SSGA ACTIVE TRUST (THE “TRUST”)
STATEMENT OF ADDITIONAL INFORMATION
September 9, 2024
This
Statement of Additional Information (“SAI”) is not a prospectus. With respect to
the Trust’s series listed below, this SAI should be read in conjunction with the
prospectus dated September 9, 2024 (the “Prospectus”), as may be
revised from time to time.
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ETF |
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TICKER |
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SPDR® Galaxy Hedged Digital
Asset Ecosystem ETF |
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HECO |
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Principal
U.S. Listing Exchange for the ETF: The Nasdaq Stock Market LLC
Capitalized
terms used herein that are not defined have the same meaning as in the
Prospectus, unless otherwise noted. Copies of the Prospectus and the Fund’s
Annual Report to Shareholders (when available) may be obtained without charge by
writing to State Street Global Advisors Funds Distributors, LLC, the Trust’s
principal underwriter (referred to herein as “Distributor” or “Principal
Underwriter”), One Iron Street, Boston, Massachusetts 02210, by visiting the
Trust’s website at https://www.ssga.com/spdrs or by calling 1-866-787-2257. The Fund had
not commenced operations as of the date of this SAI and therefore did not have
any financial information to report for the Fund’s October 31, 2023 fiscal
year end.
SPDRATHECOSAI
TABLE OF CONTENTS
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GENERAL DESCRIPTION OF THE TRUST
The
Trust is an open-end management
investment company, registered under the Investment Company Act of 1940, as
amended (the “1940 Act”), consisting of multiple investment series, including
the SPDR® Galaxy Hedged
Digital Asset Ecosystem ETF (the “Fund”). The Trust was organized as a
Massachusetts business trust on March 30, 2011 and the Fund was established
on June 24, 2024. The offering of the Fund’s shares (“Shares”) is
registered under the Securities Act of 1933, as amended (the “Securities Act”).
SSGA Funds Management, Inc. serves as the investment adviser for the Fund (“SSGA
FM” or the “Adviser”) and the Fund is sub-advised by Galaxy Digital Capital
Management LP (the “Sub-Adviser” or
“Galaxy”). To the extent that a reference in this SAI refers to the “Adviser,”
such reference should be read to refer to the Sub-Adviser where the context requires.
The
Fund offers and issues Shares at their net asset value (sometimes referred to
herein as “NAV”) only in aggregations of a specified number of Shares (each, a
“Creation Unit”). The Fund generally offers and issues Shares in exchange for
(i) a basket of securities designated by the Fund (“Deposit Securities”)
together with the deposit of a specified cash payment (“Cash Component”) or
(ii) a cash payment equal in value to the Deposit Securities (“Deposit
Cash”) together with the Cash Component. The primary consideration accepted by
the Fund (i.e., Deposit Securities or Deposit Cash) is set forth under “Purchase
and Redemption of Creation Units” later in this SAI. The Trust reserves the
right to permit or require the substitution of a “cash in lieu” amount to be
added to the Cash Component to replace any Deposit Security and reserves the
right to permit or require the substitution of Deposit Securities in lieu of
Deposit Cash (subject to applicable legal requirements). The Shares have been
approved for listing and secondary trading on a national securities exchange
(the “Exchange”). The Shares will trade on the Exchange at market prices. These
prices may differ from the Shares’ net asset values. The Shares are also
redeemable only in Creation Unit aggregations, and generally in exchange for
either (i) portfolio securities and a specified cash payment or
(ii) cash (subject to applicable legal requirements).
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions including a requirement to maintain on deposit with the Trust cash at
least equal to a specified percentage of the market value of the missing Deposit
Securities as set forth in the Participant Agreement (as defined below). See
“Purchase and Redemption of Creation Units.” The Trust may impose a transaction
fee for each creation or redemption. In all cases, such fees will be limited in
accordance with the requirements of the U.S. Securities and Exchange Commission
(“SEC”) applicable to management investment companies offering redeemable
securities. In addition to the fixed creation or redemption transaction fee, an
additional transaction fee of up to three times the fixed creation or redemption
transaction fee and/or an additional variable charge may apply.
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INVESTMENT POLICIES
The
Fund may directly, or indirectly through investment in the Subsidiary or an
exchange-traded product (“ETP”), invest in any of the instruments or engage
in any of the investment practices described below if such investment or
activity is consistent with the Fund’s investment objective and permitted
by the Fund’s stated investment policies. References to the “Fund” below should
be read to also apply to the Subsidiary (defined herein) where the context
requires.
The
Fund may invest in the following types of investments, consistent with its
investment strategies and objective. Please see the Fund’s Prospectus for
additional information regarding its principal investment strategies.
DIVERSIFICATION
STATUS
The
Fund is classified as a non-diversified
investment company under the 1940 Act. A “non-diversified” classification means that
the Fund is not limited by the 1940 Act with regard to the percentage of its
assets that may be invested in the securities of a single issuer. This means
that the Fund may invest a greater portion of its assets in the securities of a
single issuer than a diversified fund. This may have an adverse effect on the
Fund’s performance or subject the Fund’s Shares to greater price volatility than
more diversified investment companies.
The
Fund intends to maintain the required level of diversification and otherwise
conduct its operations so as to qualify as a “regulated investment company”
(“RIC”) for purposes of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code” or the “Code” ), and to relieve the Fund of any
liability for federal income tax to the extent that its earnings are distributed
to shareholders. Compliance with the diversification requirements of the
Internal Revenue Code may severely limit the investment flexibility of the Fund
and may make it less likely that the Fund will meet its investment objective.
USE
OF A CAYMAN ISLANDS ORGANIZED SUBSIDIARY
The
Fund invests a portion of its assets in the State Street Hedged Digital Asset
Ecosystem Cayman Ltd., a subsidiary organized in the Cayman Islands (the
“Subsidiary”). The Fund is the sole shareholder of the Subsidiary, and it is not
expected that shares of the Subsidiary will be sold or offered to other
investors. The Fund invests in the Subsidiary in order to indirectly gain
exposure to bitcoin and ether futures and exchange-traded products that hold
bitcoin and ether as a reference asset within the limitations of Subchapter M of
the Code applicable to RICs. Subchapter M requires, among other things, that a
fund derive at least 90% of gross income from dividends, interest, and gains
from the sale of securities (typically referred to as “qualifying income”). The
Fund may not invest more than 25% of the value of its total assets in the
Subsidiary. If the Fund’s income from the Subsidiary is not qualifying income,
the Fund could be unable to qualify as a RIC for one or more taxable years.
The
Subsidiary is a company organized under the laws of the Cayman Islands and
overseen by its own board. While the Subsidiary may be considered similar to an
investment company, it is not registered under the 1940 Act and is not subject
to all of the investor protection requirements of the 1940 Act and other U.S.
statutes and regulations. Consequently, the Fund, as the sole shareholder of the
Subsidiary, will not have all of the protections afforded to investors in RICs.
By investing in the Subsidiary, the Fund is indirectly exposed to the risks
associated with the Subsidiary’s investments. SSGA FM is responsible for the
Subsidiary’s day-to-day business pursuant to an
investment management agreement between the Subsidiary and SSGA FM. Therefore,
the Fund’s ownership and control of the Subsidiary make it unlikely that the
Subsidiary would take any action contrary to the interests of the Fund or its
shareholders. Under the investment management agreement with the Subsidiary,
SSGA FM provides the Subsidiary with the same type of management services, under
the same terms, as are provided to the Fund. The Subsidiary has entered into
separate contracts for the provision of custody, transfer agency, and accounting
agent services with the same or with affiliates of the same service providers
that provide those services to the Fund.
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The
Subsidiary is managed pursuant to compliance policies and procedures that are
the same, in all material respects, as the policies and procedures adopted by
the Fund. In managing the Subsidiary’s investment portfolio, and in adhering to
the Fund’s compliance policies and procedures, SSGA FM treats the assets of the
Subsidiary as if the assets were held directly by the Fund. SSGA FM also treats
the assets of the Subsidiary as if the assets were held directly by the Fund
with respect to its adherence to the Fund’s investment policies and
restrictions. The Trust’s Chief Compliance Officer oversees implementation of
the Subsidiary’s policies and procedures, and makes periodic reports to the
Trust’s Board regarding the Subsidiary’s compliance with its policies and
procedures. The Fund and Subsidiary test for compliance with certain investment
restrictions on a consolidated basis.
The
financial information of the Subsidiary will be consolidated in the Fund’s
financial statements, as contained within the Fund’s Annual and Semi-Annual
Reports provided to shareholders. Changes in U.S. laws (where the Fund is
organized) and/or the Cayman Islands (where the Subsidiary is organized), could
prevent the Fund and/or the Subsidiary from operating as described in the Fund’s
prospectus and this SAI and could negatively affect the Fund and its
shareholders.
COMMON
STOCK
Risks
inherent in investing in equity securities include the risk that the financial
condition of issuers may become impaired or that the general condition of the
stock market may deteriorate (either of which may cause a decrease in the value
of the Fund’s portfolio securities and therefore a decrease in the value of
Shares of the Fund). Common stock is susceptible to general stock market
fluctuation and to volatile increases and decreases in value as market
confidence and perceptions change. These investor perceptions are based on
various and unpredictable factors, including expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional political, economic or banking
crises.
Holders
of common stock incur more risk than holders of preferred stock and debt
obligations because common stockholders, as owners of the issuer, have generally
inferior rights to receive payments from the issuer in comparison with the
rights of creditors of, or holders of debt obligations or preferred stock issued
by, the issuer. Further, unlike debt securities which typically have a stated
principal amount payable at maturity (whose value, however, will be subject to
market fluctuations prior thereto), or preferred stock which typically has a
liquidation preference and which may have stated optional or mandatory
redemption provisions, common stock has neither a fixed principal amount nor a
maturity. Common stock values are subject to market fluctuations as long as the
common stock remains outstanding.
CONCENTRATION
The
Fund will concentrate its investments (i.e., hold more than 25% of its assets)
in the following group of industries: software; semiconductors &
semiconductor equipment; financial services; and capital markets. The Trust’s
general policy is to exclude securities of the U.S. government and its agencies
or instrumentalities when measuring industry concentration.
CONVERTIBLE
SECURITIES
Convertible
securities are bonds, debentures, notes, preferred stock or other securities
that may be converted or exchanged (by the holder or by the issuer) into shares
of the underlying common stock (or cash or securities of equivalent value) at a
stated exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by the Fund is called for redemption or conversion,
the Fund could be required to tender it for redemption, convert it into the
underlying common stock, or sell it to a third party.
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Convertible
securities generally have less potential for gain or loss than common stock.
Convertible securities generally provide yields higher than the underlying
common stock, but generally lower than comparable non-convertible securities. Because of this
higher yield, convertible securities generally sell at a price above their
“conversion value,” which is the current market value of the stock to be
received upon conversion. The difference between this conversion value and the
price of convertible securities will vary over time depending on changes in the
value of the underlying common stock and interest rates. When the underlying
common stock declines in value, convertible securities will tend not to decline
to the same extent because of the interest or dividend payments and the
repayment of principal at maturity for certain types of convertible securities.
However, securities that are convertible other than at the option of the holder
generally do not limit the potential for loss to the same extent as securities
convertible at the option of the holder. When the underlying common stock rises
in value, the value of convertible securities may also be expected to increase.
At the same time, however, the difference between the market value of
convertible securities and their conversion value will narrow, which means that
the value of convertible securities will generally not increase to the same
extent as the value of the underlying common stock. Because convertible
securities may also be interest-rate sensitive, their value may increase as
interest rates fall and decrease as interest rates rise. Convertible securities
are also subject to credit risk, and are often lower-quality securities.
EQUITY
SECURITIES
The
Fund may invest in equity securities. Equity securities are securities that
represent an ownership interest (or the right to acquire such an interest) in a
company and include common and preferred stock. Common stocks represent an
equity or ownership interest in an issuer. Preferred stock represents an equity
or ownership interest in an issuer that pays dividends at a specified rate and
that has priority over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds take
priority over holders of preferred stock, whose claims take priority over the
claims of those who own common stock.
While
offering greater potential for long-term growth, equity securities generally are
more volatile and riskier than some other forms of investment, although under
certain market conditions various fixed-income investments have comparable or
greater price volatility. Therefore, the value of an investment in the Fund may
at times decrease instead of increase. The Fund’s investments may include
securities traded over-the-counter as well as those
traded on a securities exchange. Some securities, particularly over-the-counter securities, may be
more difficult to sell under some market conditions.
EXCHANGE-TRADED
FUNDS
The
Fund may invest in other exchange-traded funds (“ETFs”) (including ETFs managed
by the Adviser). ETFs may be structured as investment companies that are
registered under the 1940 Act, typically as open-end funds or unit investment trusts.
These ETFs are generally based on specific domestic and foreign market
securities indices. An “index-based ETF” seeks to provide investment results
that match the performance of an index by holding in its portfolio either the
contents of the index or a representative sample of the securities in the index.
An “actively-managed ETF” invests in securities based on an adviser’s investment
strategy. An “enhanced ETF” seeks to provide investment results that match a
positive or negative multiple of the performance of an underlying index. In
seeking to provide such results, an ETF and, in particular, an enhanced ETF, may
engage in short sales of securities included in the underlying index and may
invest in derivatives instruments, such as equity index swaps, futures
contracts, and options on securities, futures contracts, and stock indices.
Alternatively, ETFs may be structured as grantor trusts or other forms of pooled
investment vehicles that are not registered or regulated under the 1940 Act.
These ETFs typically hold commodities, precious metals, currency or other non-securities investments. ETFs, like mutual
funds, have expenses associated with their operation, such as advisory and
custody fees. When the Fund invests in an ETF, in addition to directly bearing
expenses associated with its own operations, including the brokerage costs
associated with the purchase and sale of shares of the ETF, the Fund will bear a
pro rata portion of the ETF’s expenses. In addition, it may be more costly to
own an ETF than to directly own the securities or other investments held by the
ETF because of ETF expenses. The risks of
6
owning
shares of an ETF generally reflect the risks of owning the underlying securities
or other investments held by the ETF, although lack of liquidity in the market
for the shares of an ETF could result in the ETF’s value being more volatile
than the underlying securities or other investments.
EXCHANGE-TRADED
PRODUCTS
ETPs
include exchange-traded funds (“ETFs”) registered under the 1940 Act;
exchange-traded commodity trusts; and exchange-traded notes (“ETNs”). The
Adviser may receive management or other fees from the ETPs (“Affiliated ETPs”)
in which the Fund may invest, as well as a management fee for managing the Fund.
It is possible that a conflict of interest among the Fund and Affiliated ETPs
could affect how the Adviser fulfills its fiduciary duties to the Fund and the
Affiliated ETPs. Because the amount of the investment management fees to be
retained by the Adviser may differ depending upon the Affiliated ETPs in which
the Fund invests, there is a conflict of interest for the Adviser in selecting
the Affiliated ETP. In addition, the Adviser may have an incentive to take into
account the effect on an Affiliated ETP in which the Fund may invest in
determining whether, and under what circumstances, to purchase or sell shares in
that Affiliated ETP. Although the Adviser takes steps to address the conflicts
of interest, it is possible that the conflicts could impact the Fund.
The
Fund may invest in new ETPs or ETPs that have not yet established a deep trading
market at the time of investment. Shares of such ETPs may experience limited
trading volume and less liquidity, in which case the “spread” (the difference
between bid price and ask price) may be higher.
Bitcoin
and Ether ETFs. The Fund may invest, directly or indirectly, in shares of
ETFs that primarily hold bitcoin and/or ether futures contracts and in shares of
exchange-traded products that hold bitcoin or ether as a reference asset (“Spot
Crypto Asset ETPs”) (together, “Crypto Asset ETFs”). Crypto Asset ETFs are
relatively new products and, therefore, have limited financial and operating
histories. To the extent the Fund invests in Crypto Asset ETFs, such investment
exposure subjects the Fund to many of the same risks as an investment in bitcoin
or ether, including those described elsewhere in the Prospectus and this SAI. As
a shareholder in a Crypto Asset ETF, the Fund will hold, either directly or
indirectly, shares representing a fractional undivided beneficial interest in
the net assets of the bitcoin ETP. The Fund expects to purchase shares of Crypto
Asset ETFs in the secondary market at their market prices, which may be highly
volatile and may not closely correspond to either the NAV per share of the
Crypto Asset ETF or the price of bitcoin or ether. Shares of Crypto Asset ETFs
may trade at premiums (i.e., the market price of the shares is more than the
NAV) or discounts (i.e., the market price of the shares is less than the NAV),
which may be significant. The risk that share prices differ from the Crypto
Asset ETF’s NAV and/or the price of bitcoin or ether is likely to increase
during times of market volatility or stressed market conditions. Under such
conditions, the market for shares of Crypto Asset ETFs may become less liquid
making it difficult for the Fund to either increase or decrease its investment
exposure to Crypto Asset ETFs. Spot Crypto Asset ETPs are generally not
registered under the 1940 Act, and therefore, do not afford the Fund the
investor protections typical of investments in registered funds. For example,
the provisions of the 1940 Act that limit transactions with affiliates, prohibit
the suspension of redemptions (except under certain limited circumstances) or
limit sales loads, among others, do not apply to Spot Crypto Asset ETPs. Spot
Crypto Asset ETPs are also not commodity pools for purposes of the CEA and are
not otherwise regulated by the CEA or subject to registration with or oversight
by the CFTC.
FOREIGN
CURRENCY TRANSACTIONS
The
Fund may conduct foreign currency transactions on a spot (i.e., cash) or forward
basis (i.e., by entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge a fee for
such conversions, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a dealer
may offer to sell a foreign currency at one rate, while offering a lesser rate
of exchange should the counterparty desire to resell that currency to the
dealer. Forward contracts are customized transactions that generally require a
specific amount of a currency to be delivered at a specific exchange rate on a
specific date or range of dates in the future, although the Fund may also
7
enter
into non-deliverable currency forward
contracts (“NDFs”) that contractually require the netting of the parties’
liabilities. Forwards, including NDFs, can have substantial price volatility.
While foreign currency transactions on a spot and forward basis are exempt from
the definition of “swap” under the Commodity Exchange Act (“CEA”), NDFs are not,
and, thus, are subject to the jurisdiction of the Commodity Futures Trading
Commission (“CFTC”). Forward contracts are generally traded in an interbank
market directly between currency traders (usually large commercial banks) and
their customers. The parties to a forward contract may agree to offset or
terminate the contract before its maturity, or may hold the contract to maturity
and complete the contemplated currency exchange. In the event that the parties
to a forward contract agree to offset or terminate the contract before its
maturity, the contract is no longer exempt from the definition of “swap” under
the CEA and shall be treated as a swap. At the discretion of the Adviser, the
Fund may enter into forward currency exchange contracts for hedging purposes to
help reduce the risks and volatility caused by changes in foreign currency
exchange rates, or to gain exposure to certain currencies. When used for hedging
purposes, they tend to limit any potential gain that may be realized if the
value of the Fund’s foreign holdings increases because of currency fluctuations.
FOREIGN
SECURITIES
Investments
in foreign securities involve special risks and considerations. As foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to domestic companies, there may be less publicly available
information about a foreign company than about a domestic company. For example,
foreign markets have different clearance and settlement procedures. Delays in
settlement could result in temporary periods when assets of the Fund are
uninvested. The inability of the Fund to make intended security purchases due to
settlement problems could cause it to miss certain investment opportunities.
They may also entail certain other risks, such as the possibility of one or more
of the following: imposition of dividend or interest withholding or confiscatory
taxes, higher brokerage costs, thinner trading markets, currency blockages or
transfer restrictions, expropriation, nationalization, military coups or other
adverse political or economic developments; less government supervision and
regulation of securities exchanges, brokers and listed companies; and the
difficulty of enforcing obligations in other countries. Purchases of foreign
securities are usually made in foreign currencies and, as a result, the Fund may
incur currency conversion costs and may be affected favorably or unfavorably by
changes in the value of foreign currencies against the U.S. dollar. Further, it
may be more difficult for the Fund’s agents to keep currently informed about
corporate actions which may affect the prices of portfolio securities.
Communications between the United States and foreign countries may be less
reliable than within the United States, thus increasing the risk of delayed
settlements of portfolio transactions or loss of certificates for portfolio
securities. Certain markets may require payment for securities before delivery.
The Fund’s ability and decisions to purchase and sell portfolio securities may
be affected by laws or regulations relating to the convertibility of currencies
and repatriation of assets.
A
number of current significant political, demographic and economic developments
may affect investments in foreign securities and in securities of companies with
operations overseas. Such developments include dramatic political changes in
government and economic policies in several Eastern European countries and the
republics composing the former Soviet Union, as well as the unification of the
European Economic Community. The course of any one or more of these events and
the effect on trade barriers, competition and markets for consumer goods and
services are uncertain. Similar considerations are of concern with respect to
developing countries. For example, the possibility of revolution and the
dependence on foreign economic assistance may be greater in these countries than
in developed countries. Management seeks to mitigate the risks associated with
these considerations through diversification and active professional management.
FUTURES
CONTRACTS, FORWARDS, OPTIONS AND SWAP AGREEMENTS
The
Fund may invest in derivatives, including forward contracts, exchange-traded
futures on indices, exchange-traded futures on crypto assets, Treasuries or
Eurodollars, U.S. exchange-traded or OTC put and call options contracts and
exchange-traded or OTC swap transactions (including interest rate swaps, total
return swaps, excess return swaps, and credit default swaps).
8
Futures
and Options on Futures: Futures contracts generally provide for the future
sale by one party and purchase by another party of a specified commodity or
security at a specified future time and at a specified price. Index futures
contracts are settled daily with a payment by one party to the other of a cash
amount based on the difference between the level of the index specified in the
contract from one day to the next. A futures contract on an index is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract originally was written. Although the value of an index might be a
function of the value of certain specified securities, physical delivery of
these securities is not always made. A public market exists in futures contracts
covering a number of indexes, as well as financial instruments, including,
without limitation: U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates;
three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; Eurodollar certificates of
deposit; the Australian Dollar; the Canadian Dollar; the British Pound; the
Japanese Yen; the Swiss Franc; the Mexican Peso; and certain multinational
currencies, such as the Euro. It is expected that other futures contracts will
be developed and traded in the future. Futures contracts are standardized as to
maturity date and underlying instrument and are traded on futures exchanges.
The
Fund may purchase and write (sell) call and put options on futures. Options on
futures give the holder the right, in return for the premium paid, to assume a
long position (call) or short position (put) in a futures contract at a
specified exercise price upon expiration of, or at any time during the period
of, the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
The
Fund is required to make a good faith margin deposit in cash or U.S. government
securities (or other eligible collateral) with a broker or custodian to initiate
and maintain open positions in futures contracts. A margin deposit is intended
to assure completion of the contract (delivery or acceptance of the underlying
commodity or payment of the cash settlement amount) if it is not terminated
prior to the specified delivery date. Brokers may establish deposit requirements
which are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin deposits which may range upward from less than 5%
of the value of the contract being traded.
After
a futures contract position is opened, the value of the contract is marked to
market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy price changes, additional payments will be
required. Conversely, change in the contract value may reduce the required
margin, resulting in a repayment of excess margin to the contract holder.
Variation margin payments are made to and from the futures broker for as long as
the contract remains open. In such case, the Fund would expect to earn interest
income on its margin deposits. Although some futures contracts call for making
or taking delivery of the underlying commodity, generally these obligations are
closed out prior to delivery by offsetting purchases or sales of matching
futures contracts (involving the same exchange, underlying commodity, security
or index and delivery month). If an offsetting purchase price is less than the
original sale price, the Fund realizes a capital gain, or if it is more, the
Fund realizes a capital loss. Conversely, if an offsetting sale price is more
than the original purchase price, the Fund realizes a capital gain, or if it is
less, the Fund realizes a capital loss. The transaction costs also must be
included in these calculations.
Options:
The Fund may purchase and sell put and call options. Such options may relate to
particular securities and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Options trading is a
highly specialized activity that entails greater than ordinary investment risk.
Options on particular securities may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities themselves.
Short
Sales “Against the Box”: The Fund may engage in short sales “against the
box.” In a short sale against the box, the Fund agrees to sell at a future date
a security that it either contemporaneously owns or has the right to
9
acquire
at no extra cost. If the price of the security has declined at the time the Fund
is required to deliver the security, the Fund will benefit from the difference
in the price. If the price of the security has increased, the Fund will be
required to pay the difference.
Forwards:
A forward contract is an obligation to purchase or sell a specific security,
currency or other instrument for an agreed price at a future date that is
individually negotiated and privately traded by traders and their customers.
Unlike contracts traded on an exchange (such as futures contracts), forward
contracts trade OTC and are not guaranteed by an exchange or clearinghouse and
are subject to the creditworthiness of the counterparty of the trade. Forward
contracts are highly leveraged and highly volatile, and a relatively small price
movement in a forward contract may result in substantial losses to the Fund.
Depending on the asset underlying the forward contract, forward transactions can
be influenced by, among other things, changing supply and demand relationships,
government commercial and trade programs and policies, national and
international political and economic events, weather and climate conditions,
insects and plant disease, purchases and sales by foreign countries and changing
interest rates.
Swap
Transactions: The Fund may enter into swap transactions, including interest
rate swap, credit default swap, NDF, and total return swap transactions. Swap
transactions are contracts between parties in which one party agrees to make
periodic payments to the other party based on the change in market value or
level of a specified rate, index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
rate, index or asset. Swap transactions will usually be done on a net basis,
i.e., where the two parties make net payments with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. The net amount of
the excess, if any, of the Fund’s obligations over its entitlements with respect
to each swap is accrued on a daily basis and an amount of cash or equivalents
having an aggregate value at least equal to the accrued excess is maintained by
the Fund. Swaps may be used in conjunction with other instruments to offset
interest rate, currency or other underlying risks. For example, interest rate
swaps may be offset with “caps,” “floors” or “collars.” A “cap” is essentially a
call option which places a limit on the amount of floating rate interest that
must be paid on a certain principal amount. A “floor” is essentially a put
option which places a limit on the minimum amount that would be paid on a
certain principal amount. A “collar” is essentially a combination of a long cap
and a short floor where the limits are set at different levels.
The
use of swap transactions by the Fund entails certain risks, which may be
different from, or possibly greater than, the risks associated with investing
directly in the securities and other investments that are the referenced asset
for the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses, and tax planning different from those
associated with stocks, bonds, and other traditional investments. The use of a
swap requires an understanding not only of the referenced asset, reference rate,
or index, but also of the swap itself, without the benefit of observing the
performance of the swap under all the possible market conditions. Because some
swap transactions have a leverage component, adverse changes in the value or
level of the underlying asset, reference rate, or index can result in a loss
substantially greater than the amount invested in the swap itself. Certain swaps
have the potential for unlimited loss, regardless of the size of the initial
investment.
Bilateral
OTC transactions differ from exchange-traded or cleared derivatives transactions
in several respects. Bilateral OTC transactions are transacted directly with
dealers and not with a clearing corporation. Without the availability of a
clearing corporation, bilateral OTC transaction pricing is normally done by
reference to information from market makers and/or available index data, which
information is carefully monitored by the Adviser and verified in appropriate
cases. As bilateral OTC transactions are entered into directly with a dealer,
there is a risk of nonperformance by the dealer as a result of its insolvency or
otherwise. Under regulations adopted by the Commodity Futures Trading Commission
(“CFTC”) and federal banking regulators (“Margin Rules”), the Fund is required
to post collateral (known as variation margin) to cover the mark-to-market exposure in respect of
its uncleared swaps. The Margin Rules also mandate that collateral in the form
of initial margin be posted to cover potential future exposure attributable to
uncleared swap transactions. In the event the Fund is required to post
collateral in the form of initial margin or variation margin in respect of its
uncleared swap
10
transactions,
all such collateral will be posted with a third party custodian pursuant to a
triparty custody agreement between the Fund, its dealer counterparty and an
unaffiliated custodian.
