program.
The
Distributor may be entitled to payments from the Fund under the Plan, as
discussed above. The Distributor receives no other compensation from the Fund
for acting as underwriter.
PRICING
OF SHARES
When
you buy shares, you pay the NAV per share. The number of Fund shares you will be
issued will equal the amount invested divided by the applicable offering price
for those shares, calculated to three decimal places using standard rounding
criteria.
When
you sell shares, you receive the NAV per share minus any applicable redemption
fees.
The
NAV of a Fund is determined by deducting the Fund’s liabilities from the total
assets of the portfolio. The NAV per share is determined by dividing the total
NAV of the Fund by the applicable number of shares outstanding.
NAV
per share = Net Assets / Shares Outstanding
Each
Fund calculates its NAV per share after the close of trading on the NYSE
(normally 4:00 p.m., Eastern Time) each business day the NYSE is open. The Funds
do not calculate the NAV on days the NYSE is closed for trading, which include
New Year’s Day, Martin Luther King Jr. Day, President’s Day, Good Friday,
Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When
determining its NAV, each Fund values cash and receivables at their realizable
amounts, and records interest as accrued and dividends on the ex-dividend date.
Each Fund may utilize independent pricing services to assist in determining a
current market value for each security. If market quotations are readily
available for portfolio securities listed on a securities exchange or on the
NASDAQ National Market System, each Fund values those securities at the last
quoted sale price or the official closing price of the day, respectively, or, if
there is no reported sale, at the last quoted bid price. Each Fund generally
values OTC portfolio securities at the last quoted sales price (if adequate
trading volume is present) or, otherwise, at the last bid price. If a security
is traded or dealt in on more than one exchange, or on one or more exchanges and
in the OTC market, quotations from the market in which the security is primarily
traded shall be used.
Requests
to buy and sell shares are processed at the NAV per share next calculated after
we receive your request in proper form.
Generally,
trading in corporate bonds, U.S. government securities and money market
instruments is substantially completed each day at various times before the
close of the NYSE. The value of these securities used in computing the NAV is
determined as of such times. Occasionally, events affecting the values of these
securities may occur between the times at which they are determined and the
close of the NYSE that will not be reflected in the computation of the NAV. Each
Fund may rely on third party pricing vendors to monitor for events materially
affecting the value of these securities during this period. If an event occurs,
the third-party pricing vendors will provide revised values to the relevant
Fund.
Any
securities or other assets for which market quotations are not readily available
are valued at fair value as determined in good faith by the Funds’ valuation
designee pursuant to procedures established by the Investment Manager. The
Funds’ Board has designated the Investment Manager as its valuation designee
under Rule 2a-5 of the 1940 Act, subject to its oversight.
FINANCIAL
STATEMENTS
The
Annual
Report
is a separate document supplied with this SAI. The financial statements,
accompanying notes, and the report of the independent registered public
accounting firm appearing in the Annual
Report
are incorporated by reference into this SAI.
APPENDIX
A – PROXY VOTING PROCEDURES
PROSPECTOR
FUNDS, INC.
Proxy
Voting Policies and Procedures
September
7, 2007
SECTION
1. Purpose
Shareholders
of the various series (“Series”) of Prospector Funds, Inc. (the “Fund”) expect
the Fund to vote proxies received from issuers whose voting securities are held
by a Series. The Fund exercises its voting responsibilities as a fiduciary, with
the goal of maximizing the value of the Fund’s and its shareholders’
investments.
This
document describes the Policies and Procedures for Voting Proxies (“Policies”)
received from issuers whose voting securities are held by each
Series.
SECTION
2. Responsibilities
(A)Adviser.
Pursuant to the investment advisory agreement between the Fund and the
investment adviser providing advisory services to the Series (the “Adviser”),
the Fund has delegated the authority to vote proxies received by each Series
regarding securities contained in its portfolio to the Adviser. Accordingly, the
Fund incorporates herein and makes a part hereof, the Adviser’s proxy voting
policies and procedures (attached hereto as Appendix A). These Policies are to
be implemented by the Adviser for each Series for which it provides advisory
services. To the extent that these Policies do not cover potential voting issues
with respect to proxies received by a Series, the Adviser shall act on behalf of
the applicable Series to promote the Series’ investment objectives, subject to
the provisions of these Policies.
The
Adviser shall periodically inform its employees (i) that they are under an
obligation to be aware of the potential for conflicts of interest on the part of
the Adviser with respect to voting proxies on behalf of the Series, both as a
result of the employee’s personal relationships and due to circumstances that
may arise during the conduct of the Adviser’s business, and (ii) that employees
should bring conflicts of interest of which they become aware to the attention
of the management of the Adviser.