The
requirement to execute certain OTC derivatives contracts on exchanges or
electronic trading platforms called swap execution facilities (“SEFs”) may offer
certain advantages over traditional bilateral OTC trading, such as ease of
execution, price transparency, increased liquidity and/or favorable pricing.
However, SEF trading may make it more difficult and costly for the Fund to enter
into highly tailored or customized transactions and may result in additional
costs and risks. Market participants such as the Fund that execute derivatives
contracts through a SEF, whether directly or through a broker intermediary, are
required to submit to the jurisdiction of the SEF and comply with SEF and CFTC
rules and regulations which impose, among other things disclosure and
recordkeeping obligations. In addition, the Fund will generally incur SEF or
broker intermediary fees when it trades on a SEF. The Fund may also be required
to indemnify the SEF or broker intermediary for any losses or costs that may
result from the Fund’s transactions on the SEF.
Total
Return Swaps: The Fund may enter into total return swap transactions for
investment purposes. Total return swaps are transactions in which one party
agrees to make periodic payments based on the change in market value of the
underlying assets, which may include a specified security, basket of securities
or security indexes during the specified period, in return for periodic payments
based on a fixed or variable interest rate of the total return from other
underlying assets. Total return swaps may be used to obtain exposure to a
security or market without owning or taking physical custody of such security or
market, including in cases in which there may be disadvantages associated with
direct ownership of a particular security. In a typical total return equity
swap, payments made by the Fund or the counterparty are based on the total
return of a particular reference asset or assets (such as an equity security, a
combination of such securities, or an index). That is, one party agrees to pay
another party the return on a stock, basket of stocks, or stock index in return
for a specified interest rate. By entering into an equity index swap, for
example, the index receiver can gain exposure to stocks making up the index of
securities without actually purchasing those stocks. Total return swaps involve
not only the risk associated with the investment in the underlying securities,
but also the risk of the counterparty not fulfilling its obligations under the
agreement.
Credit
Default Swaps: The Fund may enter into credit default swap transactions for
investment purposes. A credit default swap transaction may have as reference
obligations one or more securities that are not currently held by the Fund. The
Fund may be either the protection buyer or protection seller in the transaction.
Credit default swaps may also be structured based on the debt of a basket of
issuers, rather than a single issuer, and may be customized with respect to the
default event that triggers purchase or other factors. As a protection seller,
the Fund would generally receive an upfront payment or a fixed rate of income
throughout the term of the swap, which typically is between six months and three
years, provided that there is no credit event. If a credit event occurs,
generally the protection seller must pay the protection buyer the full face
amount of the reference obligations that may have little or no value. If the
Fund were a protection buyer and no credit event occurred during the term of the
swap, the Fund would recover nothing if the swap were held through its
termination date. However, if a credit event occurred, the protection buyer may
elect to receive the full notional value of the swap in exchange for an equal
face amount of the reference obligation that may have little or no value. Where
the Fund is the protection buyer, credit default swaps involve the risk that the
seller may fail to satisfy its payment obligations to the Fund in the event of a
default. The purchase of credit default swaps involves costs, which will reduce
the Fund’s return.
Currency
Swaps: The Fund may enter into currency swap transactions for investment
purposes. Currency swaps are similar to interest rate swaps, except that they
involve multiple currencies. The Fund may enter into a currency swap when it has
exposure to one currency and desires exposure to a different currency.
Typically, the interest rates that determine the currency swap payments are
fixed, although occasionally one or both parties may pay a floating rate of
interest. Unlike an interest rate swap, however, the principal amounts are
exchanged at the beginning of the contract and returned at the end of the
contract. In addition to paying and receiving amounts at
11
the
beginning and end of the transaction, both sides will have to pay in full on a
periodic basis based upon the currency they have borrowed. Change in foreign
exchange rates and changes in interest rates, as described above, may negatively
affect currency swaps.
Interest
Rate Swaps: The Fund may enter into an interest rate swap in an effort to
protect against declines in the value of fixed income securities held by the
Fund. In such an instance, the Fund may agree to pay a fixed rate (multiplied by
a notional amount) while a counterparty agrees to pay a floating rate
(multiplied by the same notional amount). If interest rates rise, resulting in a
diminution in the value of the Fund’s portfolio, the Fund would receive payments
under the swap that would offset, in whole or in part, such diminution in value.
Interest
Rate Caps, Floors and Collars: The Fund may use interest rate caps, floors
and collars. Interest rate caps, floors and collars are similar to interest rate
swap contracts because the payment obligations are measured by changes in
interest rates as applied to a notional amount and because they are generally
individually negotiated with a specific counterparty. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specific index
exceeds a specified interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate cap. The purchase of
an interest rate floor entitles the purchaser, to the extent that a specified
index falls below specified interest rates, to receive payments of interest on a
notional principal amount from the party selling the interest rate floor. The
purchase of an interest rate collar entitles the purchaser, to the extent that a
specified index exceeds or falls below a specified interest rate, to receive
payments of interest on a notional principal amount from the party selling the
interest rate collar.
Options
on Swaps: An option on a swap agreement, or a “swaption,” is a contract that
gives a counterparty the right (but not the obligation) to enter into a new swap
agreement or to shorten, extend, cancel or otherwise modify an existing swap
agreement, at some designated future time on specified terms. In return, the
purchaser pays a “premium” to the seller of the contract. The seller of the
contract receives the premium and bears the risk of unfavorable changes on the
underlying swap. The Fund may write (sell) and purchase put and call swaptions.
The Fund may also enter into swaptions on either an asset-based or
liability-based basis, depending on whether the Fund is hedging its assets or
its liabilities. The Fund may write (sell) and purchase put and call swaptions
to the same extent it may make use of standard options on securities or other
instruments. The Fund may enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its holdings, as a
duration management technique, to protect against an increase in the price of
securities the Fund anticipates purchasing at a later date, or for any other
purposes, such as for speculation to increase returns. Swaptions are generally
subject to the same risks involved in the Fund’s use of options.
Depending
on the terms of the particular option agreement, the Fund will generally incur a
greater degree of risk when it writes a swaption than it will incur when it
purchases a swaption. When the Fund purchases a swaption, it risks losing only
the amount of the premium it has paid should it decide to let the option expire
unexercised. However, when the Fund writes a swaption, upon exercise of the
option the Fund will become obligated according to the terms of the underlying
agreement.
Contracts
for Differences: Contracts for differences are swap arrangements in which
the Fund may agree with a counterparty that its return (or loss) will be based
on the relative performance of two different groups or “baskets” of securities.
For example, as to one of the baskets, the Fund’s return is based on theoretical
long futures positions in the securities comprising that basket, and as to the
other basket, the Fund’s return is based on theoretical short futures positions
in the securities comprising that other basket. The notional sizes of the
baskets will not necessarily be the same, which can give rise to investment
leverage. The Fund may also use actual long and short futures positions to
achieve the market exposure(s) as contracts for differences. The Fund may enter
into swaps and contracts for differences for investment return, hedging, risk
management and for investment leverage.
Government
Regulation: The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) that was signed into law on July 21, 2010 created a
new statutory framework that comprehensively regulated the over-the-counter (“OTC”) derivatives
markets for the first time. Prior to the Dodd-Frank Act, the
12
OTC
derivatives markets were traditionally traded on a bilateral basis (so-called “bilateral OTC transactions”).
Under the Dodd-Frank Act, certain OTC derivatives transactions are now required
to be centrally cleared and traded on SEFs.
On
October 28, 2020, the SEC adopted Rule 18f-4 (the “Derivatives Rule”) under the 1940
Act which replaced prior SEC and staff guidance with an updated, comprehensive
framework for registered funds’ use of derivatives. The Derivatives Rule permits
the Fund 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. The Derivatives Rule requires the Fund to trade
derivatives and certain other instruments that create future payment or delivery
obligations subject to a value-at-risk (“VaR”) leverage limit,
develop and implement a derivatives risk management program and new testing
requirements, and comply with new requirements related to board and SEC
reporting. These requirements apply unless the Fund qualifies as a “limited
derivatives user,” as defined in the Derivatives Rule. Complying with the
Derivatives Rule may increase the cost of the Fund’s investments and cost of
doing business, which could adversely affect investors. Other new regulations
could adversely affect the value, availability and performance of certain
derivative instruments, may make them more costly, and may limit or restrict
their use by the Fund.
Regulation
Under the Commodity Exchange Act: The Fund, directly or indirectly through
investments in the Subsidiary, intends to use commodity interests, such as
futures, swaps and options on futures. Due to the Fund’s potential use of CFTC
derivatives above the prescribed levels, the Fund and the Subsidiary will each
be considered a “commodity pool” under the CEA. The Adviser has registered with
the CFTC as a commodity pool operator under the CEA with regard to the Fund and
the Subsidiary and is subject to CFTC regulation with respect to the Fund. The
CFTC adopted amended regulations of CPOs managing funds registered under the
1940 Act to “harmonize” the SEC’s and the CFTC’s regulatory schemes. The adopted
amendments to the CFTC regulations allow CPOs to registered investment companies
to satisfy certain recordkeeping, reporting and disclosure requirements that
would otherwise apply to them under Part 4 of the CFTC’s regulations by
continuing to comply with comparable SEC requirements.
Restrictions
on Trading in Commodity Interests: The Fund reserves the right to engage in
transactions involving futures, options thereon and swaps to the extent allowed
by the CFTC regulations in effect from time to time and in accordance with the
Fund’s policies.
Certain
additional risk factors related to derivatives are discussed below:
Derivatives
Risk: Under recently adopted rules by the CFTC, transactions in some types
of interest rate swaps and index credit default swaps on North American and
European indices are required to be cleared. In addition, the CFTC may
promulgate additional regulations that require clearing of other classes of
swaps. In a cleared derivatives transaction (which includes futures, options on
futures, and cleared swaps transactions), the Fund’s counterparty is a clearing
house (such as CME, ICE Clear Credit or LCH.Clearnet), rather than a bank or
broker. Since the Fund is not a member of a clearing house and only members of a
clearing house can participate directly in the clearing house, the Fund holds
cleared derivatives through accounts at clearing members, who are futures
commission merchants that are members of the clearing houses and who have the
appropriate regulatory approvals to engage in cleared derivatives transactions.
The Fund makes and receives payments owed under cleared derivatives transactions
(including margin payments) through its accounts at clearing members. Clearing
members guarantee performance of their clients’ obligations to the clearing
house. In contrast to bilateral OTC transactions, clearing members generally can
require termination of existing cleared derivatives transactions at any time and
increases in margin above the margin that it required at the beginning of a
transaction. Clearing houses also have broad rights to increase margin
requirements for existing transactions and to terminate transactions in
accordance with their rules. Any such increase or termination could interfere
with the ability of the Fund to pursue its investment strategy. Also, the Fund
is subject to execution risk if it enters into a derivatives transaction that is
required to be cleared (or that the Advisor expects to be cleared), and no
clearing member is willing or
13
able
to clear the transaction on the Fund’s behalf. While the documentation in place
between the Fund and its clearing members generally provides that the clearing
members will accept for clearing all transactions submitted for clearing that
are within credit limits specified by the clearing members in advance, the Fund
could be subject to this execution risk if the Fund submits for clearing
transactions that exceed such credit limits, if the clearing house does not
accept the transactions for clearing, or if the clearing members do not comply
with their agreement to clear such transactions. In that case, the transaction
might have to be terminated, and the Fund could lose some or all of the benefit
of any increase in the value of the transaction after the time of the
transaction. In addition, new regulations could, among other things, restrict
the Fund’s ability to engage in, or increase the cost to the Fund of,
derivatives transactions, for example, by making some types of derivatives no
longer available to the Fund or increasing margin or capital requirements. If
the Fund is not able to enter into a particular derivatives transaction, the
Fund’s investment performance and risk profile could be adversely affected as a
result.
Counterparty
Risk: Counterparty risk with respect to OTC derivatives may be affected by
new regulations promulgated by the CFTC and SEC affecting the derivatives
market. As described under “Derivatives Risk” above, all futures and options on
futures and some swap transactions are required to be cleared, and a party to a
cleared derivatives transaction is subject to the credit risk of the clearing
house and the clearing member through which it holds its cleared derivatives
position, rather than the credit risk of its original counterparty to the
derivative transaction. Clearing members are required to segregate all funds
received from customers with respect to cleared derivatives transactions from
the clearing member’s proprietary assets. However, all funds and other property
received by a clearing broker from its customers are generally held by the
clearing broker on a commingled basis in an omnibus account, and the clearing
broker may also invest those funds in certain instruments permitted under the
applicable regulations. Also, the clearing member transfers to the clearing
house the amount of margin required by the clearing house for cleared
derivatives transactions, which amounts are generally held in the relevant
omnibus account at the clearing house for all customers of the clearing member.
For
commodities futures positions, the clearing house may use all of the collateral
held in the clearing member’s omnibus account to meet a loss in that account,
without regard to which customer in fact supplied that collateral. Accordingly,
in addition to bearing the credit risk of its clearing member, each customer to
a futures transaction also bears “fellow customer” risk from other customers of
the clearing member. However, with respect to cleared swaps positions, recent
regulations promulgated by the CFTC require that the clearing member notify the
clearing house of the amount of initial margin provided by the clearing member
to the clearing house that is attributable to each customer. Because margin in
respect of cleared swaps must be earmarked for specific clearing member
customers, the clearing house may not use the collateral of one customer to
cover the obligations of another customer. However, if the clearing member does
not provide accurate reporting, the Fund is subject to the risk that a clearing
house will use the Fund’s assets held in an omnibus account at the clearing
house to satisfy payment obligations of a defaulting customer of the clearing
member to the clearing house. In addition, clearing members may generally choose
to provide to the clearing house the net amount of variation margin required for
cleared swaps for all of its customers in the aggregate, rather than the gross
amount for each customer.
FUTURE
DEVELOPMENTS
The
Fund may take advantage of opportunities in the area of options and futures
contracts, options on futures contracts, warrants, swaps and any other
investments which are not presently contemplated for use by the Fund or which
are not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund’s investment objective and
legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide appropriate disclosure.
14
ILLIQUID
INVESTMENTS
The
Fund may invest in illiquid investments. The Fund may not acquire any illiquid
investment if, immediately after the acquisition, the Fund would have invested
more than 15% of its net assets in illiquid investments. An illiquid investment
means 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. If
illiquid investments exceed 15% of the Fund’s net assets, certain remedial
actions will be taken as required by Rule 22e-4 under the 1940 Act and the Fund’s
policies and procedures.
INFLATION-PROTECTED
OBLIGATIONS
The
Fund may invest in inflation-protected public obligations, commonly known as
“TIPS,” of the U.S. Treasury, as well as TIPS of major governments and emerging
market countries, excluding the United States. TIPS are a type of security
issued by a government that are designed to provide inflation protection to
investors. TIPS are income-generating instruments whose interest and principal
payments are adjusted for inflation—a sustained increase in prices that erodes
the purchasing power of money. The inflation adjustment, which is typically
applied monthly to the principal of the bond, follows a designated inflation
index, such as the Consumer Price Index. A fixed coupon rate is applied to the
inflation-adjusted principal so that as inflation rises or falls, both the
principal value and the interest payments will increase or decrease. This can
provide investors with a hedge against inflation, as it helps preserve the
purchasing power of an investment. Because of this inflation adjustment feature,
inflation-protected bonds typically have lower yields than conventional
fixed-rate bonds.
INVESTMENT
COMPANIES
The
Fund may invest in the securities of other investment companies, including
affiliated funds, money market funds and closed-end funds, subject to applicable
limitations under Section 12(d)(1) of the 1940 Act. Pursuant to
Section 12(d)(1), the Fund may invest in the securities of another
investment company (the “acquired company”) provided that the Fund, immediately
after such purchase or acquisition, does not own in the aggregate: (i) more
than 3% of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an aggregate value in
excess of 5% of the value of the total assets of the Fund; (iii) securities
issued by the acquired company and all other investment companies (other than
Treasury stock of the Fund) having an aggregate value in excess of 10% of the
value of the total assets of the Fund; or (iv) in the case of investment in
a closed-end fund, more than 10% of the
total outstanding voting stock of the acquired company. The Fund may also invest
in the securities of other investment companies if such securities are the only
investment securities held by the Fund, such as through a master-feeder
arrangement. To the extent allowed by law, regulation, and/or the Fund’s
investment restrictions, the Fund may invest its assets in securities of
investment companies, including affiliated funds and/or money market funds, in
excess of the limits discussed above.
If
the Fund invests in and, thus, is a shareholder of, another investment company,
the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund’s own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund’s own operations.
INVESTMENTS
IN VARIABLE INTEREST ENTITY STRUCTURES
The
Fund may gain investment exposure to certain Chinese companies through variable
interest entity (“VIE”) structures. Such investments are subject to the
investment risks associated with the Chinese-based company. The VIE structure
enables foreign investors, such as the Fund, to obtain investment exposure to a
Chinese company in situations in which the Chinese government has limited or
prohibited non-Chinese ownership of
such company. The VIE structure does not involve direct equity ownership in a
China-based company, but rather involves claims
15
to
the China-based company’s profits and control of the assets that belong to the
China-based company through contractual arrangements. The contractual
arrangements in place with the China-based company provide limited ability to
exercise control over the China-based company and the China-based company’s
actions may negatively impact the value of an investment through a VIE
structure. Control may also be jeopardized if a natural person who holds an
equity interest in the China-based company breaches the terms of the contractual
arrangements or is subject to legal proceedings, or if any physical instruments
such as chops and seals are used without authorization.
Intervention
by the Chinese government with respect to the VIE structure could significantly
affect the Chinese operating company’s performance and thus, the value of the
Fund’s investment through a VIE structure, as well as the enforceability of the
contractual arrangements of the VIE structure. In the event of such an
occurrence, the Fund, as a foreign investor, may have little or no legal
recourse. If the Chinese government were to determine that the contractual
arrangements establishing the VIE structure did not comply with Chinese law or
regulations, the Chinese operating company could be subject to penalties,
revocation of its business and operating license, or forfeiture of ownership
interests. In addition to the risk of government intervention, investments
through a VIE structure are subject to the risk that the China-based company (or
its officers, directors, or Chinese equity owners) may breach the contractual
arrangements, or Chinese law changes in a way that adversely affects the
enforceability of the arrangements, or the contracts are otherwise not
enforceable under Chinese law, in which case the Fund may suffer significant
losses on its investments through a VIE structure with little or no recourse
available.
LENDING
PORTFOLIO SECURITIES
The
Fund may lend portfolio securities to certain creditworthy borrowers in U.S. and
non-U.S. markets in an amount not to
exceed 40% of the value of its net assets. The borrowers provide collateral that
is marked to market daily in an amount at least equal to the current market
value of the securities loaned. The Fund may terminate a loan at any time and
obtain the securities loaned. The Fund receives the value of any interest or
cash or non-cash distributions paid on
the loaned securities. The Fund cannot vote proxies for securities on loan, but
may recall loans to vote proxies if a material issue affecting the Fund’s
economic interest in the investment is to be voted upon. Efforts to recall such
securities promptly may be unsuccessful, especially for foreign securities or
thinly traded securities. Distributions received on loaned securities in lieu of
dividend payments (i.e., substitute payments) would not be considered qualified
dividend income.
With
respect to loans that are collateralized by cash, the borrower may be entitled
to receive a fee based on the amount of cash collateral. The Fund is compensated
by the difference between the amount earned on the reinvestment of cash
collateral and the fee paid to the borrower. In the case of collateral other
than cash, the Fund is compensated by a fee paid by the borrower equal to a
percentage of the market value of the loaned securities. Any cash collateral may
be reinvested in certain high quality short-term instruments either directly on
behalf of the lending Fund or through one or more joint accounts or funds, which
may include those managed by the Adviser. The Fund could lose money due to a
decline in the value of collateral provided for loaned securities or any
investments made with cash collateral. Certain non-cash collateral or investments made with
cash collateral may have a greater risk of loss than other non-cash collateral or investments.
The
Fund may pay a portion of the interest or fees earned from securities lending to
a borrower as described above, and to one or more securities lending agents
approved by the Board of Trustees of the Trust (the “Board”) who administer the
lending program for the Fund in accordance with guidelines approved by the
Board. In such capacity, the lending agent provides the following services to
the Fund in connection with the Fund’s securities lending activities:
(i) locating borrowers among an approved list of prospective borrowers;
(ii) causing the delivery of loaned securities from the Fund to borrowers;
(iii) monitoring the value of loaned securities, the value of collateral
received, and other lending parameters; (iv) seeking additional collateral,
as necessary, from borrowers; (v) receiving and holding collateral from
borrowers, and facilitating the investment and reinvestment of all or
substantially all cash collateral in an investment vehicle designated by the
Fund; (vi) returning collateral
16
to
borrowers; (vii) facilitating substitute dividend, interest, and other
distribution payments to the Fund from borrowers; (viii) negotiating the
terms of each loan of securities, including but not limited to the amount of any
loan premium, and monitoring the terms of securities loan agreements with
prospective borrowers for consistency with the requirements of the Fund’s
Securities Lending Authorization Agreement; (ix) selecting securities,
including amounts (percentages), to be loaned; (x) recordkeeping and
accounting servicing; and (xi) arranging for return of loaned securities to
the Fund in accordance with the terms of the Securities Lending Authorization
Agreement. State Street Bank and Trust Company (“State Street”), an affiliate of
the Trust, has been approved by the Board to serve as securities lending agent
for the Fund and the Trust has entered into an agreement with State Street for
such services. Among other matters, the Trust has agreed to indemnify State
Street for certain liabilities. State Street has received an order of exemption
from the SEC under Sections 17(a) and 12(d)(1) under the 1940 Act to serve as
the lending agent for affiliated investment companies such as the Trust and to
invest the cash collateral received from loan transactions to be invested in an
affiliated cash collateral fund.
Securities
lending involves exposure to certain risks, including operational risk (i.e.,
the risk of losses resulting from problems in the settlement and accounting
process especially so in certain international markets such as Taiwan), “gap”
risk (i.e., the risk of a mismatch between the return on cash collateral
reinvestments and the fees the Fund has agreed to pay a borrower), risk of loss
of collateral, credit, legal, counterparty and market risk. If a securities
lending counterparty were to default, the Fund would be subject to the risk of a
possible delay in receiving collateral or in recovering the loaned securities,
or to a possible loss of rights in the collateral. In the event a borrower does
not return the Fund’s securities as agreed, the Fund may experience losses if
the proceeds received from liquidating the collateral do not at least equal the
value of the loaned security at the time the collateral is liquidated, plus the
transaction costs incurred in purchasing replacement securities. Although State
Street has agreed to provide the Fund with indemnification in the event of a
borrower default, the Fund is still exposed to the risk of losses in the event a
borrower does not return the Fund’s securities as agreed. For example, delays in
recovery of lent securities may cause the Fund to lose the opportunity to sell
the securities at a desirable price.
LEVERAGING
While
the Fund does not anticipate doing so, the Fund may borrow money in an amount
greater than 5% of the value of the Fund’s total assets. However, under normal
circumstances, the Fund will not borrow money from a bank in an amount greater
than 10% of the value of the Fund’s total assets. Borrowing for investment
purposes is one form of leverage. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique that increases
investment risk, but also increases investment opportunity. Because
substantially all of the Fund’s assets will fluctuate in value, whereas the
interest obligations on borrowings may be fixed, the NAV of the Fund will
increase more when such Fund’s portfolio assets increase in value and decrease
more when the Fund’s portfolio assets decrease in value than would otherwise be
the case. Moreover, interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the returns on the
borrowed funds.
OTHER
SHORT-TERM INSTRUMENTS
The
Fund may invest in short-term instruments, including money market instruments,
(including money market funds advised by the Adviser), cash and cash
equivalents, on an ongoing basis to provide liquidity or for other reasons.
Money market instruments are generally short-term investments that may include
but are not limited to: (i) shares of money market funds (including those
advised by the Adviser); (ii) obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities (including government-sponsored
enterprises); (iii) negotiable certificates of deposit (“CDs”), bankers’
acceptances, fixed time deposits and other obligations of U.S. and foreign banks
(including foreign branches) and similar institutions; (iv) commercial
paper rated at the date of purchase “Prime-1” by Moody’s Investors Service
(“Moody’s”) or “A-1” by S&P Global
Ratings (“S&P”), or if unrated, of comparable quality as determined by the
Adviser; (v) non-convertible
corporate debt
17
securities
(e.g., bonds and debentures) with remaining maturities at the date of purchase
of not more than 397 days and that present minimal credit risk; and
(vi) short-term U.S. dollar-denominated obligations of foreign banks
(including U.S. branches) that, in the opinion of the Adviser, are of comparable
quality to obligations of U.S. banks which may be purchased by the Fund. Any of
these instruments may be purchased on a current or a forward-settled basis. Time
deposits are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated
interest rates. Bankers’ acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with international transactions. Money
market instruments also include shares of money market funds. The SEC and other
government agencies continue to review the regulation of money market funds. The
SEC has adopted changes to the rules that govern money market funds over the
years, most recently in July 2023. Legislative developments may also affect
money market funds. These changes and developments may affect the investment
strategies, performance, yield, operating expenses and continued viability of a
money market fund.
PREFERRED
SECURITIES
Preferred
securities pay fixed or adjustable rate interest or dividends to investors, and
are generally senior to common stock, but may be subordinated to bonds and other
debt instruments in a company’s capital structure and therefore may be subject
to greater credit risk than those debt instruments. There is no assurance that
interest payments, dividends or distributions on the preferred securities in
which the Fund invests will be declared or otherwise made payable. In the case
of preferred stock, in order to be payable, distributions on preferred
securities must be declared by the issuer’s board of directors. The market value
of preferred securities may be affected by favorable and unfavorable changes
impacting companies in the utilities and financial services sectors, which are
prominent issuers of preferred securities, and by actual and anticipated changes
in tax laws.
Because
the claim on an issuer’s earnings represented by preferred securities may become
onerous when interest rates fall below the rate payable on such securities, the
issuer may redeem the securities. Thus, in declining interest rate environments
in particular, the Fund’s holdings of higher rate-paying fixed rate preferred
securities may be reduced and the Fund would be unable to acquire securities
paying comparable rates with the redemption proceeds.
PRIVATE
PLACEMENTS AND RESTRICTED SECURITIES
The
Fund may invest in securities that are purchased in private placements and,
accordingly, are subject to restrictions on resale as a matter of contract or
under federal securities laws. While such private placements may offer
attractive opportunities for investment not otherwise available on the open
market, the securities so purchased are often “restricted securities,” i.e.,
securities which cannot be sold to the public without registration under the
Securities Act or the availability of an exemption from registration (such as
Rules 144 or 144A), or which are not readily marketable because they are subject
to other legal or contractual delays in or restrictions on resale. Generally
speaking, restricted securities may be sold only to qualified institutional
buyers, or in a privately negotiated transaction to a limited number of
purchasers, or in limited quantities after they have been held for a specified
period of time and other conditions are met pursuant to an exemption from
registration, or in a public offering for which a registration statement is in
effect under the Securities Act.
Because
there may be relatively few potential purchasers for such investments,
especially under adverse market or economic conditions or in the event of
adverse changes in the financial condition of the issuer, the Fund could find it
more difficult to sell such securities when the Adviser believes it advisable to
do so or may be able to sell such securities only at prices lower than if such
securities were more widely held. Market quotations for such securities are
generally less readily available than for publicly traded securities. The
absence of a trading market can make it difficult to ascertain a market value
for such securities for purposes of computing the Fund’s net asset value, and
the judgment of the Adviser may at times play a greater role in valuing these
securities than in the case of publicly traded securities. Disposing of such
securities, which may be illiquid investments, can involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for the
Fund to sell
18
them
promptly at an acceptable price. The Fund may have to bear the extra expense of
registering such securities for resale and the risk of substantial delay in
effecting such registration.
The
Fund may be deemed to be an “underwriter” for purposes of the Securities Act
when selling restricted securities to the public, and in such event the Fund may
be liable to purchasers of such securities if the registration statement
prepared by the issuer, or the prospectus forming a part of it, is materially
inaccurate or misleading.
QUALIFIED
PUBLICLY TRADED PARTNERSHIPS
Regulated
investment companies (“RICs”) are subject to favorable tax treatment under the
Internal Revenue Code. To qualify as a RIC, the Fund must derive at least 90% of
its gross income for each taxable year from sources generating “qualifying
income.” Income derived from direct and certain indirect investments in
commodities is not qualifying income. Thus, income from certain
commodities-related investments may cause the Fund not to qualify as a RIC. The
Fund may invest up to 25% of its total assets in one or more ETPs that are
qualified publicly traded partnerships (“QPTPs”) and whose principal activities
are the buying and selling of commodities or options, futures, or forwards with
respect to commodities. Income from QPTPs is generally qualifying income. A QPTP
is an entity that is treated as a partnership for federal income tax purposes,
subject to certain requirements. If such an ETP fails to qualify as a QPTP, the
income generated from the Fund’s investment in the ETP may not be qualifying
income. The Fund will only invest in such an ETP if it intends to qualify as a
QPTP, but there is no guarantee that each such ETP will be successful in
qualifying as a QPTP. In addition, there is little regulatory guidance
concerning the application of the rules governing qualification as a QPTP, and
it is possible that future guidance may adversely affect the qualification of
such ETPs as QPTPs. If the Fund fails to qualify as a RIC, the Fund itself will
be subject to tax, which will reduce returns to the Fund’s shareholders. Such a
failure will also alter the treatment of distributions to the Fund’s
shareholders.
RATINGS
An
investment grade rating means the security or issuer is rated investment grade
by Moody’s, S&P, Fitch Ratings, Inc. (“Fitch”), Dominion Bond Rating Service
Limited, or another credit rating agency designated as a nationally recognized
statistical rating organization by the SEC, or is unrated but considered to be
of equivalent quality by the Adviser.
Subsequent
to purchase by the Fund, a rated security may cease to be rated or its
investment grade rating may be reduced below an investment grade rating. Bonds
rated lower than Baa3 by Moody’s or BBB- by S&P or Fitch are below investment
grade quality and are obligations of issuers that are considered predominantly
speculative with respect to the issuer’s capacity to pay interest and repay
principal according to the terms of the obligation and, therefore, carry greater
investment risk, including the possibility of issuer default and bankruptcy and
increased market price volatility. Such securities (“lower rated securities”)
are commonly referred to as “junk” bonds and are subject to a substantial degree
of credit risk. Lower rated securities are often issued by smaller, less
creditworthy companies or by highly leveraged (indebted) firms, which are
generally less able than more financially stable firms to make scheduled
payments of interest and principal. The risks posed by securities issued under
such circumstances are substantial. Bonds rated below investment-grade tend to
be less marketable than higher-quality bonds because the market for them is less
broad. The market for unrated bonds is even narrower.
REAL
ESTATE INVESTMENT TRUSTS (“REITs”)
REITs
pool investors’ funds for investment primarily in income producing real estate
or real estate loans or interests. A REIT is not taxed on income distributed to
shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it distribute
to its shareholders at least 90% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be
19
classified
as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the
majority of their assets directly in real property, derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income primarily
from interest payments. Hybrid REITs combine the characteristics of both Equity
REITs and Mortgage REITs. The Fund will not invest in real estate directly, but
only in securities issued by real estate companies. However, the Fund may be
subject to risks similar to those associated with the direct ownership of real
estate (in addition to securities markets risks) to the extent they invest in
the securities of companies in the real estate industry. These include declines
in the value of real estate, risks related to general and local economic
conditions, dependency on management skill, heavy cash flow dependency, possible
lack of availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in property taxes and operating
expenses, changes in zoning laws, losses due to costs resulting from the clean-up of environmental problems, liability
to third parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values, the
appeal of properties to tenants and changes in interest rates. Investments in
REITs may subject Fund shareholders to duplicate management and administrative
fees.
In
addition to these risks, Equity REITs may be affected by changes in the value of
the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the beneficial tax treatment available
to REITs under the Internal Revenue Code, or to maintain their exemptions from
registration under the 1940 Act. The above factors may also adversely affect a
borrower’s or a lessee’s ability to meet its obligations to the REIT. In the
event of a default by a borrower or lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting investments.
REPURCHASE
AGREEMENTS
The
Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from its excess cash balances and to invest
securities lending cash collateral. A repurchase agreement is an agreement under
which the Fund acquires a financial instrument (e.g., a security issued by the
U.S. government or an agency thereof, a banker’s acceptance or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed upon price
and date (normally, the next Business Day—as defined below). A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument.
In
these repurchase agreement transactions, the securities acquired by the Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of the Fund’s net assets will be
invested in illiquid investments, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The
use of repurchase agreements involves certain risks. For example, if the other
party to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, the Fund may
incur a loss upon disposition of the security. If the other party to the
agreement becomes insolvent and subject to liquidation or reorganization under
the U.S. Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and, therefore, the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor of
the other party to the agreement.
20
REVERSE
REPURCHASE AGREEMENTS
The
Fund may enter into reverse repurchase agreements, which involve the sale of
securities with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment and have the characteristics of borrowing. The
securities purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such transactions is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while in many cases the
Fund is able to keep some of the interest income associated with those
securities. Such transactions are only advantageous if the Fund has an
opportunity to earn a greater rate of interest on the cash derived from these
transactions than the interest cost of obtaining the same amount of cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available and
the Fund intends to use the reverse repurchase technique only when the Adviser
believes it will be advantageous to the Fund. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the value of the
Fund’s assets. The Fund may enter into reverse repurchase agreements if it
either meets the relevant asset coverage requirements of Section 18 of the
1940 Act for senior securities representing indebtedness, or elects to treat
such arrangements as derivatives transactions under the Derivatives Rule.
U.S.
GOVERNMENT OBLIGATIONS
U.S.
Government obligations are a type of bond. U.S. Government obligations include
securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities.
One
type of U.S. Government obligation, U.S. Treasury obligations, are backed by the
full faith and credit of the U.S. Treasury and differ only in their interest
rates, maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one-year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years.
Other
U.S. Government obligations are issued or guaranteed by agencies or
instrumentalities of the U.S. Government including, but not limited to, Federal
National Mortgage Association (“Fannie Mae”), the Government National Mortgage
Association (“Ginnie Mae”), the Small Business Administration, the Federal Farm
Credit Administration, the Federal Home Loan Mortgage Corporation (“Freddie
Mac”), the Federal Home Loan Banks (“FHLB”), Banks for Cooperatives (including
the Central Bank for Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, the National Credit
Union Administration and the Federal Agricultural Mortgage Corporation (Farmer
Mac). Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury. Other
obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. Government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury. While the U.S. Government provides financial support to
such U.S. Government-sponsored federal agencies, no assurance can be given that
the U.S. Government will always do so, since the U.S. Government is not so
obligated by law.
In
September 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and
Freddie Mac, placing the two federal instrumentalities in conservatorship. Under
the terms of the takeover, the U.S. Treasury agreed to acquire $1 billion
of senior preferred stock of each instrumentality and obtained warrants for the
purchase of common stock of each instrumentality. Under these Senior Preferred
Stock Purchase Agreements (“SPAs”), the U.S. Treasury has pledged to provide a
limited amount of capital per instrumentality as needed, including the
contribution of cash capital to the instrumentalities in the event their
liabilities exceed their assets. In May 2009, the U.S. Treasury increased its
maximum commitment to each instrumentality under the SPAs from $100 billion
21
to
$200 billion per instrumentality. In December 2009, the U.S. Treasury
amended the SPAs to provide Fannie Mae and Freddie Mac with some additional
flexibility to meet the requirement to reduce their mortgage portfolios. Also in
December 2009, the U.S. Treasury further amended the SPAs to allow the cap on
the U.S. Treasury’s funding commitment to increase as necessary to accommodate
any cumulative reduction in Fannie Mae’s and Freddie Mac’s net worth through the
end of 2012. On August 17, 2012, the U.S. Treasury announced that it was
again amending the SPAs to terminate the requirement that Fannie Mae and Freddie
Mac each pay a 10% dividend annually on all amounts received under the funding
commitment. Instead, they were required to transfer to the U.S. Treasury on a
quarterly basis all profits earned during a quarter that exceeded a capital
reserve amount of $3 billion. On September 30, 2019, the U.S. Treasury
announced amendments to the SPAs permitting Fannie Mae and Freddie Mac to
maintain capital reserves of $25 billion and $20 billion,
respectively. It is believed that the amendment puts Fannie Mae and Freddie Mac
in a better position to service their debt because the companies no longer have
to borrow from the U.S. Treasury to make fixed dividend payments.
Fannie
Mae and Freddie Mac are the subject of several continuing class action lawsuits
and investigations by federal regulators over certain accounting, disclosure or
corporate governance matters, which (along with any resulting financial
restatements) may adversely affect the guaranteeing entities. Importantly, the
future of the entities is in serious question as the U.S. government reportedly
is considering multiple options, ranging from nationalization, privatization,
consolidation, or abolishment of the entities.
U.S.
REGISTERED SECURITIES OF FOREIGN ISSUERS
The
Fund may purchase exchange-traded common stocks and exchange-traded preferred
securities of foreign corporations, as well as U.S. registered,
dollar-denominated bonds of foreign corporations, governments, agencies and
supra-national entities. Investing in U.S. registered, dollar-denominated,
securities issued by non-U.S. issuers
involves some risks and considerations not typically associated with investing
in U.S. companies. These include differences in accounting, auditing and
financial reporting standards, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S. investments in foreign countries,
and potential restrictions of the flow of international capital. Foreign
companies may be subject to less governmental regulation than U.S. issuers.
Moreover, individual foreign economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self- sufficiency and balance of
payment positions.
The
Fund’s investments in common stock of foreign corporations may also be in the
form of American Depositary Receipts (“ADRs”), Global Depositary Receipts
(“GDRs”) and European Depositary Receipts (“EDRs”) (collectively “Depositary
Receipts”). Depositary Receipts are receipts, typically issued by a bank or
trust company, which evidence ownership of underlying securities issued by a
foreign corporation. For ADRs, the depository is typically a U.S. financial
institution and the underlying securities are issued by a foreign issuer. For
other Depositary Receipts, the depository may be a foreign or a U.S. entity, and
the underlying securities may have a foreign or a U.S. issuer. Depositary
Receipts will not necessarily be denominated in the same currency as their
underlying securities. Generally, ADRs, in registered form, are designed for use
in the U.S. securities markets, and EDRs, in bearer form, are designated for use
in European securities markets.
GDRs
are tradable both in the United States and in Europe and are designed for use
throughout the world. The Fund each may invest in sponsored or unsponsored ADRs.
The issuers of unsponsored ADRs are not obligated to disclose material
information in the United States, and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the market value of the ADRs.
VARIABLE
AND FLOATING RATE SECURITIES
Variable
rate securities are instruments issued or guaranteed by entities such as
(1) U.S. Government, or an agency or instrumentality thereof,
(2) states, municipalities and other political subdivisions, agencies,
authorities
22
and
instrumentalities or states and multi-state agencies or authorities,
(3) corporations, (4) financial institutions, (5) insurance
companies or (6) trusts that have a rate of interest subject to adjustment
at regular intervals but less frequently than annually. A variable rate security
provides for the automatic establishment of a new interest rate on set dates.
Variable rate obligations whose interest is readjusted no less frequently than
annually will be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. The Fund may also purchase floating
rate securities. A floating rate security provides for the automatic adjustment
of its interest rate whenever a specified interest rate changes. Interest rates
on these securities are ordinarily tied to, and are a percentage of, a widely
recognized interest rate, such as the yield on 90-day U.S. Treasury bills or the prime rate
of a specified bank. These rates may change as often as twice daily. Generally,
changes in interest rates will have a smaller effect on the market value of
variable and fixed rate floating rate securities than on the market value of
comparable fixed rate fixed income obligations. Thus, investing in variable and
fixed rate floating rate securities generally allows less opportunity for
capital appreciation and depreciation than investing in comparable fixed rate
fixed income securities.
WHEN-ISSUED
SECURITIES
The
Fund may purchase securities on a when-issued basis. Delivery of and payment for
these securities may take place as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period, and no income accrues to the Fund until
settlement takes place. When entering into a when-issued transaction, the Fund
will rely on the other party to consummate the transaction; if the other party
fails to do so, the Fund may be disadvantaged.
Securities
purchased on a when-issued basis and held by the Fund are subject to changes in
market value based upon actual or perceived changes in the level of interest
rates. Generally, the value of such securities will fluctuate inversely to
changes in interest rates — i.e., they will appreciate in value when interest
rates decline and decrease in value when interest rates rise. Therefore, if the
Fund purchases securities on a “when-issued” basis, there may be a greater
possibility of fluctuation in the Fund’s NAV.
23
SPECIAL CONSIDERATIONS AND RISKS
A
discussion of the risks associated with an investment in the Fund is contained
in the Prospectus. The discussion below supplements, and should be read in
conjunction with, the Prospectus.
GENERAL
Investment
in the Fund should be made with an understanding that the value of the Fund’s
portfolio securities may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of securities
generally and other factors.
An
investment in the Fund should also be made with an understanding of the risks
inherent in an investment in securities, including the risk that the financial
condition of issuers may become impaired or that the general condition of the
securities markets may deteriorate (either of which may cause a decrease in the
value of the portfolio securities and thus in the value of Shares). Securities
are susceptible to general market fluctuations and to volatile increases and
decreases in value as market confidence in and perceptions of their issuers
change. These investor perceptions are based on various and unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic and banking crises.
Securities of issuers traded on exchanges may be suspended on certain exchanges
by the issuers themselves, by an exchange or by government authorities. The
likelihood of such suspensions may be higher for securities of issuers in
emerging or less-developed market countries than in countries with more
developed markets. Trading suspensions may be applied from time to time to the
securities of individual issuers for reasons specific to that issuer, or may be
applied broadly by exchanges or governmental authorities in response to market
events. Suspensions may last for significant periods of time, during which
trading in the securities and instruments that reference the securities, such as
participatory notes (or “P-notes”) or
other derivative instruments, may be halted.
The
principal trading market for some of the securities in an Index may be in the
over-the-counter market. The existence
of a liquid trading market for certain securities may depend on whether dealers
will make a market in such securities. There can be no assurance that a market
will be made or maintained or that any such market will be or remain liquid. The
price at which securities may be sold and the value of the Fund’s Shares will be
adversely affected if trading markets for the Fund’s portfolio securities are
limited or absent or if bid/ask spreads are wide.
BITCOIN
EXPOSURE RISK
The
Fund may invest, directly or indirectly, in bitcoin futures contracts, shares of
ETFs that primarily hold bitcoin futures contracts and in shares of
exchange-traded products that hold bitcoin as a reference asset (“bitcoin
ETPs”). The Fund will invest only in cash-settled bitcoin futures traded on a
futures exchange registered with and regulated by the Commodity Futures Trading
Commission, and shares of bitcoin ETPs listed on a U.S. national securities
exchange. The Fund will not invest in bitcoin directly.
Bitcoin
futures and bitcoin ETPs are relatively new investments. As a result, the
markets for bitcoin futures and bitcoin ETPs may be less developed, and
potentially less liquid and more volatile, than more established futures and
securities markets. While the bitcoin futures and bitcoin ETP markets have grown
substantially since each investment commenced trading, there can be no assurance
that this growth will continue. The price of bitcoin could drop precipitously
(including to zero), which would be expected to have a similar impact on the
prices of bitcoin futures and bitcoin ETPs. In addition, unlike the exchanges
for more traditional assets, such as equity securities and futures contracts
(including the Chicago Mercantile Exchange with respect to bitcoin futures),
bitcoin and bitcoin trading venues are largely unregulated. As a result of the
lack of regulation, individuals or groups may engage in fraud or market
manipulation and investors may be more exposed to the risk of theft, fraud and
market manipulation than when investing in more traditional asset classes. Over
the past several years, a
24
number
of bitcoin trading venues have been closed due to fraud, failure or security
breaches. Legal or regulatory changes may negatively impact the operation of the
decentralized, open-source protocol and network that bitcoin is based on (the
“Bitcoin network”) or restrict the use of bitcoin. The Bitcoin network is in the
early stages of development and has a limited history, and there is no assurance
that usage of Bitcoin network, and bitcoin itself, will continue to grow.
Regulation of bitcoin and the Bitcoin network continues to evolve in both the
U.S. and foreign jurisdictions, which may result in restrictions on the use of
bitcoin or otherwise impact the demand for bitcoin. The value of bitcoin is, in
part, determined by the supply of, and demand for, bitcoin in the global markets
for the trading of bitcoin, market expectations for the adoption of bitcoin as a
decentralized store of value, the number of merchants and/or institutions that
accept bitcoin as a form of payment, and the volume of peer-to-peer transactions, among other
factors. The trading prices of bitcoin have experienced extreme volatility in
recent periods and may continue to do so. The prevalence of bitcoin a relatively
recent trend, and its long-term adoption by investors, consumers and businesses
is unpredictable.
BLOCKCHAIN
COMPANIES INVESTMENT RISK
Investing
in blockchain companies is subject to a number of risks. Blockchain technology
is new and many of its uses may be untested. There is no assurance that
widespread adoption of blockchain technology will occur, and the development and
acceptance of competing platforms or technologies may cause consumers or
investors to use an alternative to blockchain technology. Blockchain companies
may be subject to more volatility and less trading volume than securities of
companies in more established industries. As a result, a lack of expansion in,
or acceptance of, blockchain technology could adversely affect the value of the
underlying companies held by Fund. Moreover, the extent to which the underlying
companies held by the Fund utilize blockchain technology may vary, and it is
possible that even widespread adoption of blockchain technology may not result
in a material increase in the value of such companies.
Companies
that are developing applications of blockchain technology may not in fact do so
or may not be able to capitalize on those blockchain technologies. A
proliferation of recent companies attempting to apply blockchain technology in
different contexts means the possibility of conflicting intellectual property
claims that could affect a company’s operations or business. Regardless of the
merit of any intellectual property claim or other legal action, any threatened
action that reduces confidence in the viability of blockchain may adversely
affect the value of the underlying companies held by the Fund. The adoption of
blockchain technology may be impaired by laws or regulations. For example, in
2021, China moved to restrict the mining of crypto assets. Additionally, because
blockchain technology is new, it may be subject to future laws or regulations
that may be difficult to predict. Any such laws or regulations regarding
blockchain technology may adversely affect the value of the underlying
blockchain companies held by the Fund.
Transacting
on a blockchain depends in part specifically on the use of cryptographic keys
that are required to access a user’s account (or “wallet”). The theft, loss or
destruction of these keys impairs the value of ownership claims users have over
the relevant assets being represented by the blockchain (whether “smart
contracts,” securities, currency or other digital assets). The theft, loss or
destruction of the cryptographic keys needed to transact on a blockchain could
also adversely affect a company’s business or operations if it were dependent on
the blockchain. In addition, because blockchain functionality relies on the
internet, a significant disruption of internet connectivity affecting large
numbers of users or geographic areas could impede the functionality of
blockchain technologies and adversely affect the underlying companies held by
the Fund. Certain features of blockchain technology, such as decentralization,
open source protocol and reliance on peer-to-peer connectivity, may increase the
risk of fraud or cyber-attack by potentially reducing the likelihood of a
coordinated response. Blockchain companies involved in crypto assets may be
adversely affected by fluctuations in, and manipulation of, the price of crypto
assets and a lack of liquid markets or acceptance for certain crypto assets or
government policies.
25
ETHER
EXPOSURE RISK
The
Fund may invest, either directly or indirectly, in ether futures contracts,
shares of ETFs that primarily hold ether futures contracts and in shares of
exchange-traded products that hold ether as a reference asset (“ether ETPs”).
The Fund will invest only in cash-settled ether futures traded on a futures
exchange registered with and regulated by the Commodity Futures Trading
Commission, and shares of ether ETPs listed on a U.S. national securities
exchange. The Fund will not invest in ether directly.
Ether
futures and ether ETPs are relatively new investments. As a result, the markets
for ether futures and ether ETPs may be less developed, and potentially less
liquid and more volatile, than more established futures and securities markets.
While the ether futures and ether ETP markets have grown substantially since
each investment commenced trading, there can be no assurance that this growth
will continue. The price of ether could drop precipitously (including to zero),
which would be expected to have a similar impact on the prices of ether futures
and ether ETPs. In addition, unlike the exchanges for more traditional assets,
such as equity securities and futures contracts (including the Chicago
Mercantile Exchange with respect to ether futures), ether and ether trading
venues are largely unregulated. As a result of the lack of regulation,
individuals or groups may engage in fraud or market manipulation and investors
may be more exposed to the risk of theft, fraud and market manipulation than
when investing in more traditional asset classes. Legal or regulatory changes
may negatively impact the operation of the decentralized, open-source protocol
network that ether is based on (the “Ethereum network”) or restrict the use of
ether. The Ethereum network is in the early stages of development and has a
limited history, and there is no assurance that usage of the Ethereum network,
and ether itself, will continue to grow. Regulation of ether and the Ethereum
network continues to evolve in both the U.S. and foreign jurisdictions, which
may result in restrictions on the use of ether or otherwise impact the demand
for ether. The value of ether is, in part, determined by the supply of, and
demand for, ether in the global markets for the trading of ether, market
expectations for the adoption of ether as a decentralized store of value, the
number of merchants and/or institutions that accept ether as a form of payment,
and the volume of peer-to-peer transactions, among other
factors. The trading prices of ether have experienced extreme volatility in
recent periods and may continue to do so. The prevalence of ether is a
relatively recent trend, and its long-term adoption by investors, consumers and
businesses is unpredictable.
CONFLICTS
OF INTEREST RISK
An
investment in the Fund may be subject to a number of actual or potential
conflicts of interest. For example, the Adviser or its affiliates may provide
services to the Fund, such as securities lending agency services, custodial,
administrative, bookkeeping, and accounting services, transfer agency and
shareholder servicing, securities brokerage services, and other services for
which the Fund would compensate the Adviser and/or such affiliates. The Fund may
invest in other pooled investment vehicles sponsored, managed, or otherwise
affiliated with the Adviser. There is no assurance that the rates at which the
Fund pays fees or expenses to the Adviser or its affiliates, or the terms on
which it enters into transactions with the Adviser or its affiliates, will be
the most favorable available in the market generally or as favorable as the
rates the Adviser makes available to other clients. Because of its financial
interest, the Adviser may have an incentive to enter into transactions or
arrangements on behalf of the Fund with itself or its affiliates in
circumstances where it might not have done so in the absence of that interest.
CONTINUOUS
OFFERING
The
method by which Creation Units of Shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Units of
Shares are issued and sold by the Trust on an ongoing basis, at any point a
“distribution,” as such term is used in the Securities Act, may occur.
Broker-dealers and other persons are cautioned that some activities on their
part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery and liability
provisions of the Securities Act.
26
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a categorization
as an underwriter.
Broker-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in Shares, whether or not participating in the distribution of
Shares, are generally required to deliver a prospectus. This is because the
prospectus delivery exemption in Section 4(a)(3) of the Securities Act is
not available in respect of such transactions as a result of Section 24(d)
of the 1940 Act. Firms that incur a prospectus-delivery obligation with respect
to Shares of the Fund are reminded that under Securities Act Rule 153, a
prospectus-delivery obligation under Section 5(b)(2) of the Securities Act
owed to an exchange member in connection with a sale on the Exchange is
satisfied by the fact that the Fund’s Prospectus is available at the Exchange
upon request. The prospectus delivery mechanism provided in Rule 153 is only
available with respect to transactions on an exchange.
SSGA
or its affiliates (the “Selling Shareholder”) may purchase Creation Units
through a broker-dealer to “seed” (in whole or in part) the Fund as it is
launched, or may purchase shares from broker-dealers or other investors that
have previously provided “seed” for the Fund when it was launched or otherwise
in secondary market transactions, and because the Selling Shareholder may be
deemed an affiliate of the Fund, the Shares are being registered to permit the
resale of these shares from time to time after purchase. The Fund will not
receive any of the proceeds from the resale by the Selling Shareholders of these
Shares.
The
Selling Shareholder intends to sell all or a portion of the Shares owned by it
and offered hereby from time to time directly or through one or more
broker-dealers, and may also hedge such positions. The Shares may be sold on any
national securities exchange on which the Shares may be listed or quoted at the
time of sale, in the over-the-counter market or in
transactions other than on these exchanges or systems at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve cross or block transactions.
The
Selling Shareholder may also loan or pledge Shares to broker-dealers that in
turn may sell such Shares, to the extent permitted by applicable law. The
Selling Shareholder may also enter into options or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of Shares, which Shares such broker-dealer or other
financial institution may resell.
The
Selling Shareholder and any broker-dealer or agents participating in the
distribution of Shares may be deemed to be “underwriters” within the meaning of
Section 2(a)(11) of the Securities Act in connection with such sales. In
such event, any commissions paid to any such broker-dealer or agent and any
profit on the resale of the Shares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The Selling
Shareholder who may be deemed an “underwriter” within the meaning of
Section 2(a)(11) of the Securities Act will be subject to the applicable
prospectus delivery requirements of the Securities Act.
COUNTERPARTY
RISK
Counterparty
risk with respect to derivatives has been and may continue to be affected by new
rules and regulations affecting the derivatives market. Some derivatives
transactions are required to be centrally cleared, and a party to a cleared
derivatives transaction is subject to the credit risk of the clearing house and
the clearing member through which it holds its cleared position, rather than the
credit risk of its original counterparty to the derivatives transaction. Credit
risk of market participants with respect to derivatives that are centrally
cleared is
27
concentrated
in a few clearing houses, and it is not clear how an insolvency proceeding of a
clearing house would be conducted, what effect the insolvency proceeding would
have on any recovery by the Fund, and what impact an insolvency of a clearing
house would have on the financial system more generally.
CRYPTO
INDUSTRY RISK
The
technology relating to the crypto industry ecosystem is new and developing and
the risks associated with crypto assets may not fully emerge until the
technology is widely used. Technologies utilizing cryptography are used by
companies to optimize their business practices, whether by using the technology
within their business or operating business lines involved in the operation of
the technology. Cryptography refers to a set of techniques employing
mathematical concepts and algorithms designed to allow for secure communication.
Blockchain is a well-known example of a technology that relies on cryptography.
A blockchain is comprised of unchangeable, digitally recorded data in packages
called “blocks.” These digitally recorded blocks of data are stored in a linear
“chain.” Each block in the chain contains data (e.g., a transaction),
that is cryptographically connected to the previous-block in the chain, ensuring
all data in the overall “blockchain” has not been tampered with and remains
unchanged. The cryptographic keys necessary to transact a crypto asset may be
subject to theft, loss, or destruction, which could adversely affect a company’s
business or operations if it were dependent on such an asset. Competing
platforms and technologies may be developed such that consumers or investors use
an alternative to crypto assets. There may be risks posed by the lack of
regulation for crypto assets and any future regulatory developments could affect
the viability and expansion of the use of crypto technologies. Recently, U.S.
securities regulators have brought actions against companies operating in the
crypto industry ecosystem for violations of U.S. securities laws. To the extent
such an action is brought against a company held by the Fund, the value of such
a holding could decrease significantly. Because companies operating in the
crypto industry ecosystem may operate across many national boundaries and
regulatory jurisdictions, it is possible that such companies may be subject to
widespread and inconsistent regulation. Crypto industry companies that rely on
third party products may be subject to technical defects or vulnerabilities
beyond a company’s control. Because many crypto assets do not have a
standardized exchange, like a stock market, there is less liquidity for such
assets and greater possibility of volatility, fraud or manipulation. The values
of certain companies included in the Fund’s portfolio may not entirely be a
reflection of their connection to the crypto industry ecosystem, but may be
based on other business operations. In addition, these companies may engage in
other lines of business unrelated to the crypto industry ecosystem and these
lines of business could adversely affect their operating results. These
companies also may not be able to develop crypto technology applications or may
not be able to capitalize on those applications. Technologies also may never be
fully implemented, which could adversely affect an investment in such companies.