The
Adviser shall be responsible for coordinating the delivery of proxies by the
Series’ custodian to the Adviser or to an agent of the Adviser selected by the
Adviser to vote proxies with respect to which the Adviser has such discretion (a
“Proxy Voting Service”).
(B)Proxy
Manager.
The Fund will appoint a proxy manager (the “Proxy Manager”), who shall be an
officer of the Fund. The Proxy Manager shall oversee compliance by the Adviser
and the Fund’s other service providers with these Policies. The Proxy Manager
will, from to time, periodically review the Policies and industry trends in
comparable proxy voting policies and procedures. The Proxy Manager may recommend
to the Board, as appropriate, revisions to update these Policies.
SECTION
3. Scope
These
Policies summarize the Fund’s positions on various issues of concern to
investors in issuers of publicly-traded voting securities, and give guidance
about how the Adviser should vote the Series’ shares on each issue raised in a
proxy statement. These Policies are designed to reflect the types of issues that
are typically presented in proxy statements for issuers in which a Series may
invest; they are not meant to cover every possible proxy voting issue that might
arise. Accordingly, the specific policies and procedures listed below are not
exhaustive and do not address all potential voting issues or the intricacies
that may surround specific issues in all cases. For that reason, there may be
instances in which votes may vary from these Policies.
SECTION
4. Policies and Procedures for Voting Proxies
(A)General
(1)Use
of Adviser Proxy Voting Guidelines or Proxy Voting Service.
If (A) the Adviser has proprietary proxy voting guidelines that it uses for its
clients and/or the Adviser uses a Proxy Voting Service and the Proxy Voting
Service has published guidelines for proxy voting; (B) the Company’s Board of
Directors (the “Board”) has been notified that the Adviser intends to use either
such Adviser or Proxy Voting Service proxy voting guidelines to vote an
applicable Series’ proxies and has approved such guidelines; and (C) the
Adviser’s and/or Proxy Voting Service’s Guidelines are filed as an exhibit to
the applicable Series’ Registration Statement (collectively considered “Adviser
Guidelines”), then the Adviser may vote, or may delegate to the Proxy Voting
Service the responsibility to vote, the Series’ proxies consistent with such
Adviser Guidelines.
(2)Independence.
The
Adviser will obtain an annual certification from the Proxy Voting Service that
it is independent from the Adviser. The Adviser shall also ensure that the Proxy
Voting Service does not have a conflict of interest with respect to any vote
cast for the Adviser on behalf of the Series.
(3)Absence
of Proxy Voting Service Guidelines.
In the absence of Adviser Guidelines, the Adviser shall vote the Series’ proxies
consistent with Sections B and C below.
(B)Routine
Matters
As
the quality and depth of management is a primary factor considered when
investing in an issuer, the recommendation of the issuer’s management on any
issue will be given substantial weight. The position of the issuer’s management
will not be supported in any situation where it is determined not to be in the
best interests of the Series’ shareholders.
(1)Election
of Directors.
Proxies should be voted for a management-proposed slate of directors unless
there is a contested election of directors or there are other compelling
corporate governance reasons for withholding votes for such directors.
Management proposals to limit director liability consistent with state laws and
director indemnification provisions should be supported because it is important
for companies to be able to attract qualified candidates.
(2)Appointment
of Auditors.
Management recommendations will generally
be
supported.
(3)Changes
in State of Incorporation or Capital Structure.
Management recommendations about reincorporation should be supported unless the
new jurisdiction in which the issuer is reincorporating has laws that would
materially dilute the rights of shareholders of the issuer. Proposals to
increase authorized common stock should be examined on a case-by-case basis. If
the new shares will be used to implement a poison pill or another form of
anti-takeover device, or if the issuance of new shares could excessively dilute
the value of outstanding shares upon issuance, then such proposals should be
evaluated to determine whether they are in the best interest of the Series’
shareholders.
(C)Non-Routine
Matters
(1)Corporate
Restructurings, Mergers and Acquisitions.
These proposals should be examined on a case-by-case basis.
(2)Proposals
Affecting Shareholder Rights.
Proposals that seek to limit shareholder rights, such as the creation of dual
classes of stock, generally should not be supported.
(3)Anti-takeover
Issues.
Measures that impede takeovers or entrench management will be evaluated on a
case-by-case basis taking into account the rights of shareholders and the
potential effect on the value of the company.
(4)Executive
Compensation.
Although management recommendations should be given substantial weight,
proposals relating to executive compensation plans, including stock option
plans, should be examined on a case-by-case basis to ensure that the long-term
interests of management and shareholders are properly aligned.
(5)Social
and Political Issues.
These types of proposals should generally not be supported if they are not
supported by management unless they would have a readily-determinable, positive
financial effect on shareholder value and would not be burdensome or impose
unnecessary or excessive costs on the issuer.
(D)Conflicts
of Interest
The
Adviser is responsible for maintaining procedures to identify conflicts of
interest. The Fund recognizes that under certain circumstances an Adviser may
have a conflict of interest in voting proxies on behalf of a Series advised by
the Adviser. A “conflict of interest” includes, for example, any circumstance
when the Series, the Adviser, the principal underwriter, or one or more of their
affiliates (including officers, directors and employees) knowingly does business
with, receives compensation from, or sits on the board of, a particular issuer
or closely affiliated entity, and, therefore, may appear to have a conflict of
interest between its own interests and the interests of
Fund
shareholders in how proxies of that issuer are voted.
If
the Adviser determines that it, or a Proxy Voting Service, has a conflict of
interest with respect to voting proxies on behalf of a Series, then the Adviser
shall contact the Chairman of the Board. In the event that the Chairman
determines that he has a conflict of interest, the Chairman shall submit the
matter for determination to another member of the Board who is not an
“interested person” of the Fund, as defined in the Investment Company Act of
1940, as amended. In making a determination, the Chairman will consider the best
interests of the Series’ shareholders and may consider the recommendations of
the Adviser or independent third parties that evaluate proxy proposals. The
Adviser will vote the proposal according the determination and maintain records
relating to this process.
(E)Abstention
The
Fund may abstain from voting proxies in certain circumstances. The Adviser or
the Proxy Manager may determine, for example, that abstaining from voting is
appropriate if voting may be unduly burdensome or expensive, or otherwise not in
the best economic interest of the Series’ shareholders, such as when foreign
proxy issuers impose unreasonable or expensive voting or holding requirements or
when the costs to the Series to effect a vote would be uneconomic relative to
the value of the Series’ investment in the issuer.
(F)Reporting
The
Series are required to file Form N-PX annually with the SEC which lists the
Series’ complete proxy voting record for the twelve month period ended June
30th.
This form is available on the SEC’s website or is available by calling the
Series’ toll-free number as listed on the Prospectus.
PROSPECTOR
PARTNERS ASSET MANAGEMENT, LLC
Proxy
Voting Policy and Procedures
Adopted
July 11, 2005
Revised:
October, 2015; November, 2020; August 2022
I.Statement
of 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.
Prospector Partners Asset Management, LLC (the “Advisor”) generally retains
proxy-voting authority with respect to securities purchased for its clients.
Under such circumstances, the Advisor votes proxies in the best interest of its
clients and in accordance with these policies and procedures.
II.Use
of Third-Party Proxy Voting Service
The
SEC has expressed its view that although the voting of proxies remains the duty
of a registered adviser, an adviser may contract with service providers to
perform certain research and recommendation functions with respect to proxy
voting so long as the adviser is comfortable that (i) the proxy voting service
is independent from the issuer companies on which it completes its proxy
research, and (ii) the Advisor maintains ongoing oversight of the delegated
proxy voting functions; and (iii) the Advisor conducts due diligence on how the
proxy voting service conducts its delegated functions.1
The
Advisor has entered into an agreement with Institutional Shareholder Services
(the “Proxy Voting Service”), an independent third party, for the Proxy Voting
Service to provide the Advisor with its research on proxies and to facilitate
the electronic voting of proxies.
The
Advisor has instructed the Proxy Voting Service that it is generally
not
to execute any ballot on behalf of the Advisor without first receiving specific
instruction from the Advisor, unless the Proxy Voting Service’s and company
management’s recommendation are the same. If no approval is received by Proxy
Voting Service by the voting deadline, the Proxy Voting Service will execute
ballots in accordance with its recommendation and will notify the Advisor
immediately that a vote has been executed on its behalf and the character of the
vote.
Periodic
Review of Proxy Voting Service’s Policies and Procedures and Continued Retention
of the Proxy Voting Service.
The Advisor shall review periodically the proxy voting policies, procedures and
methodologies, conflicts of interest and competency of the Proxy Voting Service.