Companies that use crypto technologies may be subject to cybersecurity risk. In
addition, certain features of crypto industry technologies, such as
decentralization, open source protocol, and reliance on peer-to-peer connectivity, may
increase the risk of fraud or cyber-attack by potentially reducing the
likelihood of a coordinated response. A significant disruption of Internet
connectivity affecting large numbers of users or geographic areas could impede
the functionality of crypto technologies and adversely affect companies included
in the Fund’s portfolio. Crypto industry companies may be subject to the risks
posed by conflicting intellectual property claims, which may reduce confidence
in the viability of a crypto asset.
Certain
of the Fund’s investments, including investments in companies with direct
holdings of crypto assets may be subject to the risks associated with investing
in such assets. Such companies may be subject to the risk that: the technology
that facilitates the transfer of the crypto asset could fail; the decentralized,
open source protocol of the blockchain network utilized by a company held by the
Fund could be affected by Internet connectivity disruptions, fraud, consensus
failures or cybersecurity attacks; such network may not be adequately maintained
by its participants; because crypto assets are a new technological innovation
with a limited history, they are highly speculative assets and may experience
extreme price volatility; future regulatory actions or policies may limit the
ability to sell, exchange or use a crypto asset; the price of a crypto asset may
be impacted by the transactions of a small number of holders of such asset; and
that a crypto asset will decline in popularity, acceptance or use, thereby
impairing its price. Instability, failures, bankruptcies or other negative
events in the crypto industry, including events that are not necessarily related
to the security or utility of a particular crypto
28
asset,
could similarly negatively impact the price of such crypto asset, and thereby
the companies held by the Fund that have exposure to such crypto asset.
DIGITAL
ASSET REGULATORY RISK
Digital
asset markets in the U.S. exist in a state of regulatory uncertainty, and
adverse legislative or regulatory developments could significantly harm the
value of bitcoin ETPs, bitcoin futures contracts and companies engaged in the
digital asset industry, which could impact the Fund’s Shares. Examples of such
developments include banning, restricting or imposing onerous conditions or
prohibitions on the use of digital assets, validating or mining activity,
digital wallets, the provision of services related to trading and custodying
digital assets, the operation of the digital asset networks or the digital asset
markets generally. Such occurrences could also impair the Fund’s ability to meet
its investment objective pursuant to its investment strategy.
DIGITAL
ECONOMY COMPANIES RISK
The
Fund invests significantly in digital economy companies. Such companies may be
adversely impacted by government regulations, economic conditions and
deterioration in credit markets. Digital economy companies typically face
intense competition and could be negatively affected by new entrants into the
market, especially those located in markets with lower production costs.
Competitors in the digital payments space include financial institutions and
well-established payment processing companies. Digital economy companies
involved in the manufacturing of semiconductors face concerns of rapid product
obsolescence. Similarly, digital payments companies may be highly dependent on
their ability to enter into agreements with merchants and other third parties to
utilize a particular payment method, system, software or service, and such
agreements may be subject to increased regulatory scrutiny. In addition, many
digital economy companies store sensitive consumer information and could be the
target of cybersecurity attacks and other types of theft, which could have a
negative impact on these companies. Digital economy companies currently operate
under less regulatory scrutiny than traditional financial services companies and
banks, but there is significant risk that regulatory oversight could increase in
the future. Higher levels of regulation could increase costs and adversely
impact the current business models of some digital economy companies and could
severely impact the viability of these companies. These companies could be
negatively impacted by disruptions in service caused by hardware or software
failure, or by interruptions or delays in service by third-party data center
hosting facilities and maintenance providers. Digital economy companies,
especially smaller companies, tend to be more volatile than companies that do
not rely heavily on technology.
FUTURES
AND OPTIONS TRANSACTIONS
There
can be no assurance that a liquid secondary market will exist for any particular
futures contract or option at any specific time. Thus, it may not be possible to
close a futures or options position. In the event of adverse price movements,
the Fund would continue to be required to make daily cash payments to maintain
its required margin. In such situations, if the Fund has insufficient cash, it
may have to sell portfolio securities to meet daily margin requirements at a
time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it has
sold.
The
Fund will minimize the risk that it will be unable to close out a futures or
options contract by only entering into futures and options for which there
appears to be a liquid secondary market.
The
risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered index futures contracts) is potentially
unlimited. The risk of a futures position may still be large as traditionally
measured due to the low margin deposits required. In many cases, a relatively
small price movement in a futures contract may result in immediate and
substantial loss or gain to the investor relative to the size of a required
margin deposit. The Fund, however, may utilize futures and options contracts in
a manner designed to limit its risk exposure to that which is comparable to what
it would have incurred through direct investment in securities.
29
Utilization
of futures transactions by the Fund involves the risk of loss by the Fund of
margin deposits in the event of bankruptcy of a broker with whom the Fund has an
open position in the futures contract or option.
Certain
financial futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The “daily price fluctuation limit”
or “daily limit” establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day’s settlement price at
the end of a trading session. Once the daily limit has been reached in a
particular type of contract, generally no trades may be made on that day at a
price beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.
RISKS
OF SWAP AGREEMENTS
Swap
agreements are subject to the risk that the swap counterparty will default on
its obligations. If such a default occurs, the Fund will have contractual
remedies pursuant to the agreements related to the transaction, but such
remedies may be subject to bankruptcy and insolvency laws which could affect the
Fund’s rights as a creditor.
The
use of interest-rate and index swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. The use of a swap requires an
understanding not only of the referenced asset, reference rate, or index, but
also of the swap itself, without the benefit of observing the performance of the
swap under all possible market conditions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
The
absence of a regulated execution facility or contract market and lack of
liquidity for swap transactions has led, in some instances, to difficulties in
trading and valuation, especially in the event of market disruptions. Under
recently adopted rules and regulations, transactions in some types of swaps are
required to be centrally cleared. In a cleared derivatives transaction, the
Fund’s counterparty to the transaction is a central derivatives clearing
organization, or clearing house, rather than a bank or broker. Because the Fund
is not a member of a clearing house, and only members of a clearing house can
participate directly in the clearing house, the Fund holds cleared derivatives
through accounts at clearing members. In cleared derivatives transactions, the
Fund will make payments (including margin payments) to and receive payments from
a clearing house through its accounts at clearing members. Clearing members
guarantee performance of their clients’ obligations to the clearing house.
Centrally cleared derivative arrangements may be less favorable to the Fund than
bilateral (non-cleared) arrangements.
For example, the Fund may be required to provide greater amounts of margin for
cleared derivatives transactions than for bilateral derivatives transactions.
Also, in contrast to bilateral derivatives transactions, in some cases following
a period of notice to the Fund, a clearing member generally can require
termination of existing cleared derivatives transactions at any time or an
increase in margin requirements above the margin that the clearing member
required at the beginning of a transaction. Clearing houses also have broad
rights to increase margin requirements for existing transactions or to terminate
transactions at any time in accordance with their rules. The Fund is subject to
risk if it enters into a derivatives transaction that is required to be cleared
(or which SSGA FM expects to be cleared), and no clearing member is willing or
able to clear the transaction on the Fund’s behalf. In that case, the
transaction might have to be terminated, and the Fund could lose some or all of
the benefit of the transaction, including loss of an increase in the value of
the transaction and loss of hedging protection. In addition, the documentation
governing the relationship between the Fund and clearing members is drafted by
the clearing members and generally is less favorable to the Fund than typical
bilateral derivatives documentation.
These
clearing rules and other new rules and regulations could, among other things,
restrict the Fund’s ability to engage in, or increase the cost to the Fund of,
derivatives transactions, for example, by making some types of
30
derivatives
no longer available to the Fund, increasing margin or capital requirements, or
otherwise limiting liquidity or increasing transaction costs. These regulations,
as applicable to swaps, are relatively new and evolving, so their potential
impact on the Fund and the financial system are not yet known.
Because
they are two party contracts that may be subject to contractual restrictions on
transferability and termination and because they may have terms of greater than
seven days, swap agreements may be considered to be illiquid and subject to the
Fund’s limitation on investments in illiquid investments. To the extent that a
swap is not liquid, it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price, which may result in
significant losses. Like most other investments, swap agreements are subject to
the risk that the market value of the instrument will change in a way
detrimental to the Fund’s interest.
If
the Fund uses a swap as a hedge against, or as a substitute for, a portfolio
investment, the Fund will be exposed to the risk that the swap will have or will
develop imperfect or no correlation with the portfolio investment. This could
cause substantial losses for the Fund. While hedging strategies involving swap
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
other Fund investments. Many swaps are complex and often valued subjectively.
EUROPE
– RECENT EVENTS
A
number of countries in Europe, including Greece, Spain, Ireland, Italy, and
Portugal, have substantial government debt levels. The concern over these debt
levels has led to volatility in the European financial markets, which has
adversely affected the exchange rate of the euro and may continue to
significantly affect every country in Europe. For some countries, the ability to
repay sovereign debt is in question, and default is possible, which could affect
their ability to borrow in the future. Several countries have agreed to
multi-year bailout loans from the European Central Bank, the IMF, and other
institutions. A default or debt restructuring by any European country can
adversely impact holders of that country’s debt and can affect exposures to
other European Union (“EU”) countries and their financial companies as well.
These financial difficulties may continue, worsen or spread within or outside
Europe. Responses to the financial problems by European governments, central
banks and others, including austerity measures and reforms, may not work, may
result in social unrest and may limit future growth and economic recovery or
have other unintended consequences.
Uncertainties
regarding the viability of the EU have impacted and may continue to impact
markets in the United States and around the world. On January 31, 2020, the
United Kingdom formally withdrew from the EU (commonly referred to as “Brexit”)
and entered an 11-month transition
period. The transition period concluded on December 31, 2020, and the
United Kingdom left the EU single market and customs union under the terms of a
new trade agreement. The agreement governs the new relationship between the
United Kingdom and EU with respect to trading goods and services, but critical
aspects of the relationship remain unresolved and subject to further negotiation
and agreement. Certain aspects of Brexit have had an adverse impact on the
region, leading to increased inflation, labor shortages and business closures,
among others. The full scope and nature of the consequences of the exit are not
at this time known and are unlikely to be known for a significant period of
time. It is also unknown whether the United Kingdom’s exit will increase the
likelihood of other countries also departing the EU. Any additional exits from
the EU, or the possibility of such exits, may have a significant impact on the
United Kingdom, Europe, and global economies, which may result in increased
volatility and illiquidity, new legal and regulatory uncertainties and
potentially lower economic growth for such economies that could potentially have
an adverse effect on the value of the Fund’s investments.
MARKET
TURBULENCE RESULTING FROM INFECTIOUS ILLNESS
A
widespread outbreak of an infectious illness, such as COVID-19, may lead to governments and
businesses world-wide taking aggressive measures, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines of large populations. As occurred in the wake of COVID-19, the spread of such an illness may
result in the disruption of and delays in the delivery of healthcare services
and
31
processes,
the cancellation of organized events and educational institutions, the
disruption of production and supply chains, a decline in consumer demand for
certain goods and services, and general concern and uncertainty, all of which
may contribute to increased volatility in global markets. COVID-19, and other epidemics and pandemics
that may arise in the future, could adversely affect the economies of many
nations, the global economy, individual companies, sectors and industries, and
capital markets in ways that cannot be foreseen at the present time. In
addition, the impact of infectious diseases in developing or emerging market
countries may be greater due to limited health care resources. Political,
economic and social stresses caused by infectious illness also may exacerbate
other pre-existing political, social
and economic risks in certain countries. The duration of such an illness and its
effects cannot be determined at this time, but the effects could be present for
an extended period of time.
RUSSIA
SANCTIONS RISK
Sanctions
threatened or imposed by a number of jurisdictions, including the United States,
the European Union and the United Kingdom, and other intergovernmental actions
that have been or may be undertaken in the future, against Russia, Russian
entities or Russian individuals, may result in the devaluation of Russian
currency, a downgrade in the country’s credit rating, an immediate freeze of
Russian assets, a decline in the value and liquidity of Russian securities,
property or interests, and/or other adverse consequences to the Russian economy
or the Fund. The scope and scale of sanctions in place at a particular time may
be expanded or otherwise modified in a way that have negative effects on the
Fund. Sanctions, or the threat of new or modified sanctions, could impair the
ability of the Fund to buy, sell, hold, receive, deliver or otherwise transact
in certain affected securities or other investment instruments. Sanctions could
also result in Russia taking counter measures or other actions in response,
which may further impair the value and liquidity of Russian securities. These
sanctions, and the resulting disruption of the Russian economy, may cause
volatility in other regional and global markets and may negatively impact the
performance of various sectors and industries, as well as companies in other
countries, which could have a negative effect on the performance of the Fund,
even if the Fund does not have direct exposure to securities of Russian issuers.
As a collective result of the imposition of sanctions, Russian government
countermeasures and the impact that they have had on the trading markets for
Russian securities, the Fund may use fair valuation procedures approved by the
Fund’s Board to value certain Russian securities, which could result in such
securities being deemed to have a zero value.
A
reduction in liquidity of certain Fund holdings as a result of sanctions and
related actions may cause the Fund to experience increased premiums or discounts
to its NAV and/or wider bid-ask
spreads. Additionally, if it becomes impracticable or unlawful for the Fund to
hold securities subject to, or otherwise affected by, sanctions, or if deemed
appropriate by the Fund’s investment adviser, the Fund may prohibit in-kind deposits of the affected securities
in connection with creation transactions and instead require a cash deposit,
which may also increase the Fund’s transaction costs.
TAX
RISKS
As
with any investment, you should consider how your investment in Shares of the
Fund will be taxed. The tax information in the Prospectus and this SAI is
provided as general information. You should consult your own tax professional
about the tax consequences of an investment in Shares of the Fund.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged retirement account, such as an
individual retirement account, you need to be aware of the possible tax
consequences when the Fund makes distributions or you sell Shares.
32
INVESTMENT RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Fund. These restrictions cannot be changed without the
approval of the holders of a majority of the Fund’s outstanding voting
securities. For purposes of the 1940 Act, a majority of the outstanding voting
securities of the Fund means the vote, at an annual or a special meeting of the
security holders of the Trust, of the lesser of (1) 67% or more of the
voting securities of the Fund present at such meeting, if the holders of more
than 50% of the outstanding voting securities of the Fund are present or
represented by proxy, or (2) more than 50% of the outstanding voting
securities of the Fund. Except with the approval of a majority of the
outstanding voting securities, the Fund may not:
| |
1. |
Make loans to another person except as permitted by the 1940
Act or other governing statute, by the Rules thereunder, or by the SEC or
other regulatory agency with authority over the Fund;
|
| |
2. |
Issue senior securities or borrow money except as permitted by
the 1940 Act or other governing statute, by the Rules thereunder, or by
the SEC or other regulatory agency with authority over the Fund;
|
| |
3. |
Invest directly in real estate unless the real estate is
acquired as a result of ownership of securities or other instruments. This
restriction shall not preclude the Fund from investing in companies that
deal in real estate or in instruments that are backed or secured by real
estate; |
| |
4. |
Act as an underwriter of another issuer’s securities, except to
the extent the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the Fund’s purchase and
sale of portfolio securities; or |
| |
5. |
Invest in commodities except as permitted by the 1940 Act or
other governing statute, by the Rules thereunder, or by the SEC or other
regulatory agency with authority over the Fund. |
In
addition, the Fund has adopted a fundamental policy to:
| |
6. |
Concentrate its investments, as concentration is defined under
the 1940 Act, the Rules and regulations thereunder or any exemption
therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time, in the following group of industries:
software; semiconductors & semiconductor equipment; financial
services; and capital markets. (1) |
In
addition to the investment restrictions adopted as fundamental policies as set
forth above, the Fund observes the following restrictions, which may be changed
by the Board without a shareholder vote. The Fund will not:
| |
1. |
Invest in the securities of a company for the purpose of
exercising management or control, provided that the Trust may vote the
investment securities owned by the Fund in accordance with its views;
|
| |
2. |
The Fund’s collective exposure to crypto asset futures ETFs,
spot crypto asset ETPs, options on crypto asset futures ETFs and spot
crypto asset ETPs, and crypto asset futures will not exceed 25% of the
Fund’s assets; or |
| |
3. |
Under normal circumstances, invest less than 80% of its net
assets (plus any borrowings for investment purposes), directly or
indirectly, in Digital Asset Ecosystem investments and other instruments
that provide exposure to the Digital Asset Ecosystem. Prior to any change
in this 80% investment policy, the Fund will provide shareholders with 60
days’ notice. |
| (1) |
The SEC Staff considers concentration to involve more than 25%
of a fund’s assets to be invested in an industry or group of industries.
|
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money will be
observed continuously. With respect to the limitation on borrowing, in the event
that a subsequent change in net assets or
33
other
circumstances cause the Fund to exceed its limitation, the Fund will take steps
to bring the aggregate amount of borrowing back within the limitations within
three days thereafter (not including Sundays and holidays).
The
1940 Act currently permits the Fund to loan up to 33 1/3% of its total assets.
With respect to borrowing, the 1940 Act presently allows the Fund to:
(1) borrow from any bank (including pledging, mortgaging or hypothecating
assets) in an amount up to 33 1/3% of its total assets, (2) borrow money
for temporary purposes in an amount not exceeding 5% of the value of the Fund’s
total assets at the time of the loan, and (3) enter into reverse repurchase
agreements. However, under normal circumstances any borrowings by the Fund will
not exceed 10% of the Fund’s total assets. The 1940 Act generally prohibits
funds from issuing senior securities, although it does not treat certain
transactions as senior securities, such as certain borrowings, with appropriate
asset coverage. With respect to investments in commodities, the 1940 Act
presently permits the Fund to invest in commodities in accordance with
investment policies contained in its prospectus and SAI. Any such investment
shall also comply with the CEA and the rules and regulations thereunder. The
1940 Act does not directly restrict an investment company’s ability to invest in
real estate, but does require that every investment company have the fundamental
investment policy governing such investments. The Fund will not purchase or sell
real estate, except that the Fund may invest in companies that deal in real
estate (including REITs) or in instruments that are backed or secured by real
estate.
34
EXCHANGE LISTING AND TRADING
A
discussion of exchange listing and trading matters associated with an investment
in the Fund is contained in the Prospectus under “PURCHASE AND SALE INFORMATION”
and “ADDITIONAL PURCHASE AND SALE INFORMATION.” The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The
Shares of the Fund are approved for listing and trading on the Exchange, subject
to notice of issuance. Shares trade on the Exchange at prices that may differ to
some degree from their net asset value. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of Shares of the
Fund will continue to be met.
The
Exchange may consider the suspension of trading in, and may initiate delisting
proceedings of, the Shares of the Fund under any of the following circumstances:
(i) if the Exchange becomes aware that the Fund is no longer eligible to
operate in reliance on Rule 6c-11 under
the 1940 Act; (ii) if the Fund no longer complies with the applicable
listing requirements set forth in the Exchange’s rules; (iii) if, following
the initial twelve-month period after commencement of trading on the Exchange of
the Fund, there are fewer than 50 beneficial holders of the Fund; or
(iv) if such other event shall occur or condition exists which, in the
opinion of the Exchange, makes further dealings on the Exchange inadvisable. The
Exchange will remove the Shares from listing and trading upon termination of the
Fund.
The
Trust reserves the right to adjust the Share price of the Fund in the future to
maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the Fund or an investor’s equity interest in the
Fund.
As
in the case of other publicly traded securities, brokers’ commissions on
transactions will be based on negotiated commission rates at customary levels.
The
base and trading currencies of the Fund is the U.S. dollar. The base currency is
the currency in which the Fund’s net asset value per Share is calculated and the
trading currency is the currency in which Shares of the Fund are listed and
traded on the Exchange.
35
MANAGEMENT OF THE TRUST
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “MANAGEMENT.”
BOARD
RESPONSIBILITIES
The
management and affairs of the Trust and its series, including the Fund described
in this SAI, are overseen by the Trustees. The Board has approved contracts, as
described in this SAI, under which certain companies provide essential
management services to the Trust.
Like
most mutual funds, the day-to-day business of the Trust,
including the management of risk, is performed by third party service providers,
such as the Adviser, Sub-Adviser,
Distributor, Administrator, and Sub-Administrator. The Trustees are
responsible for overseeing the Trust’s service providers and, thus, have
oversight responsibility with respect to risk management performed by those
service providers. Risk management seeks to identify and address risks,
i.e., events or circumstances that could have material adverse effects on
the business, operations, shareholder services, investment performance or
reputation of the Fund. The Fund and its service providers employ a variety of
processes, procedures and controls to identify various of those possible events
or circumstances, to lessen the probability of their occurrence and/or to
mitigate the effects of such events or circumstances if they do occur. Each
service provider is responsible for one or more discrete aspects of the Trust’s
business (e.g., the Sub-Adviser
is responsible for the day-to-day management of the Fund’s
portfolio investments) and, consequently, for managing the risks associated with
that business. The Board has emphasized to the Fund’s service providers the
importance of maintaining vigorous risk management.
The
Trustees’ role in risk oversight begins before the inception of the Fund, at
which time the Fund’s Adviser and Sub-Adviser presents the Board with
information concerning the investment objectives, strategies and risks of the
Fund, as well as proposed investment limitations for the Fund. Additionally, the
Fund’s Adviser and Sub-Adviser provide
the Board with an overview of, among other things, their investment
philosophies, brokerage practices and compliance infrastructures. Thereafter,
the Board continues its oversight function as various personnel, including the
Trust’s Chief Compliance Officer, as well as personnel of the Adviser and other
service providers, such as the Fund’s independent accountants, make periodic
reports to the Audit Committee or to the Board with respect to various aspects
of risk management. The Board and the Audit Committee oversee efforts by
management and service providers to manage risks to which the Fund may be
exposed.
The
Board is responsible for overseeing the nature, extent and quality of the
services provided to the Fund by the Adviser and Sub-Adviser and receives information about
those services at its regular meetings. In addition, on an annual basis, in
connection with its consideration of whether to renew the Investment Advisory
Agreement and Sub-Advisory Agreement
with the Adviser and Sub-Adviser,
respectively, the Board meets with the Adviser and Sub-Adviser to review such services. Among
other things, the Board regularly considers the Adviser’s and Sub-Adviser’s adherence to the Fund’s
investment restrictions and compliance with various Fund policies and procedures
and with applicable securities regulations. The Board also reviews information
about the Fund’s investments.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues. At least annually, the Trust’s Chief Compliance
Officer provides the Board with a report reviewing the adequacy and
effectiveness of the Trust’s policies and procedures and those of its service
providers, including the Adviser and the Sub-Adviser. The report addresses the
operation of the policies and procedures of the Trust and each service provider
since the date of the last report; any material changes to the policies and
procedures since the date of the last report; any recommendations for material
changes to the policies and procedures; and any material compliance matters
since the date of the last report.
The
Board receives reports from the Fund’s service providers regarding operational
risks and risks related to the valuation and liquidity of portfolio securities.
Regular reports are made to the Board concerning investments for
36
which
market quotations are not readily available. Annually, the independent
registered public accounting firm reviews with the Audit Committee its audit of
the Fund’s financial statements, focusing on major areas of risk encountered by
the Fund and noting any significant deficiencies or material weaknesses in the
Fund’s internal controls. Additionally, in connection with its oversight
function, the Board oversees Fund management’s implementation of disclosure
controls and procedures, which are designed to ensure that information required
to be disclosed by the Trust in its periodic reports with the SEC are recorded,
processed, summarized, and reported within the required time periods. The Board
also oversees the Trust’s internal controls over financial reporting, which
comprise policies and procedures designed to provide reasonable assurance
regarding the reliability of the Trust’s financial reporting and the preparation
of the Trust’s financial statements.
From
their review of these reports and discussions with the Adviser and Sub-Adviser, the Chief Compliance Officer,
the independent registered public accounting firm and other service providers,
the Board and the Audit Committee learn in detail about the material risks of
the Fund, thereby facilitating a dialogue about how management and service
providers identify and mitigate those risks.
The
Board recognizes that not all risks that may affect the Fund can be identified
and/or quantified, that it may not be practical or cost-effective to eliminate
or mitigate certain risks, that it may be necessary to bear certain risks (such
as investment-related risks) to achieve the Fund’s goals, and that the
processes, procedures and controls employed to address certain risks may be
limited in their effectiveness. Moreover, reports received by the Trustees as to
risk management matters are typically summaries of the relevant information.
Most of the Fund’s investment management and business affairs are carried out by
or through the Fund’s Adviser, Sub-Adviser and other service providers, each
of which has an independent interest in risk management but whose policies and
the methods by which one or more risk management functions are carried out may
differ from the Fund’s and each other’s in the setting of priorities, the
resources available or the effectiveness of relevant controls. As a result of
the foregoing and other factors, the Board’s ability to monitor and manage risk,
as a practical matter, is subject to limitations.
TRUSTEES
AND OFFICERS
There
are eight members of the Board of Trustees, seven of whom are not interested
persons of the Trust, as that term is defined in the 1940 Act (“Independent
Trustees”). Carl Verboncoeur, an Independent Trustee, serves as Chairman of the
Board. The Board has determined its leadership structure is appropriate given
the specific characteristics and circumstances of the Trust. The Board made this
determination in consideration of, among other things, the fact that the
Independent Trustees constitute a super-majority (88%) of the Board, the
fact that the chairperson of each Committee of the Board is an Independent
Trustee, the amount of assets under management in the Trust, and the number of
funds overseen by the Board. The Board also believes that its leadership
structure facilitates the orderly and efficient flow of information to the
Independent Trustees from fund management.
The
Board of Trustees has two standing committees: the Audit Committee and Trustee
Committee. The Audit Committee and Trustee Committee are each chaired by an
Independent Trustee and composed of all of the Independent Trustees.
Set
forth below are the names, year of birth, position with the Trust, length of
term of office, and the principal occupations during the last five years and
other directorships held of each of the persons currently serving as a Trustee
or Officer of the Trust.
37
TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
|
Name,
Address
and
Year of Birth |
|
Position(s)
With
Fund |
|
Term of
Office and
Length of
Time
Served |
|
Principal
Occupation(s)
During Past
Five Years |
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee† |
|
Other
Directorships
Held by
Trustee
During Past
Five Years |
|
INDEPENDENT
TRUSTEES |
|
|
|
|
|
|
|
CARL G.
VERBONCOEUR
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1952 |
|
Independent Trustee, Chairman, Trustee Committee Chair |
|
Term: Unlimited Served: since March 2011 |
|
Self-employed consultant since 2009. |
|
122 |
|
None. |
|
|
|
|
|
|
|
DWIGHT D.