The Advisor will also review the continued retention of the Proxy Voting
Service, including whether any relevant credible potential factual errors,
incompleteness or methodological weaknesses in the Proxy Voting Service’s
analysis that the Advisor is aware of materially affected the research and
recommendations used by the Advisor. In addition, the Advisor will also consider
the effectiveness of the Proxy Voting Service’s policies and procedures for
obtaining current and accurate information relevant to matters included in its
research and on which it makes voting recommendations.
III.Proxy
Voting Procedures
The
Advisor follows the Proxy Voting Service’s “United States Proxy Voting
Guidelines and Benchmark Policy Recommendations” which are consistent with the
Advisor’s proxy voting guidelines.
Proxies
relating to securities held in client accounts will be sent directly to the
Proxy Voting Service. If a proxy is received by the Advisor and not sent
directly to the Proxy Voting Service, the Compliance Officer will promptly
forward it to the Proxy Voting Service. In the event that (a) the Proxy Voting
Service is unable to complete/provide its research regarding a security on a
timely basis, (b) the Compliance Officer or the Proxy Voting Service determines
that the Proxy Voting Service has a conflict of interest with
1
See
Commission Guidance Regarding Proxy Voting Responsibilities of Investment
Advisers, Release Nos. IA-5325; IC-33605 (Aug. 21, 2019) and SEC Staff Legal
Bulletin No. 20, Proxy Voting: Proxy Voting Responsibilities of Investment
Advisers and Availability of Exemptions from the Proxy Rules for Proxy Advisory
Firms (June 30, 2014).
respect
to voting a proxy, or (c) the Advisor has made a determination that it is in the
best interests of the Advisor’s clients for the Advisor to vote the proxy, the
Advisor’s general proxy-voting guidelines (Section IV) are required to be
followed.
For
all proxies, the Compliance Officer or its designee, with the assistance of the
Proxy Voting Service will:
1.Keep
a record of each proxy received;
2.Provide
a report of companies for which proxies need to be voted to the Portfolio
Managers and Analysts on a weekly, monthly or periodic basis;
3.In
cases where the Proxy Voting Service’s and company management’s recommendation
are the same, the vote for all ballots in line with the Proxy Voting Service’s
recommendation will be automatically submitted without further approval by the
Advisor;
4.If
the Proxy Voting Service makes a recommendation contrary to company management’s
recommendation, the Proxy Voting Service research report will be provided to the
Portfolio Manager / Analyst to assist in determining how to vote. Absent
material conflicts (see Section VI), the Portfolio Manager / Analyst will
determine how to vote. If the recommended vote is against the Proxy Voting
Service recommendation, an explanation must be provided to enable the Chief
Compliance Officer to conclude that the vote is in the best interest of the
client(s); and
5.Perform
reconciliations to ensure that all ballots have been received for shares that
are owned as of the record date by Advisor’s clients for all
proxies.
IV.General
Voting Guidelines
To
the extent that the Advisor is voting a proxy itself and not utilizing the Proxy
Voting Service, the Advisor will follow these general voting guidelines.
Investment professionals of the Advisor each have the duty to vote proxies in a
way that, in their best judgment, is in the best interest of the Advisor’s
clients. Generally, the Advisor believes that voting proxies in accordance with
the following guidelines is in the best interests of its clients. However, it is
anticipated that circumstances may arise where votes are inconsistent with these
general guidelines. In addition, the Advisor will vote proxies in the best
interests of each particular client, which may result in different votes for
proxies for the same issuer.
A.Elections
of Directors
Unless
there is a proxy fight for seats on the Board of Directors, the Advisor will
generally vote in favor of the management proposed slate of directors. The
Advisor may withhold votes if the board fails to act in the best interests of
shareholders, including, but not limited to, their failure to:
•Implement
proposals to declassify boards
•Implement
a majority vote requirement
•Submit
a rights plan to a shareholder vote
•Act
on tender offers where a majority of shareholders have tendered their
shares
The
Advisor may withhold votes for directors of non-U.S. issuers if insufficient
information about the nominees is disclosed in the proxy statement.
B.Appointment
of Auditors
The
Advisor generally believes that the company remains in the best position to
choose its auditors and will generally support management’s recommendation for
the appointment of auditors.
The
Advisor will generally oppose the appointment of auditors when:
•The
fees for non-audit related services are disproportionate to the total audit
fees
•Other
reasons to question the independence of the auditors exist
C.Changes
In Capital Structure
Absent
a compelling reason to the contrary, the Advisor will generally cast votes in
accordance with the company’s management. However, the Advisor will review and
analyze on a case-by-case basis any non-routine proposals that are likely to
affect the structure and operation of the company or have a material economic
effect on the company.