CHURCHILL
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1953 |
|
Independent Trustee, Audit Committee Chair |
|
Term: Unlimited Served: since March 2011 |
|
Self-employed consultant since 2010; CEO and President, CFA
Institute (June 2014 - January 2015). |
|
122 |
|
Affiliated Managers Group, Inc. (Director) (2010 -
present). |
|
|
|
|
|
|
|
CLARE S. RICHER
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1958 |
|
Independent Trustee |
|
Term: Unlimited Served: since July 2018 |
|
Retired. Chief Financial Officer, Putnam Investments LLC
(December 2008 - May 2017). |
|
122 |
|
Principal Financial Group (Director and Financial Committee
Chair) (2020 – present); Bain Capital Specialty Finance (Director) (2019 –
present); Bain Capital Private Credit (Director) (2022 – present);
University of Notre Dame (Trustee) (2015 – present). |
|
|
|
|
|
|
|
SANDRA
G. SPONEM
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1958 |
|
Independent Trustee |
|
Term: Unlimited Served: since July 2018 |
|
Retired. Chief Financial Officer, M.A. Mortenson Companies,
Inc. (construction and real estate company) (February 2007 - April
2017). |
|
122 |
|
Rydex Series Funds (52 portfolios), Rydex Dynamic Funds (8
portfolios) and Rydex Variable Trust (49 portfolios) (Trustee) (2016 –
present); Guggenheim Strategy Funds Trust (3 portfolios), Guggenheim Funds
Trust (18 portfolios), Guggenheim Taxable Municipal Bond &
Investment Grade Debt Trust, Guggenheim Strategic Opportunities Fund,
Guggenheim Variable Funds Trust (14 portfolios), and Transparent Value
Trust (5 portfolios) (Trustee) (2019-present); Guggenheim Active
Allocation Fund (Trustee) (2021-present); Fiduciary/ Claymore Energy
Infrastructure Fund (Trustee) (2019-2022); Guggenheim Enhanced Equity
Income Fund and Guggenheim Credit Allocation Fund (Trustee) (2019-2021);
and Guggenheim Energy & Income Fund (Trustee) (2015 -
2023) |
38
|
|
|
|
|
|
|
|
|
|
|
|
Name,
Address
and
Year of Birth |
|
Position(s)
With
Fund |
|
Term of
Office and
Length of
Time
Served |
|
Principal
Occupation(s)
During Past
Five Years |
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee† |
|
Other
Directorships
Held by
Trustee
During Past
Five Years |
|
CAROLYN
M. CLANCY
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1960 |
|
Independent Trustee |
|
Term Unlimited Served: since October 2022 |
|
Retired. Executive Vice President, Head of Strategy,
Analytics and Market Readiness, Fidelity Investments (April 2020 – June
2021); Executive Vice President, Head of Broker Dealer Business, Fidelity
Investments (July 2017 – March 2020). |
|
122 |
|
Assumption University (Trustee) (2011 – 2021) and (2022 –
present); Big Sister Association of Greater Boston (Director) (2016 –
2023). |
|
|
|
|
|
|
|
KRISTI
L. ROWSELL
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1966 |
|
Independent Trustee |
|
Term Unlimited Served: since October 2022 |
|
Partner and President, Harris Associates (2010 – 2021). |
|
122 |
|
Harris Associates Investment Trust (8 portfolios) (Trustee)
(2010 – present); Board of Governors, Investment Company Institute
(Member) (2018 – present); Habitat for Humanity Chicago (Director) (2015 –
present). |
|
|
|
|
|
|
|
JAMES
E. ROSS*
c/o
SSGA Active Trust
One
Iron Street Boston,
MA
02210
1965 |
|
Independent Trustee |
|
Term: Unlimited Served: since March 2011 |
|
President, Winnisquam Capital LLC (December 2022 –
present); Non-Executive Chairman,
Fusion Acquisition Corp II (February 2020 – present); Non-Executive Chairman, Fusion
Acquisition Corp. (June 2020 – September 2021); Retired Chairman and
Director, SSGA Funds Management, Inc. (2005 – March 2020); Retired
Executive Vice President, State Street Global Advisors (2012 – March
2020); Retired Chief Executive Officer and Manager, State Street Global
Advisors Funds Distributors, LLC (May 2017 – March 2020); Director, State
Street Global Markets, LLC (2013 – April 2017); President, SSGA Funds
Management, Inc. (2005 – 2012); Principal, State Street Global Advisors
(2000 – 2005). |
|
133 |
|
Investment Managers Series Trust (50 Portfolios) (2022 –
present); The Select Sector SPDR Trust (11 portfolios) (2005 – present);
SSGA SPDR ETFs Europe I plc (Director) (2016 – 2020); SSGA SPDR ETFs
Europe II plc (Director) (2016 – 2020); State Street Navigator Securities
Lending Trust (2016 – 2020); SSGA Funds (2014 – 2020); State Street
Institutional Investment Trust (2007 –2020); State Street Master Funds
(2007 –2020); Elfun Funds (2016 –2018). |
39
|
|
|
|
|
|
|
|
|
|
|
|
Name,
Address
and
Year of Birth |
|
Position(s)
With
Fund |
|
Term of
Office and
Length of
Time
Served |
|
Principal
Occupation(s)
During Past
Five Years |
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee† |
|
Other
Directorships
Held by
Trustee
During Past
Five Years |
| INTERESTED TRUSTEES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GUNJAN
CHAUHAN**
c/o
SSGA Active Trust
One
Iron Street
Boston,
MA 02210
1982 |
|
Interested Trustee |
|
Term Unlimited Served: since October 2022 |
|
Senior Managing Director, State Street Global Advisors
(April 2018 – Present); Managing Director, State Street Global Advisors
(June 2015– March 2018). |
|
122 |
|
State
Street ICAV
(Director)
(2018 – 2022). |
| † |
For the purpose of determining the number of portfolios
overseen by the Trustees, “Fund Complex” comprises registered investment
companies for which SSGA Funds Management, Inc. serves as investment
adviser, which includes series of the SSGA Active Trust, SPDR Series Trust
and SPDR Index Shares Funds. |
| * |
Mr. Ross previously served as an Interested Trustee from
November 2005 to December 2009 and from April 2010 to May 2024.
|
| ** |
Ms. Chauhan is an Interested Trustee because of her
position with an affiliate of the Adviser. |
OFFICERS
|
|
|
|
|
|
|
|
Name,
Address
and
Year of Birth |
|
Position(s)
With Fund |
|
Term of
Office and
Length of
Time Served |
|
Principal Occupation(s)
During Past Five Years |
|
ANN
M. CARPENTER
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1966 |
|
President and Principal Executive Officer; Deputy
Treasurer |
|
Term: Unlimited Served: since May 2023 (with respect to
President and Principal Executive Officer); Term: Unlimited Served: since
February 2016 (with respect to Deputy Treasurer) |
|
Chief Operating Officer, SSGA Funds Management, Inc. (April
2005 - present)*; Managing Director, State Street Global Advisors (April
2005 - present).* |
|
|
|
|
|
BRUCE
S. ROSENBERG
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1961 |
|
Treasurer and Principal Financial Officer |
|
Term: Unlimited Served: since February 2016 |
|
Managing Director, State Street Global Advisors and SSGA
Funds Management, Inc. (July 2015 - present). |
|
|
|
|
|
CHAD
C. HALLETT
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1969 |
|
Deputy Treasurer |
|
Term: Unlimited Served: since February 2016 |
|
Vice President, State Street Global Advisors and SSGA Funds
Management, Inc. (November 2014 - present). |
|
|
|
|
|
ANDREW
J. DELORME
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1975 |
|
Chief Legal Officer |
|
Term: Unlimited Served: since February 2024 |
|
Managing Director and Managing Counsel, State Street Global
Advisors (March 2023 - present); Counsel, K&L Gates (February 2021 -
March 2023); Vice President and Senior Counsel, State Street Global
Advisors (August 2014 - February 2021). |
40
|
|
|
|
|
|
|
|
Name,
Address
and
Year of Birth |
|
Position(s)
With Fund |
|
Term of
Office and
Length of
Time Served |
|
Principal Occupation(s)
During Past Five Years |
|
|
|
|
|
DAVID
URMAN
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1985 |
|
Secretary |
|
Term: Unlimited Served: since August 2019 |
|
Vice President and Senior Counsel, State Street Global
Advisors (April 2019 - present); Vice President and Counsel, State Street
Global Advisors (August 2015 - April 2019). |
|
|
|
|
|
DAVID
BARR
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1974 |
|
Assistant Secretary |
|
Term: Unlimited Served: since November 2020 |
|
Vice President and Senior Counsel, State Street Global
Advisors (October 2019 - present); Vice President and Counsel, Eaton Vance
Corp. (October 2010 - October 2019). |
|
|
|
|
|
E.
GERARD MAIORANA, JR.
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1971 |
|
Assistant Secretary |
|
Term: Unlimited Served: since May 2023 |
|
Assistant Vice President, State Street Global Advisors
(July 2014 - present). |
|
|
|
|
|
DARLENE
ANDERSON-VASQUEZ
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1968 |
|
Deputy Treasurer |
|
Term: Unlimited Served: since November 2016 |
|
Managing Director, State Street Global Advisors and SSGA
Funds Management, Inc. (May 2016 - present). |
|
|
|
|
|
ARTHUR
A. JENSEN
SSGA
Funds Management, Inc.
1600
Summer Street
Stamford,
CT 06905
1966 |
|
Deputy Treasurer |
|
Term: Unlimited Served: since August 2017 |
|
Vice President, State Street Global Advisors and SSGA Funds
Management, Inc. (July 2016 - present). |
|
|
|
|
|
DAVID
LANCASTER
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1971 |
|
Assistant Treasurer |
|
Term: Unlimited Served: since November 2020 |
|
Vice President, State Street Global Advisors and SSGA Funds
Management, Inc. (July 2017 - present).* |
|
|
|
|
|
JOHN
BETTENCOURT
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1976 |
|
Assistant Treasurer |
|
Term: Unlimited Served: since May 2022 |
|
Vice President, State Street Global Advisors and SSGA Funds
Management Inc. (March 2020 – present); Assistant Vice President, State
Street Global Advisors (June 2007 – March 2020). |
|
|
|
|
|
VEDRAN
VUKOVIC
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1985 |
|
Assistant Treasurer |
|
Term: Unlimited Served: since February 2024 |
|
Vice President, State Street Global Advisors (2023 –
present); Assistant Vice President, Brown Brothers Harriman & Co.
(2011 – 2023). |
|
|
|
|
|
BRIAN
HARRIS
SSGA
Funds Management, Inc.
One
Iron Street
Boston,
MA 02210
1973 |
|
Chief Compliance Officer; Anti-Money Laundering Officer;
Code of Ethics Compliance Officer |
|
Term: Unlimited Served: since November 2013 |
|
Managing Director, State Street Global Advisors and SSGA
Funds Management, Inc. (June 2013 - present).* |
| * |
Served in various capacities and/or with various affiliated
entities during the noted time period. |
41
INDIVIDUAL
TRUSTEE QUALIFICATIONS
The
Board has concluded that each of the Trustees should serve on the Board because
of his or her ability to review and understand information about the Fund
provided to him or her by management, to identify and request other information
he or she may deem relevant to the performance of his or her duties, to question
management and other service providers regarding material factors bearing on the
management and administration of the Fund, and to exercise his or her business
judgment in a manner that serves the best interests of the Fund’s shareholders.
The Board has concluded that each of the Trustees should serve as a Trustee
based on his or her own experience, qualifications, attributes and skills as
described below.
The
Board has concluded that Mr. Verboncoeur should serve as Trustee because of
the experience he gained serving as the Chief Executive Officer of a large
financial services and investment management company, his knowledge of the
financial services industry and his experience serving on the boards of other
investment companies, including SPDR Index Shares Funds and SPDR Series Trust
since April 2010.
The
Board has concluded that Mr. Churchill should serve as Trustee because of
the experience he gained serving as the Head of the Fixed Income Division of one
of the nation’s leading mutual fund companies and provider of financial
services, his knowledge of the financial services industry and the experience he
has gained serving as Trustee of SPDR Index Shares Funds and SPDR Series Trust
since April 2010.
The
Board has concluded that Ms. Richer should serve as Trustee because of the
experience she gained serving as the Chief Financial Officer of a large
financial services and investment management company, her knowledge of the
financial services industry and her experience serving on the board of a major
educational institution. Ms. Richer was appointed to serve as Trustee of
the Trust in July 2018 and elected to serve as Trustee of the Trust in October
2022.
The
Board has concluded that Ms. Sponem should serve as Trustee because of the
experience she gained serving as the Chief Financial Officer of a large
financial services company, her knowledge of the financial services industry and
her experience serving on the boards of other investment companies.
Ms. Sponem was appointed to serve as Trustee of the Trust in July 2018 and
elected to serve as Trustee of the Trust in October 2022.
The
Board has concluded that Ms. Clancy should serve as Trustee because of the
experience she gained serving as an Executive Vice President of a large
financial services company, her knowledge of the financial services industry and
her experience serving on the boards of a major educational institution and a
charitable foundation. Ms. Clancy was elected to serve as Trustee of the
Trust in October 2022.
The
Board has concluded that Ms. Rowsell should serve as Trustee because of the
experience she gained serving as the President and Chief Financial Officer of a
large financial services company, her knowledge of the financial services
industry and her experience serving on the boards of a financial services
company, a leading association representing regulated investment funds and a
charitable foundation. Ms. Clancy was elected to serve as Trustee of the
Trust in October 2022.
The
Board has concluded that Mr. Ross should serve as Trustee because of the
experience he has gained in his various roles with the Adviser, his knowledge of
the financial services industry, and the experience he has gained serving as
Trustee of SPDR Index Shares Funds and SPDR Series Trust since 2005
(Mr. Ross did not serve as Trustee of SPDR Index Shares Funds or SPDR
Series Trust from December 2009 until April 2010).
The
Board has concluded that Ms. Chauhan should serve as Trustee because of the
experience she has gained in her various roles with an affiliate of the Adviser
and her knowledge of the financial services industry. Ms. Chauhan was
elected to serve as Trustee of the Trust in October 2022.
In
its periodic assessment of the effectiveness of the Board, the Board considers
the complementary individual skills and experience of the individual Trustees
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the Fund
42
REMUNERATION
OF THE TRUSTEES AND OFFICERS
The
Trust, SPDR Series Trust and SPDR Index Shares Funds (together with the Trust,
the “Trusts”) pay, in the aggregate, each Trustee (other than Ms. Chauhan)
an annual fee of $300,000 plus $12,500 per in-person meeting attended and $2,500 for
each telephonic or video conference meeting attended. The Chairman of the Board
receives an additional annual fee of $115,000 (prior to January 1, 2023,
$75,000) and the Chairman of the Audit Committee receives an additional annual
fee of $40,000 (prior to January 1, 2023, $30,000). The Trusts also
reimburse each Trustee (other than Ms. Chauhan) for travel and other out-of-pocket expenses incurred by
him/her in connection with attending such meetings and in connection with
attending industry seminars and meetings. Trustee fees are allocated between the
Trusts and each of their respective series in such a manner as deemed equitable,
taking into consideration the relative net assets of the series. During the
fiscal period ended October 31, 2023, no officer of the Trust received
compensation in excess of $60,000 from the Trust. Additionally, no Trustee or
officer of the Trust is entitled to any pension or retirement benefits from the
Trust.
The
table below shows the compensation that the Trustees received during the fiscal
year ended June 30, 2024.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
of
Trustee |
|
Aggregate
Compensation
from
the
Trust(1) |
|
|
Pension
or
Retirement
Benefits
Accrued
as
Part
of Trust
Expenses |
|
|
Estimated
Annual
Benefits
Upon
Retirement |
|
|
Total
Compensation
from
the
Trust and
Fund
Complex
Paid
to
Trustees(1) |
|
|
Independent
Trustees: |
|
|
Carl
G. Verboncoeur |
|
$ |
410,882 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
495,000 |
|
|
Dwight
D. Churchill |
|
$ |
348,636 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
420,000 |
|
|
Clare
S. Richer |
|
$ |
315,448 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
380,000 |
|
|
Sandra
G. Sponem |
|
$ |
315,448 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
380,000 |
|
|
Carolyn
M. Clancy |
|
$ |
315,448 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
380,000 |
|
|
Kristi
L. Rowsell |
|
$ |
315,448 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
380,000 |
|
|
James
E. Ross(2) |
|
$ |
315,448 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
380,000 |
|
|
Interested
Trustee: |
|
|
Gunjan
Chauhan(3) |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
| (1) |
The Fund Complex includes SPDR Series Trust, SSGA Active Trust
and SPDR Index Shares Funds. |
| (2) |
Effective May 16, 2024, Mr. Ross became an
Independent Trustee after previously serving as an Interested Trustee.
|
| (3) |
Not compensated by the Trust due to Ms. Chauhan’s position
with an affiliate of the Adviser. |
STANDING
COMMITTEES
Audit
Committee: The Board has an Audit Committee consisting of all the
Independent Trustees. Mr. Churchill serves as Chairman. The Audit Committee
meets with the Trust’s independent auditors to review and approve the scope and
results of their professional services; to review the procedures for evaluating
the adequacy of the Trust’s accounting controls; to consider the range of audit
fees; and to make recommendations to the Board regarding the engagement of the
Trust’s independent auditors. The Audit Committee met four (4) times during
the fiscal period ended October 31, 2023.
Trustee
Committee: The Board has established a Trustee Committee consisting of all
the Independent Trustees. Mr. Verboncoeur serves as Chairman. The
responsibilities of the Trustee Committee are to: 1) nominate Independent
Trustees; 2) review on a periodic basis the governance structures and procedures
of the Fund; 3) review proposed resolutions and conflicts of interest that
may arise in the business of the Fund and may have an impact on the investors of
the Fund; 4) select any independent counsel of the independent trustees as well
as make determinations as to that counsel’s independence; 5) review matters that
are referred to the Committee by the Chief Legal Officer or other counsel to the
Trust; and 6) provide general oversight of the Fund on behalf of the investors
43
of
the Fund. The Trustee Committee does not have specific procedures in place with
respect to the consideration of nominees recommended by security holders, but
may consider such nominees in the event that one is recommended. The Trustee
Committee met four (4) times during the fiscal period ended
October 31, 2023.
OWNERSHIP
OF FUND SHARES
As
of December 31, 2023, neither the Independent Trustees nor their immediate
family members owned beneficially or of record any securities in the
Adviser, Principal Underwriter or any person directly or indirectly controlling,
controlled by, or under common control with the Adviser or Principal
Underwriter.
The
following table shows, as of December 31, 2023, the amount of equity
securities beneficially owned by the Trustees in the Trust.
|
|
|
|
|
|
|
|
|
|
|
|
Name
of Trustee |
|
Fund |
|
Dollar Range of
Equity
Securities in
the
Trust |
|
|
Aggregate Dollar
Range of
Equity
Securities in All
Funds Overseen
by
Trustee in
Family
of
Investment
Companies(1) |
|
|
Independent
Trustees: |
|
|
|
|
|
|
|
|
|
Carl
G. Verboncoeur |
|
SPDR S&P Dividend ETF |
|
|
$10,001 - $50,000 |
|
|
|
$50,001 - $100,000 |
|
|
|
SPDR S&P Kensho New Economies Composite
ETF |
|
|
$10,001 - $50,000 |
|
|
|
|
|
|
|
SPDR S&P 600 Small Cap Value ETF |
|
|
$10,001 - $50,000 |
|
|
|
|
|
|
Dwight
D. Churchill |
|
SPDR S&P 500® ESG ETF |
|
|
Over $100,000 |
|
|
|
Over $100,000 |
|
|
|
SPDR Nuveen Bloomberg High Yield Municipal
Bond ETF |
|
|
Over $100,000 |
|
|
|
|
|
|
|
SPDR Portfolio Short Term Corporate Bond
ETF |
|
|
Over $100,000 |
|
|
|
|
|
|
|
SPDR Portfolio Intermediate Term Treasury
ETF |
|
|
Over $100,000 |
|
|
|
|
|
|
Clare
S. Richer |
|
SPDR Portfolio S&P 500 Value ETF |
|
|
Over $100,000 |
|
|
|
Over $100,000 |
|
|
|
SPDR S&P Kensho New Economies Composite
ETF |
|
|
Over $100,000 |
|
|
|
|
|
|
|
SPDR S&P Biotech ETF |
|
|
$1 - $10,000 |
|
|
|
|
|
|
Sandra
G. Sponem |
|
SPDR S&P Kensho New Economies Composite
ETF |
|
|
Over $100,000 |
|
|
|
Over $100,000 |
|
|
Carolyn
M. Clancy |
|
SPDR Portfolio S&P 500 Value ETF |
|
|
Over $100,000 |
|
|
|
Over $100,000 |
|
|
|
SPDR Portfolio S&P 1500 Composite Stock
Market ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
|
SPDR Portfolio S&P 600 Small Cap ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
|
SPDR S&P Dividend ETF |
|
|
$10,001 - $50,000 |
|
|
|
|
|
|
Kristi
L. Rowsell |
|
SPDR Bloomberg 1-3 Month T-Bill ETF |
|
|
Over $100,000 |
|
|
|
$50,001 - $100,000 |
|
|
|
SPDR Bloomberg 1-10 Year TIPS ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
James
E. Ross(2) |
|
SPDR Dow Jones REIT ETF |
|
|
$10,001 - $50,000 |
|
|
|
Over $100,000 |
|
|
|
SPDR Bloomberg 1-3 Month T-Bill ETF |
|
|
$1 - $10,000 |
|
|
|
|
|
|
|
SPDR Portfolio S&P 400 Mid Cap ETF |
|
|
$10,001 - $50,000 |
|
|
|
|
|
|
|
SPDR Portfolio S&P 500 ETF |
|
|
Over $100,000 |
|
|
|
|
|
|
|
SPDR S&P 400 Mid Cap Growth ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
|
SPDR S&P 600 Small Cap Growth ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
|
SPDR S&P Biotech ETF |
|
|
$1 - $10,000 |
|
|
|
|
|
|
|
SPDR S&P Dividend ETF |
|
|
$50,001 - $100,000 |
|
|
|
|
|
|
Interested
Trustee: |
|
|
|
|
|
|
|
|
|
Gunjan
Chauhan |
|
None |
|
|
None |
|
|
|
None |
|
44
| (1) |
The family of investment companies includes series of SSGA
Active Trust, SPDR Series Trust and SPDR Index Shares Funds.
|
| (2) |
Effective May 16, 2024, Mr. Ross became an
Independent Trustee after previously serving as an Interested Trustee.
|
CODES
OF ETHICS
The
Trust and the Adviser (which includes applicable reporting personnel of the
Distributor) and the Sub-Adviser each
have adopted a Code of Ethics pursuant to Rule 17j-1 of the 1940 Act, which is designed to
prevent affiliated persons of the Trust, the Adviser, the Sub-Adviser and the Distributor from engaging
in deceptive, manipulative or fraudulent activities in connection with
securities held or to be acquired by the Fund (which may also be held by persons
subject to the Codes of Ethics). Each Code of Ethics permits personnel, subject
to that Code of Ethics, to invest in securities for their personal investment
accounts, subject to certain limitations, including securities that may be
purchased or held by the Fund.
There
can be no assurance that the Codes of Ethics will be effective in preventing
such activities. Each Code of Ethics, filed as exhibits to this registration
statement, may be examined at the office of the SEC in Washington, D.C. or on
the Internet at the SEC’s website at https://www.sec.gov.
PROXY
VOTING POLICIES
The
Board has delegated the responsibility to vote proxies on securities held by the
Fund to the Adviser, subject to certain exceptions. The Board has retained
authority to vote proxies for certain bank and bank holding company securities
(“Bank Securities”) that may be held by the Fund from time to time. The Board
has adopted the Institutional Shareholder Services, Inc.’s (“ISS”) benchmark
proxy voting policy with respect to voting such Bank Securities’ proxies. The
Board has retained this authority in order to permit the Adviser to utilize
exemptions from limitations arising under the Bank Holding Company Act of 1956,
as amended, that might otherwise prevent the Adviser from acquiring Bank
Securities on behalf of the Fund. Each of the Trust’s and the Adviser’s proxy
voting policies, as well as ISS’ benchmark proxy voting policy, are attached as
appendices to this SAI. Information regarding how the Fund voted proxies
relating to its portfolio securities during the most recent twelve-month period
ended June 30 is available: (1) without charge by calling 1-866-787-2257; (2) on the
Fund’s website at https://www.ssga.com/spdrs; and (3) on the SEC’s website
at https://www.sec.gov.
DISCLOSURE
OF PORTFOLIO HOLDINGS POLICY
The
Trust has adopted a policy regarding the disclosure of information about the
Trust’s portfolio holdings. The Board must approve all material amendments to
this policy. The Fund’s portfolio holdings are publicly disseminated each day
the Fund is open for business through financial reporting and news services
including publicly accessible Internet web sites. In addition, a basket
composition file, which includes the security names and share quantities to
deliver in exchange for Shares, together with estimates and actual cash
components, is publicly disseminated daily prior to the opening of the Exchange
via the National Securities Clearing Corporation (“NSCC”). The basket represents
one Creation Unit of the Fund. Neither the Trust, the Adviser, the Sub-Adviser nor State Street will disseminate
non-public information concerning the
Trust, except information may be made available prior to its public
availability: (i) to a party for a legitimate business purpose related to
the day-to-day operations of the Fund,
including (a) a service provider, (b) the stock exchanges upon which
an ETF is listed, (c) the NSCC, (d) the Depository Trust Company, and
(e) financial data/research companies such as Morningstar, Bloomberg L.P.,
and Reuters, or (ii) to any other party for a legitimate business or
regulatory purpose, upon waiver or exception, with the consent of an applicable
Trust officer.
45
INVESTMENT ADVISORY AND OTHER SERVICES
THE
INVESTMENT ADVISER
SSGA
FM acts as investment adviser to the Trust and, subject to the oversight of the
Board, is responsible for the investment management of the Fund. As of
June 30, 2024, the Adviser managed approximately $1.01 trillion in
assets. The Adviser’s principal address is One Iron Street, Boston,
Massachusetts 02210. The Adviser, a Massachusetts corporation, is a
wholly-owned subsidiary of State Street Global Advisors, Inc., which itself is a
wholly-owned subsidiary of State Street Corporation, a publicly held
financial holding company. State Street Global Advisors (“SSGA”), consisting
of the Adviser and other investment advisory affiliates of State Street
Corporation, is the investment management arm of State Street Corporation.
The
Adviser serves as investment adviser to the Fund pursuant to an investment
advisory agreement (“Investment Advisory Agreement”) between the Trust and the
Adviser. The Adviser also serves as an investment adviser to the Subsidiary
pursuant to an investment advisory services agreement. The Investment Advisory
Agreement, with respect to the Fund, continues in effect for two years from its
effective date, and thereafter is subject to annual approval by (1) the
Board or (2) vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, provided that in either event such
continuance also is approved by a majority of the Board who are not interested
persons (as defined in the 1940 Act) of the Trust by a vote cast in person at a
meeting called for the purpose of voting on such approval. The Investment
Advisory Agreement with respect to the Fund is terminable without penalty, on 60
days’ notice, by the Board or by a vote of the holders of a majority (as defined
in the 1940 Act) of the Fund’s outstanding voting securities. The Investment
Advisory Agreement is also terminable upon 60 days’ notice by the Adviser and
will terminate automatically in the event of its assignment (as defined in the
1940 Act).
Under
the Investment Advisory Agreement, the Adviser, subject to the oversight of the
Board and in conformity with the stated investment policies of the Fund, manages
the investment of the Fund’s assets. The Adviser is responsible for placing
purchase and sale orders and providing continuous supervision of the investment
portfolio of the Fund. Pursuant to the Investment Advisory Agreement, the
Adviser is not liable for certain liabilities, including certain liabilities
arising under the federal securities laws, unless such loss or liability results
from willful misfeasance, bad faith or gross negligence in the performance of
its duties or the reckless disregard of its obligations and duties.