The
Advisor will generally favor increases in authorized common stock when it is
necessary to:
•Implement
a stock split
•Aid
in restructuring or acquisition
•Provide
a sufficient number of shares for an employee savings plan, stock option plan or
executive compensation plan
The
Advisor will generally oppose increases in authorized common stock
when:
•There
is evidence that the shares will be used to implement a poison pill or another
form of anti-takeover defense
•The
issuance of new shares could excessively dilute the value of the outstanding
shares upon issuance
D.Corporate
Restructurings, Mergers and Acquisitions
The
Advisor will analyze such proposals on a case-by-case basis, taking into
account, among other things, the views of investment professionals managing the
portfolios in which the stock is held.
E.Proposals
Affecting Shareholder Rights
The
Advisor believes that certain fundamental rights of shareholders must be
protected. The Advisor will weigh the financial impact of proposed measures
against the impairment of shareholder rights.
The
Advisor will generally favor proposals that give shareholders a greater voice in
the affairs of the company, and generally oppose proposals that have the effect
of restricting shareholders’ voice in the affairs of the company.
F.Corporate
Governance
The
Advisor believes that good corporate governance is important in ensuring that
management and the Board of Directors fulfill their obligations to the company’s
shareholders.
The
Advisor will generally favor proposals that promote transparency and
accountability within a company, such as those promoting:
•Equal
access to proxies
•A
majority of independent directors on key committees
•The
Advisor will generally oppose:
•Companies
having two classes of shares
•The
existence of a majority of interlocking directors
G.Anti-Takeover
Measures
In
general, proposed measures (whether advanced by management or shareholder
groups) that impede takeovers or have the effect of entrenching management may
be detrimental to the rights of shareholders and may negatively impact the value
of the company.
The
Advisor will generally favor proposals that have the purpose or effect of
restricting or eliminating existing anti-takeover measures that have previously
been adopted, such as:
•Shareholder
proposals that seek to require the company to submit a shareholder rights plan
to a shareholder vote.
The
Advisor will generally oppose proposals that have the purpose or effect of
entrenching management or diluting shareholder ownership, such as:
•“Blank
check” preferred stock
•Classified
boards
•Supermajority
vote requirements
H.Executive
Compensation
The
Advisor generally believes that company management and the compensation
committee of the Board of Directors should, within reason, be given latitude in
determining the types and mix of compensation and benefit awards
offered.
The
Advisor will review proposals relating to executive compensation plans on a
case-by-case basis to ensure:
•The
long-term interests of management and shareholders are properly
aligned
•The
option exercise price is not below market price on the date of
grant
•An
acceptable number of employees are eligible to participate in such compensation
programs
The
Advisor will generally favor proposals that have the purpose or effect of fairly
benefiting both management and shareholders, such as proposals to:
•“Double
trigger” option vesting provisions
•Seek
treating employee stock options as an expense
The
Advisor will generally oppose proposals that have the purpose or effect of
unduly benefiting management, such as:
•Plans
that permit re-pricing of underwater employee stock options
•“Single
trigger” option vesting provisions
I.Social
And Corporate Responsibility
The
Advisor will review and analyze on a case-by-case basis proposals relating to
social, political and environmental issues to determine their financial impact
on shareholder value. The Advisor will generally oppose such social, political
and environmental
proposals
that have a negative financial impact on shareholder value, such as measures
that are unduly burdensome or result in unnecessary and excessive costs to the
company.
J.Abstentions;
Determination Not to Vote; Closed Positions
The
Advisor will abstain from voting or affirmatively decide not to vote if the
Advisor determines that abstention or not voting is in the best interests of the
client. In making this determination, the Advisor will consider various factors,
including, but not limited to, (i) the costs associates with exercising the
proxy (e.g., translation or travel costs); and (ii) any legal restrictions
on trading resulting from the exercise of a proxy. The Advisor may determine not
to vote proxies relating to securities in which clients have no position as of
the receipt of the proxy (for example, when the Advisor has sold, or has
otherwise closed, a client position after the proxy record date but before the
proxy receipt date).
Proxy
voting in certain countries requires “share blocking.” Shareholders wishing to
vote their proxies must deposit their shares shortly before the date of the
meeting (usually one week) with a designated depositary. During this blocking
period, shares that will be voted at the meeting cannot be sold until the
meeting has taken place and the shares are returned to the clients’ custodian
banks. The Advisor may determine that the value of exercising the vote is
outweighed by the detriment of not being able to sell the shares during this
period. In cases where we want to retain the ability to trade shares, we may
abstain from voting those shares.