Under
the Investment Advisory Agreement, the Adviser performs certain oversight and
supervisory functions with respect to Galaxy as sub-adviser to the Fund,
including: (i) conduct periodic analysis and review of the performance by
Galaxy of its obligations to the Fund and provide periodic reports to the Board
regarding such performance; (ii) review any changes to Galaxy’s ownership,
management, or personnel responsible for performing its obligations to the Fund;
and make appropriate reports to the Board; (iii) perform periodic due
diligence meetings with representatives of Galaxy; and (iv) assist the
Board and management of the Trust, as applicable, concerning the initial
approval, continued retention or replacement of Galaxy as sub-adviser to the Fund.
A
summary of the factors considered by the Board in connection with the initial
approval of the Investment Advisory Agreement for the Fund will be available in
the Fund’s Form N-CSR filing with the
SEC after the Fund commences operations.
For
the services provided to the Fund under the Investment Advisory Agreement, the
Fund pays the Adviser monthly fees based on a percentage of the Fund’s average
daily net assets as set forth in the Fund’s Prospectus. The management fee is
reduced by any acquired fund fees and expenses attributable to the Fund’s
investments in other investment companies (except acquired fund fees and
expenses associated with holdings of acquired funds for cash management
purposes). The Adviser pays all expenses of the Fund other than the management
fee, acquired fund fees and expenses associated with holdings of acquired und
for cash management purposes,
46
brokerage
expenses, taxes, interest, fees and expenses of the Independent Trustees
(including any Trustee’s counsel fees), acquired fund fees and expenses,
litigation expenses and other extraordinary expenses. No fee will be paid to the
Adviser for the advisory services that it provides to the Subsidiary.
From
time to time, the Adviser may waive all or a portion of its fee. The Adviser has
agreed to pay all costs associated with the organization of the Trust and the
Fund.
The
Fund had not commenced operations as of the date of this SAI and therefore did
not pay fees to the Adviser for the past three fiscal years.
Investment
Sub-Adviser.
Pursuant
to the Investment Advisory Agreement between the Fund and the Adviser, the
Adviser is authorized to engage one or more sub-advisers for the performance of any of
the services contemplated to be rendered by the Adviser. The Adviser has entered
into an investment sub-advisory
agreement (the “Sub-Advisory
Agreement”) with Galaxy, who has been retained to be responsible for the day-to-day management of the Fund’s
investments, subject to supervision of the Adviser and oversight by the Board.
The Adviser provides administrative, compliance and general management services
to the Fund. Galaxy is a consolidated subsidiary of Galaxy Digital Holdings LP
(“Galaxy Holdings”). Galaxy Digital Holdings Ltd., which holds a limited partner
interest in Galaxy Holdings, is listed on the Toronto Stock Exchange under the
symbol “GLXY”. Galaxy’s principal office is located at 300 Vesey Street New
York, NY 10282. As of July 31, 2024, Galaxy had approximately $4.72 billion of
assets under management.
A
summary of the factors considered by the Board in connection with the initial
approval of the Sub-Advisory Agreement
for the Fund will be available in the Fund’s Form N-CSR filing with the SEC after the Fund
commences operations. In accordance with the Sub-Advisory Agreement, the Adviser pays the
Sub-Adviser an annual investment sub-advisory fee equal to a portion of the
average daily net assets of the Fund. The Fund had not commenced operations as
of the date of this SAI and therefore did not pay fees to the Sub-Adviser for the past three fiscal years.
PORTFOLIO
MANAGERS
The
Sub-Adviser manages the Fund using a
team of investment professionals. The professionals primarily responsible for
the day-to-day portfolio management of the
Fund are Chris Rhine, Paul Cappelli and Ian Kolman.
The
following table lists the number and types of accounts managed by each of the
key professionals involved in the day-to-day portfolio management for
the Fund and assets under management in those accounts. The total number of
accounts and assets have been allocated to each respective manager. Therefore,
some accounts and assets have been counted twice.
Other Accounts Managed as of July 31, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Manager |
|
Registered
Investment
Company
Accounts |
|
|
Assets
Managed
(millions)* |
|
|
Other
Pooled
Investment
Vehicle
Accounts |
|
|
Assets
Managed
(millions)* |
|
|
Other
Accounts |
|
|
Assets
Managed
(millions)* |
|
|
Total
Assets
Managed
(millions) |
|
|
Chris
Rhine |
|
|
0 |
|
|
$ |
0 |
|
|
|
2 |
|
|
$ |
100.66 |
|
|
|
0 |
|
|
$ |
0 |
|
|
$ |
100.66 |
|
|
Paul
Cappelli |
|
|
0 |
|
|
$ |
0 |
|
|
|
10 |
|
|
$ |
2,019.32 |
|
|
|
1 |
|
|
$ |
47.82 |
|
|
$ |
2,067.14 |
|
|
Ian
Kolman |
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
|
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
| * |
There are no performance-based fees associated with these
accounts. |
47
The
Fund had not commenced operations prior to the date of this SAI and therefore
the portfolio managers did not beneficially own any Shares.
Compensation.
The Sub-Adviser’s compensation system
is designed to support the organization’s corporate values and culture. While
acknowledging the importance of financial incentives and seeking to pay highly
competitive compensation for top performance, the Sub-Adviser also believes that compensation
is only one of a number of critically important elements that allow the
emergence of a strong, winning culture that attracts, retains and motivates
talented investors and teams. The Sub-Adviser’s compensation system supports
its belief that investment professionals are a key element of the company’s
success in meeting clients’ objectives. The Sub-Adviser’s financial arrangements with its
portfolio managers, its competitive compensation and its career path emphasis at
all levels reflect the value senior management places on key resources. The
portfolio manager compensation structure seeks to provide a competitive package
that attracts, motivates, and retains appropriately experienced and qualified
individuals, as well as to provide a link between discretionary short and
long-term incentives with short and long-term corporate goals. Compensation may
include a variety of components and may vary from year to year based on a number
of factors. A Per Annum Total Compensation (“PATC”) structure for portfolio
managers has been implemented, which includes: (i) base salaries;
(ii) annual cash bonuses and (iii) annual restricted stock unit
awards. In addition to PATC, longer-dated restricted stock units and stock
options are issued in select cases to high performing portfolio managers, with
the goals of (i) rewarding strong in-year performance and (ii) aligning
our future leaders more closely to shareholders and other stakeholders.
Base
salary typically reflects scope, responsibilities and experience required in a
particular role, be it on the investment side or any other function in the
company. Base compensation is generally fixed and regularly reviewed against
peers with the help of compensation survey data of the investment industry to
evaluate competitive market compensation for its investment management
professionals. Base compensation is typically a greater percentage of total
compensation for more junior positions, while for the most senior roles it is
typically a comparatively small component (often capped at a Managing Director
level) and only adjusted every few years.
The
variable compensation component typically comprises a cash bonus that pays out
after the performance year as well as an annual restricted stock unit awards
component. The variable compensation is determined on a discretionary basis and
is primarily designed to reflect the achievements of the firm, business group,
and individual against set goals, over a certain time period.
Allocation
to individual team members is determined based on individual performance and
contribution to the team and client success. All team members have agreed upon
performance objectives to serve as a basis for performance evaluation during the
year. These objectives are both quantitative and qualitative in nature.
Quantitative objectives typically align to investment performance and
client-stated objectives. Qualitative objectives reflect contributions to
broader team goals, such as idea sharing, contributions made to client review
meetings, product development or product refinement initiatives, and the way
behaviors reflect Sub-Adviser’s core
values. For all investment professionals, a feedback evaluation forms part of
the qualitative input. Achievement against these goals as measured by the lead
portfolio manager and firm’s Chief Investment Officer serve to link performance
to compensation.
Currently,
the variable compensation for the portfolio managers of these Funds is not
determined on a formulaic basis. These teams do not necessarily share a
percentage of advisory fee revenue including performance fee revenue, if
applicable, generated by the investment strategy. In addition to competitive
compensation, the firm’s approach to retention includes providing a challenging
career path for each professional, a supportive culture to ensure each
employee’s progress and a full benefits package.
Other
Benefits. Portfolio managers are also eligible to participate in broad-based
plans offered generally to employees of the Sub-Adviser and its affiliates, including
401(k), health and other employee benefit plans.
Conflicts
of Interest. Potential or actual conflicts of interest may arise from time
to time between the Galaxy and its affiliates, on the one hand, and its clients,
on the other hand. Portfolio managers may manage multiple
48
accounts
on behalf of a number of clients and other pooled investment vehicles, as well
as non-client accounts. Portfolio
managers make investment decisions for each account based on the investment
objectives and policies and other relevant investment considerations applicable
to that portfolio. A potential conflict may arise as a result of investment
programs with similar investment objectives and strategies, some of which have
objectives that are similar to, or which overlap with, those of other clients. A
client that is sponsored or managed by Galaxy, such as the Fund, or its
affiliates may invest in the same issuers in which other clients may invest.
Galaxy may also sponsor funds or advise clients that provide financing to
portfolio companies in or through which certain clients invest. A client’s
investments may include investments in vehicles that are directly or indirectly
affiliated with Galaxy, such as the Fund. Such activities raise potential
conflicts of interest, including the determination of whether and to what extent
investment opportunities should be allocated among clients.
In
addition, as a consequence of Galaxy Holdings’ status as a public company, the
officers, directors, members, managers and employees of Galaxy Holdings may take
into account certain considerations and other factors, including publicity
concerns and short-term share value, in connection with the management of
clients that would not necessarily be taken into account if Galaxy was not
affiliated with a public company.
As
noted above, Galaxy and Galaxy Related Parties (defined as Galaxy’s affiliates)
engage in a broad spectrum of activities, including, without limitation, trading
and investment banking, asset management, and digital infrastructure solutions.
Galaxy’s clients may benefit from the broad activities of Galaxy Holdings and
the relationships that arise incidental to such activities, which could generate
investment and other opportunities and wider industry expertise. However,
situations could arise in which the activities of the Galaxy Related Parties
conflict with the interests of Galaxy’s clients and investors. Due to the broad
scope of Galaxy Related Parties’ businesses, potential conflicts of interest
include situations where Galaxy’s services to a particular client or Galaxy
Related Parties’ own investments (including its management of the Galaxy
Principal Investments Portfolio, a portfolio of principal investments held and
beneficially owned by the Galaxy Related Parties) or other interests conflict,
or are perceived to conflict, with the interests of another client, as well as
situations where one or more of Galaxy Related Parties’ businesses have access
to material non-public information that
may not be shared with its other businesses and situations where Galaxy Related
Parties may be an investor or creditor of an entity with which it also has an
advisory or other relationship.
Galaxy
has implemented policies and procedures designed to identify and manage
potential conflicts of interest to provide fair and equitable allocation to act
in the best interests of the Fund. These policies include, but are not limited
to, allocation policies that seek to provide equitable treatment of investment
opportunities among all accounts and established Code of Ethics that governs the
conduct of the portfolio manager and other personnel or where other conflicts of
interests may exist.
Investments,
Directorships or Similar Roles with Issuers. Officers, members, partners,
affiliates and employees of Galaxy and its affiliates may make personal
investments in certain issuers or serve as directors or officers of certain
issuers in which the Fund invests and, in those capacities, may be required to
make decisions that they consider to be in the best interests of their personal
investments or such companies. In certain circumstances, for example, in
situations involving the bankruptcy or near-insolvency of a company, actions
that may be in the best interest of the issuer or in connection with a personal
investment may not be in the best interest of the Fund, or actions that may be
ultimately found to be in the best interest of the Fund may not be in the best
interest of the issuer or in connection with a personal investment. In these
situations, there may be conflicts between an individual’s duties as an officer,
affiliate or employee of Galaxy, or its affiliates and such individual’s
personal investments or duties as a director or officer of the issuer.
Restrictions
Arising under the Securities or Other Laws or Agreements. The activities of
affiliates of Galaxy (including, without limitation, the holding of investment
positions or having one of its personnel on the board of directors of a company
or as its officer or otherwise) could result in securities law or other
restrictions on transactions in investments held by the Fund, affect the prices
of the Fund’s investments or the ability of the Fund to purchase, retain or
dispose of such investments, or otherwise create conflicts of interest for the
Fund, any of which could have a material adverse impact on the performance of
the Fund and thus the return to the Fund.
49
THE
ADMINISTRATOR, SUB-ADMINISTRATOR,
CUSTODIAN AND TRANSFER AGENT
Administrator:
SSGA FM serves as the administrator to each series of the Trust, pursuant to an
Administration Agreement dated June 1, 2015 (the “SSGA Administration
Agreement”). Pursuant to the SSGA Administration Agreement, SSGA FM is obligated
to continuously provide business management services to the Trust and its series
and will generally, subject to the general oversight of the Trustees and except
as otherwise provided in the SSGA Administration Agreement, manage all of the
business and affairs of the Trust.
Sub-Administrator, Custodian and Transfer
Agent: State Street serves as the sub-administrator to each series of the
Trust, pursuant to a Sub-Administration
Agreement dated June 1, 2015 (the “Sub-Administration Agreement”). Under the
Sub-Administration Agreement, State
Street is obligated to provide certain sub-administrative services to the Trust and
its series. State Street is a wholly-owned subsidiary of State Street
Corporation, a publicly held financial holding company, and is affiliated with
the Adviser. State Street’s mailing address is One Congress Street, Boston,
Massachusetts 02114.
State
Street also serves as Custodian for the Trust’s series pursuant to a custodian
agreement (“Custodian Agreement”). As Custodian, State Street holds Fund assets,
calculates the net asset value of the Shares and calculates net income and
realized capital gains or losses. State Street and the Trust will comply with
the self-custodian provisions of Rule 17f-2 under the 1940 Act.
State
Street also serves as Transfer Agent for each series of the Trust pursuant to a
transfer agency agreement (“Transfer Agency Agreement”).
Compensation:
As compensation for its services provided under the SSGA Administration
Agreement, SSGA FM shall receive fees for the services, calculated based on the
average aggregate net assets of the Trust, which are accrued daily and paid
monthly out of its management fee.
As
compensation for its services under the Sub-Administration Agreement, Custodian
Agreement and Transfer Agency Agreement, State Street shall receive an annual
fixed fee In addition, State Street shall receive global safekeeping and
transaction fees, which are calculated on a per-country basis, in-kind creation (purchase) and redemption
transaction fees (as described below) and revenue on certain cash balances.
State Street may be reimbursed by series of the Trust for its out-of-pocket expenses. The Investment
Advisory Agreement provides that the Adviser will pay certain operating expenses
of the Trust, including the fees due to State Street under the Custodian
Agreement and the Transfer Agency Agreement.
Additional
Sub-Administration Services: Also
under the Sub-Administration Agreement,
State Street receives: (i) an annual per Fund fee for certain services
required in the preparation (including preparing a schedule of quarterly
portfolio investments) and filing of Form N-PORT and Form N-CEN with the SEC (“N-PORT Related Services”); (ii) an
annual per Fund fee for services regarding certain liquidity analytics
(“Liquidity Risk Measurement Services”) under the Sub-Administration Agreement; and
(iii) an annual per Fund fee for certain services related to the
preparation of tailored shareholder reports (“Tailored Shareholder Report
Services”). N-PORT Related Services,
Liquidity Risk Measurement Services, and Tailored Shareholder Report Services
fees are paid by the Adviser from its management fee.
THE
DISTRIBUTOR
State
Street Global Advisors Funds Distributors, LLC is the principal underwriter and
Distributor of Shares. Its principal address is One Iron Street, Boston,
Massachusetts 02210. Investor information can be obtained by calling 1-866-787-2257. The Distributor
has entered into a distribution agreement (“Distribution Agreement”) with the
Trust pursuant to which it distributes Shares of the Fund. The Distribution
Agreement will continue for two years from its effective date and is renewable
annually thereafter. Shares will be continuously offered for sale by the Trust
through the Distributor only in Creation Units, as described in the Prospectus
and below under “PURCHASE AND REDEMPTION OF CREATION UNITS.” Shares in less than
Creation Units are not
50
distributed
by the Distributor. The Distributor will deliver the Prospectus to persons
purchasing Creation Units and will maintain records of both orders placed with
it and confirmations of acceptance furnished by it. The Distributor is a
broker-dealer registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) and a member of the Financial Industry Regulatory Authority
(“FINRA”). The Distributor has no role in determining the investment policies of
the Trust or which securities are to be purchased or sold by the Trust. An
affiliate of the Distributor may assist Authorized Participants (as defined
below) in assembling shares to purchase Creation Units or upon redemption, for
which it may receive commissions or other fees from such Authorized
Participants. An affiliate of the Distributor also receives compensation from
State Street for providing on-line
creation and redemption functionality to Authorized Participants through its
Fund Connect application.
The
Adviser or Distributor, or an affiliate of the Adviser or Distributor, may
directly or indirectly make cash payments to certain broker-dealers for
participating in activities that are designed to make registered representatives
and other professionals more knowledgeable about exchange-traded products,
including the SPDR funds, or for other activities, such as participation in
marketing activities and presentations, educational training programs,
conferences, the development of technology platforms and reporting systems.
In
addition, as of the date of this SAI, the Adviser and/or Distributor had
arrangements whereby they may make payments, other than for the educational
programs and marketing activities described above, to Pershing LLC (“Pershing”),
RBC Capital Markets, LLC (“RBC”), LPL Financial, LLC (“LPL”), and Morgan Stanley
Wealth Management, LLC. These amounts, which may be significant, are paid by the
Adviser and/or Distributor from their own resources and not from Fund assets.
Pursuant to these arrangements, Pershing, RBC and LPL have agreed to offer
certain SPDR funds to their customers and not to charge certain of their
customers any commissions when those customers purchase or sell shares of
certain SPDR funds. Payments to a broker-dealer or intermediary may create
potential conflicts of interest between the broker dealer or intermediary and
its clients.
In
addition, the Adviser or Distributor, or an affiliate of the Adviser or
Distributor, as well as an index provider that is not affiliated with the
Adviser or Distributor, may reimburse expenses or make payments from their own
assets to other persons in consideration of services, provision of data, or
other activities that they believe may benefit the SPDR business or facilitate
investment in SPDR funds.
The
Distribution Agreement provides that it may be terminated at any time, without
the payment of any penalty, as to the Fund: (i) by vote of a majority of
the Independent Trustees or (ii) by vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of the Fund, on at least 60 days’
written notice to the Distributor. The Distribution Agreement is also terminable
upon 60 days’ notice by the Distributor and will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
The
continuation of the Distribution Agreement and any other related agreements is
subject to annual approval of the Board, including by a majority of the
Independent Trustees, as described above.
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Unit aggregations of Shares.
Such Soliciting Dealers may also be Participating Parties (as defined in the
“Book Entry Only System” section below) and/or DTC Participants (as defined
below).
Pursuant
to the Distribution Agreement, the Trust has agreed to indemnify the
Distributor, and may indemnify Soliciting Dealers and Authorized Participants
(as described below) entering into agreements with the Distributor, for certain
liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from willful misfeasance, bad faith
or gross negligence in the performance of its duties or the reckless disregard
of its obligations and duties under the Distribution Agreement or other
agreement, as applicable.
51
BROKERAGE TRANSACTIONS
All
portfolio transactions are placed on behalf of the Fund by the Adviser.
Purchases and sales of securities on a securities exchange are affected through
brokers who charge a commission for their services. Ordinarily commissions are
not charged on over-the-counter orders (e.g., fixed
income securities) because the Fund pays a spread which is included in the cost
of the security and represents the difference between the dealer’s quoted price
at which it is willing to sell the security and the dealer’s quoted price at
which it is willing to buy the security. When the Fund executes an over-the-counter order with an
electronic communications network or an alternative trading system, a commission
is charged by such electronic communications networks and alternative trading
systems as they execute such orders on an agency basis. Securities may be
purchased from underwriters at prices that include underwriting fees.
In
placing a portfolio transaction, the Adviser seeks to achieve best execution.
The Adviser’s duty to seek best execution requires the Adviser to take
reasonable steps to obtain for the client as favorable an overall result as
possible for Fund portfolio transactions under the circumstances, taking into
account various factors that are relevant to the particular transaction.
The
Adviser refers to and selects from the list of approved trading counterparties
maintained by the Adviser’s Credit Risk Management team. In selecting a trading
counterparty for a particular trade, the Adviser seeks to weigh relevant factors
including, but not limited to the following:
| |
• |
|
Prompt and reliable execution; |
| |
• |
|
The competitiveness of commission rates and spreads, if
applicable; |
| |
• |
|
The financial strength, stability and/or reputation of the
trading counterparty; |
| |
• |
|
The willingness and ability of the executing trading
counterparty to execute transactions (and commit capital) of size in
liquid and illiquid markets without disrupting the market for the
security; |
| |
• |
|
Local laws, regulations or restrictions;
|
| |
• |
|
The ability of the trading counterparty to maintain
confidentiality; |
| |
• |
|
The availability and capability of execution venues, including
electronic communications networks for trading and execution management
systems made available to Adviser; |
| |
• |
|
Execution related costs; |
| |
• |
|
History of execution of orders; |
| |
• |
|
Likelihood of execution and settlement;
|
| |
• |
|
Clearance and settlement capabilities, especially in high
volatility market environments; |
| |
• |
|
Availability of lendable securities; |
| |
• |
|
Sophistication of the trading counterparty’s trading
capabilities and infrastructure/facilities; |
| |
• |
|
The operational efficiency with which transactions are
processed and cleared, taking into account the order size and complexity;
|
| |
• |
|
Speed and responsiveness to the Adviser;
|
| |
• |
|
Access to secondary markets; |
52
| |
• |
|
Counterparty exposure; and |
| |
• |
|
Depending upon the circumstances, the Adviser may take other
relevant factors into account if the Adviser believes that these are
important in taking all sufficient steps to obtain the best possible
result for execution of the order. |
In
selecting a trading counterparty, the price of the transaction and costs related
to the execution of the transaction typically merit a high relative importance,
depending on the circumstances. The Adviser does not necessarily select a
trading counterparty based upon price and costs but may take other relevant
factors into account if it believes that these are important in taking
reasonable steps to obtain the best possible result for the Fund under the
circumstances. Consequently, the Adviser may cause a client to pay a trading
counterparty more than another trading counterparty might have charged for the
same transaction in recognition of the value and quality of the brokerage
services provided. The following matters may influence the relative importance
that the Adviser places upon the relevant factors:
| |
(i) |
The nature and characteristics of the order or transaction. For
example, size of order, market impact of order, limits, or other
instructions relating to the order; |
| |
(ii) |
The characteristics of the financial instrument(s) or other
assets which are the subject of that order. For example, whether the order
pertains to an equity, fixed income, derivative or convertible instrument;
|
| |
(iii) |
The characteristics of the execution venues to which that order
can be directed, if relevant. For example, availability and capabilities
of electronic trading systems; |
| |
(iv) |
Whether the transaction is a ‘delivery versus payment’ or ‘over-the-counter’ transaction.
The creditworthiness of the trading counterparty, the amount of existing
exposure to a trading counterparty and trading counterparty settlement
capabilities may be given a higher relative importance in the case of
‘over-the-counter’ transactions;
and/or |
| |
(v) |
Any other circumstances that the Adviser believes are relevant
at the time. |
The
process by which trading counterparties are selected to effect transactions is
designed to exclude consideration of the sales efforts conducted by
broker-dealers in relation to the Fund.
The
Adviser does not currently use the Fund’s assets in connection with third-party
soft dollar arrangements. While the Adviser does not currently use “soft” or
commission dollars paid by the Fund for the purchase of third-party research,
the Adviser reserves the right to do so in the future.
The
Fund had not commenced operations as of the date of this SAI and therefore did
not pay brokerage commissions during the past three fiscal years.
Securities
of “Regular Broker-Dealers”: The Trust is required to identify any
securities of its “regular brokers and dealers” (as such term is defined in the
1940 Act) which it may hold at the close of its most recent fiscal year.
“Regular brokers or dealers” of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar
amounts of brokerage commissions from the Trust’s portfolio transactions;
(ii) engaged as principal in the largest dollar amounts of portfolio
transactions of the Trust; or (iii) sold the largest dollar amounts of the
Trust’s shares.
The
Fund had not commenced operations as of the date of this SAI and therefore did
not have any holdings in Securities of Regular Broker-Dealers as of
June 30, 2023.
Portfolio
Turnover: Portfolio turnover may vary from year to year, as well as within a
year. High turnover rates are likely to result in comparatively greater
brokerage expenses or transaction costs. The overall reasonableness of brokerage
commissions and transaction costs is evaluated by the Adviser based upon its
knowledge of available information as to the general level of commissions and
transaction costs paid by other institutional investors for comparable services.
53
BOOK ENTRY ONLY SYSTEM
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “ADDITIONAL PURCHASE AND SALE INFORMATION.”
The
Depository Trust Company (“DTC”) acts as securities depositary for the Shares.
Shares of the Fund are represented by securities registered in the name of DTC
or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
Except in the limited circumstance provided below, certificates will not be
issued for Shares.
DTC,
a limited-purpose trust company, was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and
FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to herein as “Beneficial Owners”) is shown on, and the transfer of
ownership is effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written
confirmation relating to their purchase of Shares.
Conveyance
of all notices, statements and other communications to Beneficial Owners is
effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a
fee to be charged to the Trust a listing of the Shares of the Fund held by each
DTC Participant. The Trust, either directly or through a third party service,
shall inquire of each such DTC Participant as to the number of Beneficial Owners
holding Shares, directly or indirectly, through such DTC Participant. The Trust,
either directly or through a third party service, shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participant and/or
third party service a fair and reasonable amount as reimbursement for the
expenses attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
the Fund as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a “street name,” and will be the
responsibility of such DTC Participants.
The
Trust has no responsibility or liability for any aspects of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in such Shares, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for any other
aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
54
DTC
may determine to discontinue providing its service with respect to Shares at any
time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
55
CONTROL PERSONS AND PRINCIPAL HOLDERS
OF SECURITIES
The
Fund had not commenced operations prior to the date of this SAI and therefore
did not have any beneficial owners that owned greater than 5% of the outstanding
voting securities as of the date of this SAI.
An
Authorized Participant (as defined below) may hold of record more than 25% of
the outstanding Shares. From time to time, Authorized Participants may be a
beneficial and/or legal owner of the Fund, may be affiliated with an index
provider, may be deemed to have control of the Fund and/or may be able to affect
the outcome of matters presented for a vote of the shareholders of the Fund.
Authorized Participants may execute an irrevocable proxy granting the
Distributor or another affiliate of State Street (the “Agent”) power to vote or
abstain from voting such Authorized Participant’s beneficially or legally owned
Shares. In such cases, the Agent shall mirror vote (or abstain from voting) such
Shares in the same proportion as all other beneficial owners of the Fund.
The
Trustees and Officers of the Trust, as a group, own less than 1% of the Trust’s
voting securities as of the date of this SAI.
56
PURCHASE AND REDEMPTION OF CREATION
UNITS
The
Fund issues and redeems its Shares on a continuous basis, at net asset value,
only in a large specified number of Shares called a “Creation Unit.” The value
of the Fund is determined once each business day as described under
“Determination of Net Asset Value.” The Creation Unit size for the Fund may
change. Authorized Participants (as defined below) will be notified of such
change. The principal consideration for creations and redemptions for the Fund
is in-kind, although this may be
revised at any time without notice.
PURCHASE
(CREATION)
The
Trust issues and sells Shares of the Fund only: in Creation Units on a
continuous basis through the Principal Underwriter, without a sales load (but
subject to transaction fees), at their NAV per share next determined after
receipt of an order, on any Business Day (as defined below), in proper form
pursuant to the terms of the Authorized Participant Agreement (“Participant
Agreement”). A “Business Day” with respect to the Fund is, generally, any day on
which the NYSE is open for business.
FUND
DEPOSIT
The
consideration for purchase of a Creation Unit of the Fund generally consists of
either (i) the Deposit Securities and the Cash Component (defined below),
computed as described below or (ii) the cash value of the Deposit
Securities and the “Cash Component,” computed as described below. When accepting
purchases of Creation Units for cash, the Fund may incur additional costs
associated with the acquisition of Deposit Securities that would otherwise be
provided by an in-kind purchaser.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the Fund. The “Cash
Component,” which may include a Dividend Equivalent Payment, is an amount equal
to the difference between the net asset value of the Shares (per Creation Unit)
and the market value of the Deposit Securities or Deposit Cash, as applicable.
The “Dividend Equivalent Payment” enables the Fund to make a complete
distribution of dividends on the day preceding the next dividend payment date,
and is an amount equal, on a per Creation Unit basis, to the dividends on all
the portfolio securities of the Fund (“Dividend Securities”) with ex-dividend dates within the accumulation
period for such distribution (the “Accumulation Period”), net of expenses and
liabilities for such period, as if all of the Dividend Securities had been held
by the Fund for the entire Accumulation Period. The Accumulation Period begins
on the ex-dividend date for the Fund
and ends on the day preceding the next ex-dividend date. If the Cash Component is a
positive number (i.e., the net asset value per Creation Unit exceeds the market
value of the Deposit Securities or Deposit Cash, as applicable), the Cash
Component shall be such positive amount. If the Cash Component is a negative
number (i.e., the net asset value per Creation Unit is less than the market
value of the Deposit Securities or Deposit Cash, as applicable), the Cash
Component shall be such negative amount and the creator will be entitled to
receive cash in an amount equal to the Cash Component. The Cash Component serves
the function of compensating for any differences between the net asset value per
Creation Unit and the market value of the Deposit Securities or Deposit Cash, as
applicable. Computation of the Cash Component excludes any stamp duty or other
similar fees and expenses payable upon transfer of beneficial ownership of the
Deposit Securities, if applicable, which shall be the sole responsibility of the
Authorized Participant (as defined below).
The
Custodian, through NSCC, makes available on each Business Day, prior to the
opening of business on the Exchange (currently 9:30 a.m., Eastern time), the
list of the names and the required number of shares of each Deposit Security or
the required amount of Deposit Cash, as applicable, to be included in the
current standard Fund Deposit (based on information at the end of the previous
Business Day) for the Fund. Such standard Fund Deposit is subject to any
applicable adjustments as described below, in order to effect purchases of
Creation Units of the Fund until such time as the next-announced composition of
the Deposit Securities or the required amount of Deposit Cash, as applicable, is
made available.
57
The
identity and number of shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for a Fund Deposit for the Fund may be changed
from time to time with a view to the investment objective of the Fund.
Information regarding a Fund Deposit necessary for the purchase of a Creation
Unit is made available to Authorized Participants and other market participants
seeking to transact in Creation Unit aggregations.
As
noted above, the Trust reserves the right to permit or require the substitution
of Deposit Cash to replace any Deposit Security, which shall be added to the
Cash Component, including, without limitation, in situations where the Deposit
Security: (i) may not be available in sufficient quantity for delivery,
(ii) may not be eligible for transfer through the systems of DTC for
corporate securities and municipal securities; (iii) may not be eligible
for trading by an Authorized Participant (as defined below) or the investor for
which it is acting; (iv) would be restricted under the securities laws or
where the delivery of the Deposit Security to the Authorized Participant would
result in the disposition of the Deposit Security by the Authorized Participant
becoming restricted under the securities laws, or (v) in certain other
situations (collectively, “non-standard
orders”). The Trust also reserves the right to permit or require the
substitution of Deposit Securities in lieu of Deposit Cash. The adjustments
described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Fund Deposit
resulting from certain corporate actions.
PROCEDURES
FOR PURCHASE OF CREATION UNITS
To
be eligible to place orders with the Principal Underwriter, as facilitated via
the Transfer Agent, to purchase a Creation Unit of the Fund, an entity must be
(i) a “Participating Party”, i.e., a broker-dealer or other participant in
the clearing process through the Continuous Net Settlement System of the NSCC
(the “Clearing Process”), a clearing agency that is registered with the SEC; or
(ii) a DTC Participant (see “BOOK ENTRY ONLY SYSTEM”). In addition, each
Participating Party or DTC Participant (each, an “Authorized Participant”) must
execute a Participant Agreement that has been agreed to by the Principal
Underwriter and the Transfer Agent, and that has been accepted by the Trust,
with respect to purchases and redemptions of Creation Units. Each Authorized
Participant will agree, pursuant to the terms of a Participant Agreement, on
behalf of itself or any investor on whose behalf it will act, to certain
conditions, including that it will pay to the Trust, an amount of cash
sufficient to pay the Cash Component together with the creation transaction fee
(described below) and any other applicable fees, taxes and additional variable
charge.
All
orders to purchase Shares directly from the Fund, including non-standard orders, must be placed for one
or more Creation Units and in the manner and by the time set forth in the
Participant Agreement and/or the applicable order form. The date on which an
order to purchase Creation Units (or an order to redeem Creation Units, as set
forth below) is received and accepted is referred to as the “Order Placement
Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g., to provide for
payments of cash, when required). Investors should be aware that their
particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from the Fund in Creation Units
have to be placed by the investor’s broker through an Authorized Participant
that has executed a Participant Agreement. In such cases there may be additional
charges to such investor. At any given time, there may be only a limited number
of broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On
days when the Exchange or the bond markets close earlier than normal, the Fund
may require orders to create Creation Units to be placed earlier in the day. In
addition, if a market or markets on which the Fund’s investments are primarily
traded is closed, the Fund will also generally not accept orders on such day(s).
Orders must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order
form. Those placing orders through an Authorized Participant should allow
sufficient time to permit proper
58
submission
of the purchase order by the cut-off
time. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an
Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash and U.S. government securities), or through DTC (for
corporate securities and municipal securities), through a subcustody agent (for
foreign securities) and/or through such other arrangements allowed by the Trust
or its agents. With respect to foreign Deposit Securities, the Custodian shall
cause the subcustodian of the Fund to maintain an account into which the
Authorized Participant shall deliver, on behalf of itself or the party on whose
behalf it is acting, such Deposit Securities. Foreign Deposit Securities must be
delivered to an account maintained at the applicable local subcustodian. The
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion so as to ensure the delivery of the requisite number of Deposit
Securities or Deposit Cash, as applicable, to the account of the Fund or its
agents by no later than the Settlement Date. The “Settlement Date” with respect
to a creation order for the Fund is generally the first Business Day (“T+1”)
after the Order Placement Date. All questions as to the number of Deposit
Securities or Deposit Cash to be delivered, as applicable, and the validity,
form and eligibility (including time of receipt) for the deposit of any tendered
securities or cash, as applicable, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash represented by the
Cash Component must be transferred directly to the Custodian through the Federal
Reserve Bank wire transfer system in a timely manner so as to be received by the
Custodian no later than the Settlement Date. If the Cash Component and the
Deposit Securities or Deposit Cash, as applicable, are not received in a timely
manner by the Settlement Date, the creation order may be cancelled. Upon written
notice to the Distributor, such cancelled order may be resubmitted the following
Business Day using a Fund Deposit as newly constituted to reflect the then
current NAV of the Fund. The delivery of Creation Units so created generally
will occur no later than the first Business Day following the day on which the
purchase order is deemed received by the Distributor.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in
the appropriate amount are deposited by 2:00 p.m. or 3:00 p.m. Eastern time (per
applicable instructions), with the Custodian on the Settlement Date. If the
order is not placed in proper form as required, or federal funds in the
appropriate amount are not received by 2:00 p.m. or 3:00 p.m. Eastern time (per
applicable instructions) on the Settlement Date, then the order may be deemed to
be rejected and the Authorized Participant shall be liable to the Fund for
losses, if any, resulting therefrom. A creation request is considered to be in
“proper form” if all procedures set forth in the Participant Agreement, order
form and this SAI are properly followed.
Shortened
settlement cycles are expected to be available, through which creation
transactions can be settled on the trade date in accordance with instructions
provided by the Trust and/or Distributor.
ISSUANCE
OF A CREATION UNIT
Except
as provided herein, Creation Units will not be issued until the transfer of good
title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities
(or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, the Principal Underwriter and the Adviser shall
be notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units.
In
instances where the Trust accepts Deposit Securities for the purchase of a
Creation Unit, the Creation Unit may be purchased in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the net asset value of the Shares on the date the order is placed in proper
form since in addition to available Deposit Securities, cash must be deposited
in an amount equal to the sum of (i) the Cash Component, plus (ii) an
additional amount of cash equal to a percentage of the market value as set forth
in the Participant Agreement, of the undelivered
59
Deposit
Securities (the “Additional Cash Deposit”), which shall be maintained in a
separate non-interest bearing
collateral account. An additional amount of cash shall be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to
the extent necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to the applicable percentage, as set forth in the
Participant Agreement, of the daily marked to market value of the missing
Deposit Securities. The Trust may use such Additional Cash Deposit to buy the
missing Deposit Securities at any time. Authorized Participants will be liable
to the Trust for all costs, expenses, dividends, income and taxes associated
with missing Deposit Securities, including the costs incurred by the Trust in
connection with any such purchases. These costs will be deemed to include the
amount by which the actual purchase price of the Deposit Securities exceeds the
market value of such Deposit Securities on the day the purchase order was deemed
received by the Principal Underwriter plus the brokerage and related transaction
costs associated with such purchases. The Trust will return any unused portion
of the Additional Cash Deposit once all of the missing Deposit Securities have
been properly received by the Custodian or purchased by the Trust and deposited
into the Trust. In addition, a transaction fee as set forth below under
“Creation Transaction Fees” will be charged in all cases and an additional
variable charge may also be applied. The delivery of Creation Units so created
generally will occur no later than the Settlement Date.
ACCEPTANCE
OF ORDERS OF CREATION UNITS
The
Trust reserves the right to reject an order for Creation Units transmitted in
respect of the Fund at its discretion, including, without limitation, if
(a) the order is not in proper form or the Deposit Securities delivered do
not consist of the securities that the Custodian specified; (b) the Deposit
Securities or Deposit Cash, as applicable, delivered by the Authorized
Participant are not as disseminated through the facilities of the NSCC for that
date by the Custodian; (c) the investor(s), upon obtaining the Shares
ordered, would own 80% or more of the currently outstanding Shares of the Fund;
(d) the acceptance of the Fund Deposit would, in the opinion of counsel, be
unlawful; (e) the acceptance or receipt of the order for a Creation Unit
would, in the opinion of counsel to the Trust, be unlawful; or (f) in the
event that circumstances outside the control of the Trust, the Custodian, the
Transfer Agent, the Distributor and/or the Adviser make it for all practical
purposes not feasible to process orders for Creation Units. Examples of such
circumstances include acts of God or public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Principal Underwriter, the Custodian, the
Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in
the creation process, and other extraordinary events. The Trust or its agents
shall communicate to the Authorized Participant its rejection of an order. The
Trust, the Transfer Agent, the Custodian and the Principal Underwriter are under
no duty, however, to give notification of any defects or irregularities in the
delivery of Fund Deposits nor shall either of them incur any liability for the
failure to give any such notification. The Trust, the Transfer Agent, the
Custodian and the Principal Underwriter shall not be liable for the rejection of
any purchase order for Creation Units. Given the importance of the ongoing
issuance of Creation Units to maintaining a market price that is at or close to
the underlying net asset value of the Fund, the Trust does not intend to suspend
acceptance of orders for Creation Units.
All
questions as to the number of shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
REDEMPTION
Shares
may be redeemed only in Creation Units at their net asset value next determined
after receipt of a redemption request in proper form by the Fund through the
Transfer Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE FUND,
THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors
must accumulate enough Shares in the secondary market to constitute a Creation
Unit in order to have such Shares redeemed by the Trust. There can be no
60
assurance,
however, that there will be sufficient liquidity in the public trading market at
any time to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Fund, the Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on
each Business Day, the list of the names and share quantities of securities
designated by the Fund that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Redemption Securities”). Redemption Securities received on redemption
may not be identical to Deposit Securities. The identity and number of shares of
the Redemption Securities or the Cash Redemption Amount (defined below) may be
changed from time to time with a view to the investment objective of the Fund.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or a combination thereof,
as determined by the Trust. With respect to in-kind redemptions of the Fund, redemption
proceeds for a Creation Unit will consist of Redemption Securities plus cash in
an amount equal to the difference between the net asset value of the Fund Shares
being redeemed, as next determined after a receipt of a request in proper form,
and the value of the Redemption Securities (the “Cash Redemption Amount”), less
a fixed redemption transaction fee and any applicable additional variable charge
as set forth below. In the event that the Redemption Securities have a value
greater than the net asset value of the Fund Shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized
Participant by the redeeming shareholder. Notwithstanding the foregoing, at the
Trust’s discretion, an Authorized Participant may receive the corresponding cash
value of the securities in lieu of the in-kind securities value representing one or
more Redemption Securities.
PROCEDURES
FOR REDEMPTION OF CREATION UNITS
Redemption
proceeds from the Fund will be delivered to the redeeming Authorized
Participant. The Fund may deliver redemption proceeds directly to a redeeming
Authorized Participant After the Trust has deemed an order for redemption
received, the Trust will initiate procedures to transfer the requisite
Redemption Securities and the Cash Redemption Amount to the Authorized
Participant by the Settlement Date. The “Settlement Date” with respect to a
redemption order for the Fund is generally T+1. With respect to in-kind redemptions of the Fund, the
calculation of the value of the Redemption Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under “Determination of Net Asset Value”, computed
on the Business Day on which a redemption order is deemed received by the Trust.
Therefore, if a redemption order in proper form is submitted to the Principal
Underwriter by a DTC Participant by the specified time on the Order Placement
Date, and the requisite number of Shares of the Fund are delivered to the
Custodian prior to 2:00 p.m. or 3:00 p.m. Eastern time (per applicable
instructions) on the Settlement Date, then the value of the Redemption
Securities and the Cash Redemption Amount to be delivered will be determined by
the Custodian on such Order Placement Date. If the requisite number of Shares of
the Fund are not delivered by 2:00 p.m. or 3:00 p.m. Eastern time (per
applicable instructions) on the Settlement Date, the Fund will not release the
underlying securities for delivery unless collateral is posted in such
percentage amount of missing Shares as set forth in the Participant Agreement
(marked to market daily).
With
respect to in-kind redemptions of the
Fund, in connection with taking delivery of shares of Redemption Securities upon
redemption of Creation Units, an Authorized Participant must maintain
appropriate custody arrangements with a qualified broker-dealer, bank or other
custody providers in each jurisdiction in which any of the Redemption Securities
are customarily traded (or such other arrangements as allowed by the Trust or
its agents), to which account such Redemption Securities will be delivered.
Delivery of redemption proceeds is generally T+1. The order form specifies the
date at which the delivery of redemption proceeds for the Fund is generally
expected to occur.
Due
to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds may take longer
than one Business Day, after the day on which the redemption request is received
in proper form. If
61
the
Authorized Participant has not made appropriate arrangements to take delivery of
the Redemption Securities in the applicable foreign jurisdiction and it is not
possible to make other such arrangements, or if it is not possible to effect
deliveries of the Redemption Securities in such jurisdiction, the Trust may, in
its discretion, exercise its option to redeem such Shares in cash, and the
Authorized Participant will be required to receive its redemption proceeds in
cash.
If
it is not possible to make other such arrangements, or if it is not possible to
effect deliveries of the Redemption Securities, the Trust may in its discretion
exercise its option to redeem such Shares in cash, and the redeeming investor
will be required to receive its redemption proceeds in cash. In addition, an
investor may request a redemption in cash that the Fund may, in its sole
discretion, permit. In either case, the investor will receive a cash payment
equal to the NAV of its Shares based on the NAV of Shares of the relevant Fund
next determined after the redemption request is received in proper form (minus a
redemption transaction fee and additional charge for requested cash redemptions
specified above, to offset the Trust’s brokerage and other transaction costs
associated with the disposition of Redemption Securities). The Fund may also, in
its sole discretion, upon request of a shareholder, provide such redeemer a
portfolio of securities that differs from the exact composition of the
Redemption Securities but does not differ in net asset value.
An
Authorized Participant submitting a redemption request is deemed to represent to
the Trust that, as of the close of the Business Day on which the redemption
request was submitted, it (or its client) will own (within the meaning of Rule
200 of Regulation SHO) or has arranged to borrow for delivery to the Trust on or
prior to the Settlement Date of the redemption request, the requisite number of
Shares of the relevant Fund to be redeemed as a Creation Unit. In either case,
the Authorized Participant is deemed to acknowledge that: (i) it (or its
client) has full legal authority and legal right to tender for redemption the
requisite number of Shares of the applicable Fund and to receive the entire
proceeds of the redemption; and (ii) if such Shares submitted for
redemption have been loaned or pledged to another party or are the subject of a
repurchase agreement, securities lending agreement or any other arrangement
affecting legal or beneficial ownership of such Shares being tendered, there are
no restrictions precluding the tender and delivery of such Shares (including
borrowed shares, if any) for redemption, free and clear of liens, on the
redemption Settlement Date. The Trust reserves the right to verify these
representations at its discretion, but will typically require verification with
respect to a redemption request from the Fund in connection with higher levels
of redemption activity and/or short interest in the Fund. If the Authorized
Participant, upon receipt of a verification request, does not provide sufficient
verification of its representations as determined by the Trust, the redemption
request will not be considered to have been received in proper form and may be
rejected by the Trust.
Redemptions
of Shares for Redemption Securities will be subject to compliance with
applicable federal and state securities laws and the Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Trust could not lawfully deliver specific
Redemption Securities upon redemptions or could not do so without first
registering the Redemption Securities under such laws. An Authorized Participant
or an investor for which it is acting subject to a legal restriction with
respect to a particular security included in the Redemption Securities
applicable to the redemption of Creation Units may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming investor of the
Shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment. Further, an Authorized Participant
that is not a “qualified institutional buyer,” (“QIB”) as such term is defined
under Rule 144A of the Securities Act, will not be able to receive Redemption
Securities that are restricted securities eligible for resale under Rule 144A.
An Authorized Participant may be required by the Trust to provide a written
confirmation with respect to QIB status in order to receive Redemption
Securities.
The
right of redemption may be suspended or the date of payment postponed with
respect to the Fund (1) for any period during which the Exchange is closed
(other than customary weekend and holiday closings); (2) for any period
during which trading on the Exchange is suspended or restricted; (3) for
any period during which an emergency exists as a result of which disposal of the
Shares of the Fund or determination of the NAV of the Shares is not reasonably
practicable; or (4) in such other circumstance as is permitted by the SEC.
62
REQUIRED
EARLY ACCEPTANCE OF ORDERS
Notwithstanding
the foregoing, as described in the Participant Agreement and/or the applicable
order form, the Fund may require orders to be placed prior to the trade date, as
described in the Participant Agreement or the applicable order form, in order to
receive the trade date’s net asset value. The cut-off time to receive the trade date’s net
asset value will not precede the calculation of the net asset value of the
Fund’s shares on the prior Business Day. Orders to purchase Shares that are
submitted on the Business Day immediately preceding a holiday or a day (other
than a weekend) that the equity markets in the relevant foreign market are
closed may not be accepted. Authorized Participants may be notified that the
cut-off time for an order may be
earlier on a particular Business Day, as described in the Participant Agreement
and the applicable order form.
CREATION
AND REDEMPTION TRANSACTION FEES
A
transaction fee, as set forth in the table below, is imposed for the transfer
and other transaction costs associated with the purchase or redemption of
Creation Units, as applicable. Authorized Participants will be required to pay a
fixed creation transaction fee and/or a fixed redemption transaction fee, as
applicable, on a given day regardless of the number of Creation Units created or
redeemed on that day. The Fund may adjust the transaction fee from time to time.
An additional charge or a variable charge (discussed below) will be applied to
certain creation and redemption transactions, including non-standard orders and whole or partial cash
purchases or redemptions. With respect to creation orders, Authorized
Participants are responsible for the costs of transferring the securities
constituting the Deposit Securities to the account of the Trust and with respect
to redemption orders, Authorized Participants are responsible for the costs of
transferring the Redemption Securities from the Trust to their account or on
their order. Investors who use the services of a broker or other such
intermediary may also be charged a fee for such services.
Creation and Redemption Transaction Fees:
|
|
|
|
|
|
|
|
|
|
Fund |
|
Transaction
Fee*, ** |
|
|
Maximum
Transaction
Fee*, ** |
|
|
SPDR® Galaxy Hedged Digital
Asset Ecosystem ETF |
|
$ |
250 |
|
|
$ |
1000 |
|
| * |
From time to time, the Fund may waive all or a portion of its
applicable transaction fee(s). An additional charge of up to three
(3) times the standard transaction fee may be charged to the extent a
transaction is outside of the clearing process. |
| ** |
In addition to the transaction fees listed above, the Fund may
charge an additional variable fee for creations and redemptions in cash to
offset brokerage and impact expenses associated with the cash transaction.
The variable transaction fee will be calculated based on historical
transaction cost data and the Adviser’s view of current market conditions;
however, the actual variable fee charged for a given transaction may be
lower or higher than the trading expenses incurred by the Fund with
respect to that transaction. |
63
DETERMINATION OF NET ASSET VALUE
The
following information supplements and should be read in conjunction with the
sections in the Prospectus entitled “PURCHASE AND SALE INFORMATION” and
“ADDITIONAL PURCHASE AND SALE INFORMATION.”
NAV
per Share for the Fund is computed by dividing the value of the net assets of
the Fund (i.e., the value of its total assets less total liabilities) by the
total number of Shares outstanding. Expenses and fees, including the management
fees, are accrued daily and taken into account for purposes of determining NAV.
The NAV of the Fund is calculated by State Street and determined once daily as
of the close of the regular trading session on the NYSE (ordinarily 4:00 p.m.
Eastern time) on each day that such exchange is open. Creation/redemption order
cut-off times may be earlier on any day
that the Securities Industry and Financial Markets Association (or applicable
exchange or market on which the Fund’s investments are traded) announces an
early closing time. Any assets or liabilities denominated in currencies other
than the U.S. dollar are converted into U.S. dollars at market rates on the date
of valuation (generally as of 4:00 p.m. London time) as quoted by one or more
sources.
In
calculating the Fund’s net asset value per Share, the Fund’s investments are
generally valued using market valuations. A market valuation generally means a
valuation (i) obtained from an exchange, a pricing service, or a major
market maker (or dealer) or (ii) based on a price quotation or other
equivalent indication of value supplied by an exchange, a pricing service, or a
major market maker (or dealer). The Fund relies on a third-party service
provider for assistance with the daily calculation of the Fund’s NAV. The
third-party service provider, in turn, relies on other parties for certain
pricing data and other inputs used in the calculation of the Fund’s NAV.
Therefore, the Fund is subject to certain operational risks associated with
reliance on its service provider and that service provider’s sources of pricing
and other data. NAV calculation may be adversely affected by operational risks
arising from factors such as errors or failures in systems and technology. Such
errors or failures may result in inaccurately calculated NAVs, delays in the
calculation of NAVs and/or the inability to calculate NAV over extended time
periods. The Fund may be unable to recover any losses associated with such
failures. In the case of shares of other funds that are not traded on an
exchange, a market valuation means such fund’s published net asset value per
share. The Fund may use various pricing services, or discontinue the use of any
pricing service. Fixed-income assets are generally valued as of the announced
closing time for trading in fixed-income instruments in a particular market or
exchange, and generally 4:00 p.m. EST for U.S. fixed-income assets. Fixed-income
assets are generally valued at the mean of the bid and ask prices for bank loans
and inflation protected securities, and at the bid price for all other
fixed-income assets.
Pursuant
to Board approved valuation procedures, the Board has designated the Adviser as
the valuation designee for the Fund. These procedures address, among other
things, (i) determining (a) when market quotations are not readily
available or reliable and (b) the methodologies to be used for determining
the fair value of investments, and (ii) the use and oversight of
third-party pricing services for fair valuation. The Adviser is responsible for
periodically reviewing the procedures, and the selected methodologies used, for
their continuing appropriateness and accuracy, and making any changes or
adjustments to the procedures and methodologies as appropriate.
In
the event that current market valuations are not readily available or are deemed
unreliable, the Trust’s procedures require the Adviser to determine a security’s
fair value. In determining a fair value, the Adviser may consider, among other
things, (i) price comparisons among multiple sources, (ii) a review of
corporate actions and news events, and (iii) a review of relevant financial
indicators (e.g., movement in interest rates and market indices). In these
cases, the Fund’s net asset value may reflect certain portfolio securities’ fair
values rather than their market prices. The fair value of a portfolio instrument
is generally the price which the Fund might reasonably expect to receive upon
its current sale in an orderly market between market participants. Ascertaining
fair value requires a determination of the amount that an arm’s-length buyer, under the circumstances,
would currently pay for the portfolio instrument. Fair value pricing involves
subjective judgments and it is possible that the fair value determination for a
security is materially different than the value that could be realized upon the
sale of the security.
64
DIVIDENDS AND DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “DISTRIBUTIONS.”
GENERAL
POLICIES
Dividends
from net investment income, if any, are generally declared and paid quarterly by
the Fund. Distributions of net realized securities gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more
frequent basis for the Fund to comply with the distribution requirements of the
Internal Revenue Code, in all events in a manner consistent with the provisions
of the 1940 Act.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust.
Management
of the Trust reserves the right to declare special dividends if, in its
reasonable discretion, such action is necessary or advisable to preserve the
Fund’s eligibility for treatment as a RIC under the Internal Revenue Code or to
avoid imposition of income or excise taxes at the Fund level.
DIVIDEND
REINVESTMENT
Broker
dealers, at their own discretion, may offer a dividend reinvestment service
under which Shares are purchased in the secondary market at current market
prices. Investors should consult their broker dealer for further information
regarding any dividend reinvestment service offered by such broker dealer.
65
TAXES
The
following is a summary of certain federal income tax considerations generally
affecting the Fund and its shareholders that supplements the discussions in the
Prospectus. No attempt is made to present a comprehensive explanation of the
federal, state, local or foreign tax treatment of the Fund or its shareholders,
and the discussion here and in each Prospectus is not intended to be a
substitute for careful tax planning.
The
following general discussion of certain federal income tax consequences is based
on the Internal Revenue Code and the regulations issued thereunder as in effect
on the date of this SAI. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
The
following information should be read in conjunction with the section in the
Prospectus entitled “ADDITIONAL TAX INFORMATION.”
TAXATION
OF THE FUND
The
Fund is treated as a separate corporation for federal income tax purposes. The
Fund therefore is considered to be a separate entity in determining its
treatment under the rules for RICs described herein and in the Prospectus.
Losses in one series of the Trust do not offset gains in any other series of the
Trust and the requirements (other than certain organizational requirements) for
qualifying for treatment as a RIC are determined at the Fund level rather than
at the Trust level. The Fund has elected or will elect and intends to qualify
each year to be treated as a separate RIC under Subchapter M of the Internal
Revenue Code. As such, the Fund should not be subject to federal income tax on
its net investment income and capital gains, if any, to the extent that it
timely distributes such income and capital gains to its shareholders. In order
to qualify for treatment as a RIC, the Fund must distribute annually to its
shareholders at least the sum of 90% of its taxable net investment income
(generally including the excess of net short-term capital gains over net
long-term capital losses) and 90% of its net tax-exempt interest income, if any (the
“Distribution Requirement”) and also must meet several additional requirements.