V.Disclosure
A.The
Advisor will disclose in its Form ADV Part 2 that clients may contact the
Compliance Officer via e-mail or telephone in order to obtain information on how
the Advisor voted such client’s proxies, and to request a copy of these policies
and procedures. If a client requests this information, the Compliance Officer
will prepare a written response to the client that lists, with respect to each
voted proxy that the client has inquired about, (1) the name of the issuer; (2)
the proposal voted upon and (3) how the Advisor voted the client’s
proxy.
B.A
concise summary of these Proxy Voting Policies and Procedures will be included
in the Advisor’s Form ADV Part II, and will be updated whenever these policies
and procedures are updated.
VI.Potential
Conflicts of Interest
A.In
the event that the Advisor is directly voting a proxy, the Compliance Officer
will examine conflicts that exist between the interests of the Advisor and its
clients. This examination will include a review of the relationship of the
Advisor, its personnel and its affiliates with the issuer of each security and
any of the issuer’s affiliates to determine if the issuer is a client of the
Advisor or an affiliate of the Advisor or has some other relationship with the
Advisor, its personnel or a client of the Advisor.
B.If,
as a result of the Compliance Officer’s examination, a determination is made
that a material conflict of interest exists, the Advisor will determine whether
voting in accordance with the voting guidelines and factors described above is
in the best interests of the client. If the proxy involves a matter covered by
the voting guidelines and factors described above, the Advisor will generally
vote the proxy in accordance with the voting guidelines. Alternatively, the
Advisor may vote the proxy in accordance with the recommendation of the Proxy
Voting Service provided the Proxy Voting Service is not subject to a material
conflict of interest.
C.The
Advisor may disclose the conflict to the affected clients and, except in the
case of clients that are subject to the Employee Retirement Income Security Act
of 1974, as amended (“ERISA”), give the clients the opportunity to vote their
proxies themselves. In the case of ERISA clients, if the Investment Management
Agreement reserves to the ERISA client the authority to vote proxies when the
Advisor determines it has a material conflict that affects its best judgment as
an ERISA fiduciary, the Advisor will give the ERISA client the opportunity to
vote the proxies themselves.
D.If
the Advisor determines that it, or a Proxy Voting Service, has a conflict of
interest with respect to voting proxies on behalf of a series (the “Series”) of
Prospector Funds, Inc. (the “Mutual Fund”), then the Advisor shall contact the
Chairman of the Board of the Mutual Fund. In the event that the Chairman
determines that he has a conflict of interest, the Chairman shall submit the
matter for determination to another member of the Board who is not an
“interested person” of the Mutual Fund, as defined in the Investment Company Act
of 1940, as amended. In making a determination, the Chairman will consider the
best interests of the Series’
shareholders
and may consider the recommendations of the Advisor or independent third parties
that evaluate proxy proposals. The Advisor will vote the proposal according the
determination and maintain records relating to this process.
VII.Proxy
Recordkeeping
The
Compliance Officer or its designee will maintain files relating to the Advisor’s
proxy voting procedures in an easily accessible place. (Under the services
contract between the Advisor and its Proxy Voting Service, the Proxy Voting
Service will maintain the Advisor’s proxy-voting records). Records will be
maintained and preserved for five years from the end of the fiscal year during
which the last entry was made on a record, with records for the most recent two
years kept in the offices of the Advisor. Records of the following will be
included in the files:
1.copies
of these proxy voting policies and procedures, and any amendments
thereto;
2.A
copy of each proxy statement that the Advisor receives regarding client
securities (the Advisor may rely on third parties or EDGAR);
3.A
record of each vote that the Advisor casts;
4.A
copy of any document the Advisor created that was material to making a decision
how to vote proxies, or that memorializes that decision. (For votes that are
inconsistent with the Advisor’s general proxy voting polices, the
reason/rationale for such an inconsistent vote is required to be briefly
documented and maintained.);
5.A
copy of each written client request for information on how the Advisor voted
such client’s proxies, and a copy of any written response to any (written or
oral) client request for information on how the Advisor voted its
proxies.
6.A
copy of the documentation relating to the Advisor’s determination that a
conflict of interest exists with respect to a proxy, including the nature of the
conflict, the factors considered in determining how to resolve and address the
conflict, and any action taken with respect to the particular
proxy.