Among these requirements are the following: (i) at least 90% of the Fund’s
gross income each taxable year must be derived from dividends, interest,
payments with respect to certain securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived
with respect to its business of investing in such stock, securities or
currencies, and net income derived from interests in qualified publicly traded
partnerships (the “Qualifying Income Requirement”); and (ii) at the end of
each quarter of the Fund’s taxable year, its assets must be diversified so that
(a) at least 50% of the market value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with such other securities limited, in respect
to any one issuer, to an amount not greater in value than 5% of the value of the
Fund’s total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer, the securities (other
than securities of other RICs) of two or more issuers that it controls and that
are engaged in the same, similar, or related trades or businesses, or the
securities of one or more qualified publicly traded partnerships (the
“Diversification Requirement”).
If
the Fund fails to satisfy the Qualifying Income Requirement or the
Diversification Requirement in any taxable year, the Fund may be eligible for
relief provisions if the failures are due to reasonable cause and not willful
neglect and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. Additionally, relief is provided for certain de minimis
failures of the Diversification Requirement where the Fund corrects the failure
within a specified period of time. In order to be eligible for the relief
provisions with respect to a failure to meet the Diversification Requirement,
the Fund may be required to dispose of certain assets. If these relief
provisions were not available to the Fund and it were to fail to qualify for
treatment as a RIC for a taxable year, all of its taxable income would be
subject to tax at the applicable corporate rate without any deduction for
distributions to shareholders, and its distributions (including capital gains
distributions) generally
66
would
be taxable as ordinary income dividends to its shareholders, subject to the
dividends-received deduction for corporate shareholders and the lower tax rates
on qualified dividend income received by noncorporate shareholders. To requalify
for treatment as a RIC in a subsequent taxable year, the Fund would be required
to satisfy the RIC qualification requirements for that year and to distribute
any earnings and profits from any year in which the Fund failed to qualify for
tax treatment as a RIC. If the Fund failed to qualify as a RIC for a period
greater than two taxable years, it would generally be required to pay a
Fund-level tax on certain net built-in
gains recognized with respect to certain of its assets upon a disposition of
such assets within five years of qualifying as a RIC in a subsequent year. The
Board reserves the right not to maintain the qualification of the Fund for
treatment as a RIC if it determines such course of action to be beneficial to
shareholders.
As
discussed more fully below, the Fund intends to distribute substantially all of
its net investment income and its capital gains for each taxable year.
If
the Fund meets the Distribution Requirement but retains some or all of its
income or gains, it will be subject to federal income tax to the extent any such
income or gains are not distributed. The Fund may designate certain amounts
retained as undistributed net capital gain in a notice to its shareholders, who
(i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of the
undistributed amount so designated, (ii) will be entitled to credit their
proportionate shares of the income tax paid by the Fund on that undistributed
amount against their federal income tax liabilities and to claim refunds to the
extent such credits exceed their liabilities and (iii) will be entitled to
increase their tax basis, for federal income tax purposes, in their Shares by an
amount equal to the excess of the amount of undistributed net capital gain
included in their respective income over their respective income tax credits. If
the Fund failed to satisfy the Distribution Requirement for any taxable year, it
would be taxed as a regular corporation, with consequences generally similar to
those described in the preceding paragraph.
The
Fund will be subject to a 4% excise tax on certain undistributed income if it
does not distribute to its shareholders in each calendar year an amount at least
equal to 98% of its ordinary income for the calendar year plus 98.2% of its
capital gain net income for the twelve months ended October 31 of such
year, subject to an increase for any shortfall in the prior year’s distribution.
The Fund intends to declare and distribute dividends and distributions in the
amounts and at the times necessary to avoid the application of this 4% excise
tax.
The
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable
year (commonly referred to as “post-October losses”) and certain other late-year
losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, the Fund may carry a
net capital loss from any taxable year forward indefinitely to offset its
capital gains, if any, in years following the year of the loss. To the extent
subsequent capital gains are offset by such losses, they will not result in U.S.
federal income tax liability to the Fund and may not be distributed as capital
gains to its shareholders. Generally, the Fund may not carry forward any losses
other than net capital losses.
TAXATION
OF SHAREHOLDERS—DISTRIBUTIONS
The
Fund intends to distribute annually to its shareholders substantially all of its
investment company taxable income (computed without regard to the deduction for
dividends paid), its net tax-exempt
income, if any, and any net capital gain (net recognized long-term capital gains
in excess of net recognized short-term capital losses, taking into account any
capital loss carryforwards). The Fund will report to shareholders annually the
amounts of
67
dividends
paid from ordinary income, the amount of distributions of net capital gain, the
portion of dividends which may qualify for the dividends-received deduction, and
the portion of dividends which may qualify for treatment as qualified dividend
income.
Subject
to certain limitations, dividends reported by the Fund as qualified dividend
income will be taxable to noncorporate shareholders at reduced rates. Dividends
may be reported by the Fund as qualified dividend income if they are
attributable to qualified dividend income received by the Fund. Qualified
dividend income includes, in general, subject to certain holding period
requirements and other requirements, dividend income from certain U.S. and
foreign corporations. Subject to certain limitations, eligible foreign
corporations include those incorporated in possessions of the United States,
those incorporated in certain countries with comprehensive tax treaties with the
United States and other foreign corporations if the stock with respect to which
the dividends are paid is tradable on an established securities market in the
United States. A dividend generally will not be treated as qualified dividend
income to the extent that (i) the shareholder has not held the stock on
which the dividend was paid for more than 60 days during the 121-day period that begins on the date that
is 60 days before the date on which the stock becomes ex-dividend with respect to such dividend or,
in the case of certain preferred stock, for more than 90 days during the
181-day period beginning 90 days
before such date, (ii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to
substantially similar or related property, or (iii) the shareholder elects
to treat such dividend as investment income under section 163(d)(4)(B) of
the Internal Revenue Code. The holding period requirements described in this
paragraph apply to shareholders’ investments in the Fund and to the Fund’s
investments in underlying dividend-paying stocks. Additionally, income derived
in connection with the Fund’s securities lending activities, will, in general,
not be treated as qualified dividend income. If 95% or more of the Fund’s gross
income (calculated without taking into account net capital gain derived from
sales or other dispositions of stock or securities) consists of qualified
dividend income, the Fund may report all distributions of such income as
qualified dividend income.
Certain
dividends received by the Fund from U.S. corporations (generally, dividends
received by the Fund in respect of any share of stock (1) with a tax
holding period of at least 46 days during the 91-day period beginning on the date that is
45 days before the date on which the stock becomes ex-dividend as to that dividend and
(2) that is held in an unleveraged position) when distributed and
appropriately so reported by the Fund may be eligible for the 50%
dividends-received deduction generally available to corporations under the
Internal Revenue Code. In order to qualify for the deduction, corporate
shareholders must meet the minimum holding period requirement stated above with
respect to their Shares, taking into account any holding period reductions from
certain hedging or other transactions or positions that diminish their risk of
loss with respect to their Shares, and, if they borrow to acquire or otherwise
incur debt attributable to Shares, they may be denied a portion of the
dividends-received deduction with respect to those Shares. Any corporate
shareholder should consult its tax adviser regarding the possibility that its
tax basis in its Shares may be reduced, for U.S. federal income tax purposes, by
reason of “extraordinary dividends” received with respect to the Shares and, to
the extent such basis would be reduced below zero, current recognition of income
may be required.
Distributions
from the Fund’s net short-term capital gains will generally be taxable to
shareholders as ordinary income. Distributions from the Fund’s net capital gain
will be taxable to shareholders at long-term capital gains rates, regardless of
how long shareholders have held their Shares. Long-term capital gains are
generally taxed to noncorporate shareholders at reduced rates.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by the Fund in October, November or December and payable to
shareholders of record in such a month that is paid during the following January
will be treated for U.S. federal income tax purposes as received by shareholders
on December 31 of the calendar year in which it was declared.
If
the Fund’s distributions exceed its earnings and profits, all or a portion of
the distributions made in the taxable year may be treated as a return of capital
to shareholders. A return of capital distribution generally will not be
68
taxable
but will reduce the shareholder’s cost basis and result in a higher capital gain
or lower capital loss when the Shares on which the distribution was received are
sold. After a shareholder’s basis in the Shares has been reduced to zero,
distributions in excess of earnings and profits will be treated as gain from the
sale of the shareholder’s Shares.
Under
Section 163(j) of the Code, a taxpayer’s business interest expense is
generally deductible to the extent of its business interest income plus certain
other amounts. If the Fund earns business interest income, it may report a
portion of its dividends as “Section 163(j) interest dividends,” which its
shareholders may be able to treat as business interest income for purposes of
Section 163(j) of the Code. The Fund’s “Section 163(j) interest
dividend” for a tax year will be limited to the excess of its business interest
income over the sum of its business interest expense and other deductions
properly allocable to its business interest income. In general, the Fund’s
shareholders may treat a distribution reported as a Section 163(j) interest
dividend as interest income only to the extent the distribution exceeds the sum
of the portions of the distribution reported as other types of tax-favored income. To be eligible to treat a
Section 163(j) interest dividend as interest income, a shareholder may need
to meet certain holding period requirements in respect of Fund Shares and must
not have hedged its position in Fund Shares in certain ways. Distributions that
are reinvested in additional Shares of the Fund through the means of a dividend
reinvestment service, if offered by your broker-dealer, will nevertheless be
taxable dividends to the same extent as if such dividends had been received in
cash.
A
3.8% Medicare contribution tax generally applies to all or a portion of the net
investment income of a shareholder who is an individual and not a nonresident
alien for federal income tax purposes and who has adjusted gross income (subject
to certain adjustments) that exceeds a threshold amount ($250,000 if married
filing jointly or if considered a “surviving spouse” for federal income tax
purposes, $125,000 if married filing separately, and $200,000 in other cases).
This 3.8% tax also applies to all or a portion of the undistributed net
investment income of certain shareholders that are estates and trusts. For these
purposes, interest, dividends and certain capital gains (generally including
capital gain distributions and capital gains realized on the sale of Shares) are
generally taken into account in computing a shareholder’s net investment income.
Distributions
of ordinary income and capital gains may also be subject to foreign, state and
local taxes depending on a shareholder’s circumstances.
TAXATION
OF SHAREHOLDERS—SALE OF SHARES
In
general, a sale of Shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the length of time the
Shares were held. A sale of Shares held for a period of one year or less at the
time of such sale will, for tax purposes, generally result in short-term capital
gains or losses, and a sale of those held for more than one year will generally
result in long-term capital gains or losses. Long-term capital gains are
generally taxed to noncorporate shareholders at reduced rates.
Gain
or loss on the sale of Shares is measured by the difference between the amount
received and the adjusted tax basis of the Shares. Shareholders should keep
records of investments made (including Shares acquired through reinvestment of
dividends and distributions) so they can compute the tax basis of their Shares.
A
loss realized on a sale of Shares may be disallowed if substantially identical
Shares are acquired (whether through the reinvestment of dividends or otherwise)
within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty (30) days after
the date that the Shares are disposed of. In such a case, the basis of the
Shares acquired must be adjusted to reflect the disallowed loss. Any loss upon
the sale of Shares held for six (6) months or less will be treated as
long-term capital loss to the extent of any amounts treated as distributions to
the shareholder of long-term capital gain (including any amounts credited to the
shareholder as undistributed capital gains).
69
COST
BASIS REPORTING
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for the Shares and then may be subsequently adjusted for other applicable
transactions as required by the Internal Revenue Code. The difference between
the selling price and the cost basis of Shares generally determines the amount
of the capital gain or loss realized on the sale or exchange of Shares. Contact
the broker through whom you purchased your Shares to obtain information with
respect to the available cost basis reporting methods and elections for your
account.
TAXATION
OF FUND INVESTMENTS
Dividends
and interest received by the Fund on foreign securities may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may reduce or eliminate such
taxes. The Fund does not expect to satisfy the requirements for passing through
to its shareholders any share of any foreign taxes paid by the Fund, with the
result that shareholders will not include such taxes in their gross incomes and
will not be entitled to a tax deduction or credit for such taxes on their own
returns.
Certain
of the Fund’s investments may be subject to complex provisions of the Internal
Revenue Code (including provisions relating to hedging transactions, straddles,
integrated transactions, foreign currency contracts, forward foreign currency
contracts, and notional principal contracts) that, among other things, may
affect the character of gains and losses realized by the Fund (e.g., may affect
whether gains or losses are ordinary or capital), accelerate recognition of
income to the Fund and defer losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the Fund to mark-to-market certain types of
positions in its portfolio (i.e., treat them as if they were closed out) which
may cause the Fund to recognize income without receiving cash with which to make
distributions to its shareholders in amounts necessary to satisfy the RIC
distribution requirements for avoiding income and excise taxes. The Fund intends
to monitor its transactions, intends to make appropriate tax elections, and
intends to make appropriate entries in its books and records in order to
mitigate the effect of these rules and preserve the Fund’s qualification for
treatment as a RIC.
Certain
investments made by the Fund may be treated as equity in passive foreign
investment companies or “PFICs” for federal income tax purposes. In general, a
passive foreign investment company is a foreign corporation (i) that
receives at least 75% of its annual gross income from passive sources (such as
interest, dividends, certain rents and royalties, or capital gains) or
(ii) where at least 50% of its assets (computed based on average fair
market value) either produce or are held for the production of passive income.
If the Fund acquires any equity interest (under Treasury regulations that may be
promulgated in the future, generally including not only stock but also an option
to acquire stock such as is inherent in a convertible bond) in a PFIC, the Fund
could be subject to U.S. federal income tax and nondeductible interest charges
on “excess distributions” received from such companies or on gain from the sale
of stock in such companies, even if all income or gain actually received by the
Fund is timely distributed by the Fund to its shareholders. The Fund would not
be able to pass through to its shareholders any credit or deduction for such a
tax. A “qualified electing fund” election or a “mark to market” election may be
available that would ameliorate these adverse tax consequences, but such
elections could require the Fund to recognize taxable income or gain (subject to
the distribution requirements applicable to RICs, as described above) without
the concurrent receipt of cash. In order to satisfy the distribution
requirements and avoid a tax at the Fund level, the Fund may be required to
liquidate portfolio securities that it might otherwise have continued to hold,
potentially resulting in additional taxable gain or loss to the Fund. Gains from
the sale of stock of PFICs may also be treated as ordinary income. In order for
the Fund to make a qualified electing fund election with respect to a PFIC, the
PFIC would have to agree to provide certain tax information to the Fund on an
annual basis, which it might not agree to do. The Fund may limit and/or manage
its holdings in PFICs to limit its tax liability or maximize its returns from
these investments.
70
If
a sufficient portion of the interests in a foreign issuer are held or deemed
held by the Fund, independently or together with certain other U.S. persons,
that issuer may be treated as a “controlled foreign corporation” (a “CFC”) with
respect to the Fund, in which case the Fund will be required to take into
account each year, as ordinary income, its share of certain portions of that
issuer’s income, whether or not such amounts are distributed. The Fund may have
to dispose of its portfolio securities (potentially resulting in the recognition
of taxable gain or loss, and potentially under disadvantageous circumstances) to
generate cash, or may have to borrow the cash, to meet its distribution
requirements and avoid Fund-level taxes. In addition, some Fund gains on the
disposition of interests in such an issuer may be treated as ordinary income.
The Fund may limit and/or manage its holdings in issuers that could be treated
as CFCs in order to limit its tax liability or maximize its after-tax return from these investments.
The
Fund is required for federal income tax purposes to mark-to-market and recognize as income
for each taxable year its net unrealized gains and losses on certain futures
contracts as of the end of the year as well as those actually realized during
the year. Gain or loss from futures and options contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. The Fund may be required to defer the recognition
of losses on futures contracts, options contracts and swaps to the extent of any
unrecognized gains on offsetting positions held by the Fund. It is anticipated
that certain net gain realized from the closing out of futures or options
contracts will be considered gain from the sale of securities and therefore will
be qualifying income for purposes of the Qualifying Income Requirement.
Investments
by the Fund in zero coupon or other discount securities will result in income to
the Fund equal to a portion of the excess face value of the securities over
their issue price (the “original issue discount” or “OID”) each year that the
securities are held, even though the Fund may receive no cash interest payments
or may receive cash interest payments that are less than the income recognized
for tax purposes. In other circumstances, whether pursuant to the terms of a
security or as a result of other factors outside the control of the Fund, the
Fund may recognize income without receiving a commensurate amount of cash. Such
income is included in determining the amount of income that the Fund must
distribute to maintain its eligibility for treatment as a RIC and to avoid the
payment of federal income tax, including the nondeductible 4% excise tax
described above.
Any
market discount recognized on a market discount bond is taxable as ordinary
income. A market discount bond is a bond acquired in the secondary market at a
price below redemption value, or below adjusted issue price if issued with
original issue discount. Absent an election by the Fund to include the market
discount in income as it accrues, gain on the Fund’s disposition of such an
obligation will be treated as ordinary income rather than capital gain to the
extent of the accrued market discount. Where the income required to be
recognized as a result of the OID and/or market discount rules is not matched by
a corresponding cash receipt by the Fund, the Fund may be required to borrow
money or dispose of securities to enable the Fund to make distributions to its
shareholders in order to qualify for treatment as a RIC and eliminate taxes at
the Fund level.
Special
rules apply if the Fund holds inflation-indexed bonds, such as Treasury
Inflation-Protected Securities (TIPS). Generally, all stated interest on
inflation-indexed bonds is taken into income by the Fund under its regular
method of accounting for interest income. The amount of any positive inflation
adjustment for a taxable year, which results from an increase in the
inflation-adjusted principal amount of the bond, is treated as OID. The amount
of the Fund’s OID in a taxable year with respect to a bond will increase the
Fund’s taxable income for such year without a corresponding receipt of cash,
until the bond matures. As a result, the Fund may need to use other sources of
cash to satisfy its distribution requirements for the applicable year. The
amount of any negative inflation adjustments, which result from a decrease in
the inflation-adjusted principal amount of the bond, first reduces the amount of
interest (including stated interest, OID, and market discount, if any) otherwise
includable in the Fund’s taxable income with respect to the bond for the taxable
year; any remaining negative adjustments will be either treated as ordinary loss
or, in certain circumstances, carried forward to reduce the amount of interest
income taken into account with respect to the bond in future taxable years.
71
The
Fund invests a portion of its assets (not to exceed 25% of its assets) in the
Subsidiary, which is classified as a corporation for U.S. federal income tax
purposes. Because the Subsidiary is a foreign corporation that is wholly owned
by the Fund, the Subsidiary is a CFC, and the Fund is considered a “United
States shareholder” thereof. As a result, the Fund is required to include in its
gross income each taxable year all of the Subsidiary’s “subpart F income,” which
generally is treated as ordinary income. It is expected that virtually all of
the Subsidiary’s income will be “subpart F income.” If the Subsidiary realizes a
net loss, that loss generally would not be available to offset the Fund’s
income. The Fund’s inclusion of the Subsidiary’s “subpart F income” in its gross
income increases the Fund’s tax basis in its shares of the Subsidiary.
Distributions by the Subsidiary to the Fund are generally not taxable to the
extent of its previously undistributed “subpart F income” and reduce the Fund’s
tax basis in those shares. Under applicable regulations, the Fund’s subpart F
income inclusions in respect of the Subsidiary will constitute qualifying income
for the Fund, whether or not any amount is distributed by the Subsidiary to the
Fund, if the subpart F income inclusions are derived with respect to the Fund’s
business of investing in stock, securities or currencies. It is possible that
the IRS might take the position that subpart F income inclusions from the
Subsidiary are not qualifying income. Under those circumstances the Fund might
fail to qualify for treatment as a RIC. If the Fund failed to qualify as a RIC
for any taxable year and was ineligible to or otherwise did not cure the
failure, it would be subject to federal income tax on its taxable income at the
corporate tax rate, with the consequence that its income available for
distribution to shareholders would be reduced and all such distributions from
its current or accumulated earnings and profits would be taxable to its
shareholders. Based on applicable regulations, the Fund expects its subpart F
income inclusions from the Subsidiary to be qualifying income. In the future, if
the IRS issues regulations or other guidance, or Congress enacts legislation,
limiting the circumstances in which the Fund’s subpart F income inclusions from
the Subsidiary will be considered qualifying income, the Fund might be required
to make changes to its operations, which could reduce the Fund’s ability to gain
investment exposure to commodities. Fund shareholders could also experience
adverse tax consequences in such circumstances. In that event, the Trust’s Board
may authorize a significant change in investment strategy or the Fund’s
liquidation.
Significant
aspects of the U.S. federal income tax treatment of digital assets are
uncertain. The IRS and U.S. Department of Treasury have issued only limited
guidance on the taxation of digital assets. In March 2014, the IRS issued a
notice that discusses certain aspects of the treatment of “convertible digital
currencies” (which the IRS describes as virtual currency that has an equivalent
value in real currency, or that acts as a substitute for real currency) for U.S.
federal income tax purposes. In the notice, the IRS stated that, for U.S.
federal tax purposes, (i) convertible digital currency is “property” that
is not “currency” and (ii) convertible digital currency may be held as a
capital asset.
In
October 2019, the IRS released further guidance regarding U.S. federal income
tax aspects of convertible digital currencies: (1) a series of frequently
asked questions that expand on the guidance provided in the notice, and
(2) a revenue ruling that addresses the U.S. federal income tax treatment
of certain “forks” or “air drops” of digital currency. The responses to the
frequently asked questions provide taxpayers with guidance on (i) the
proper method of determining a taxpayer’s holding period and tax basis for units
of convertible digital currency acquired at different times or at varying prices
and (ii) how a holder of units of convertible digital currency acquired at
different times or at varying prices may designate, for U.S. federal income tax
purposes, which units are transferred in a subsequent sale, exchange or other
disposition. The revenue ruling provides that a taxpayer will recognize income
if the taxpayer receives an “air drop” of a new digital currency following and
in connection with a “hard fork” of another digital currency. In a March
2021 non-binding legal memorandum, the
IRS stated that a taxpayer owning a digital currency that undergoes a “hard
fork” resulting in a new digital currency must recognize income at the time the
taxpayer has the ability to sell, exchange, or transfer the new digital
currency, regardless of the specific means by which the new digital currency is
distributed or otherwise made available (e.g., whether by an “air drop”
or other means).
In
July 2023, the IRS released a revenue ruling that addresses the U.S. federal
income tax treatment of certain staking activities. The ruling provides that a
cash-method taxpayer that stakes crypto assets and receives additional units of
the crypto asset as a reward when validation occurs includes the fair market
value of the
72
validation
reward in gross income in the tax year in which the taxpayer gains dominion and
control over the validation reward. The ruling does not address any other
aspects of staking activities.
The
existing guidance does not address the U.S. federal income tax treatment of
digital assets that are not digital currency. Nor does that guidance address
other significant aspects of the U.S. federal income tax treatment of digital
assets, including, but not limited to: (i) whether any digital asset is
properly treated as a “commodity” for U.S. federal income tax purposes;
(ii) whether any digital asset is properly treated as a “collectible” for
U.S. federal income tax purposes; (iii) the treatment of digital asset
derivatives; and (iv) the treatment of decentralized finance transactions.
The
uncertainty surrounding the U.S. federal income tax treatment of digital assets
could affect the performance of the Fund and, potentially, the taxation of
shareholders. The IRS may disagree with positions taken by the Fund with respect
to its investments in digital assets.
TAX-EXEMPT SHAREHOLDERS
Certain
tax-exempt shareholders, including
qualified pension plans, individual retirement accounts, salary deferral
arrangements, 401(k) plans, and other tax-exempt entities, generally are exempt
from federal income taxation except with respect to their unrelated business
taxable income (“UBTI”). Under current law, the Fund generally serves to block
UBTI from being realized by its tax-exempt shareholders. However,
notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by
virtue of their investment in the Fund where, for example, (i) the Fund
invests in REITs that hold residual interests in real estate mortgage investment
conduits (“REMICs”) or (ii) Shares constitute debt-financed property in the
hands of the tax-exempt shareholders
within the meaning of section 514(b) of the Internal Revenue Code. Charitable
remainder trusts are subject to special rules and should consult their tax
advisors. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult with their tax advisors regarding these issues.
Certain
tax-exempt educational institutions
will be subject to a 1.4% tax on net investment income. For these purposes,
certain dividends and capital gain distributions, and certain gains from the
disposition of Shares (among other categories of income), are generally taken
into account in computing a shareholder’s net investment income.
FOREIGN
SHAREHOLDERS
Dividends,
other than capital gains dividends, “short-term capital gain dividends” and
“interest-related dividends” (described below), paid by the Fund to shareholders
who are nonresident aliens or foreign entities will be subject to a 30% United
States withholding tax unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law to the extent derived from
investment income and short-term capital gain or unless such income is
effectively connected with a U.S. trade or business carried on through a
permanent establishment in the United States.
Nonresident
shareholders are urged to consult their own tax advisors concerning the
applicability of the United States withholding tax and the proper withholding
form(s) to be submitted to the Fund. A non-U.S. shareholder who fails to provide an
appropriate IRS Form W-8 may be subject
to backup withholding at the appropriate rate.
Dividends
reported by the Fund as (i) interest-related dividends, to the extent such
dividends are derived from the Fund’s “qualified net interest income,” or
(ii) short-term capital gain dividends, to the extent such dividends are
derived from the Fund’s “qualified short-term gain,” are generally exempt from
this 30% withholding tax. “Qualified net interest income” is the Fund’s net
income derived from U.S.-source interest and original issue discount, subject to
certain exceptions and limitations. “Qualified short-term gain” generally means
the excess of the Fund’s net short-term capital gain for the taxable year over
its net long-term capital loss, if any. In the case of Shares held through an
intermediary, the intermediary may withhold even if the Fund reports the payment
as an interest-related dividend or as a short-term capital gain dividend. Non-U.S. shareholders should contact their
intermediaries with respect to the application of these rules to their accounts.
73
Unless
certain non-U.S. entities that hold
Shares comply with IRS requirements that will generally require them to report
information regarding U.S. persons investing in, or holding accounts with, such
entities, a 30% withholding tax may apply to Fund distributions payable to such
entities. A non-U.S. shareholder may be
exempt from the withholding described in this paragraph under an applicable
intergovernmental agreement between the U.S. and a foreign government, provided
that the shareholder and the applicable foreign government comply with the terms
of such agreement.
BACKUP
WITHHOLDING
The
Fund will be required in certain cases to withhold (as “backup withholding”) on
amounts payable to any shareholder who (1) has provided the Fund either an
incorrect tax identification number or no number at all, (2) is subject to
backup withholding by the IRS for failure to properly report payments of
interest or dividends, (3) has failed to certify to the Fund that such
shareholder is not subject to backup withholding, or (4) has not certified
that such shareholder is a U.S. person (including a U.S. resident alien). The
backup withholding rate is currently 24%. Backup withholding will not be applied
to payments that have been subject to the 30% withholding tax on shareholders
who are neither citizens nor permanent residents of the U.S.
CREATION
UNITS
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. A person who redeems Creation Units
will generally recognize a gain or loss equal to the difference between the
exchanger’s basis in the Creation Units and the sum of the aggregate market
value of any securities received plus the amount of any cash received for such
Creation Units. The IRS, however, may assert that a loss realized upon an
exchange of securities for Creation Units cannot be deducted currently under the
rules governing “wash sales,” or on the basis that there has been no significant
change in economic position.
Any
gain or loss realized upon a creation of Creation Units will be treated as
capital gain or loss if the Authorized Participant holds the securities
exchanged therefor as capital assets, and otherwise will be ordinary income or
loss. Similarly, any gain or loss realized upon a redemption of Creation Units
will be treated as capital gain or loss if the Authorized Participant holds the
Shares comprising the Creation Units as capital assets, and otherwise will be
ordinary income or loss. Any capital gain or loss realized upon the creation of
Creation Units will generally be treated as long-term capital gain or loss if
the securities exchanged for such Creation Units have been held for more than
one year, and otherwise will be short-term capital gain or loss. Any capital
gain or loss realized upon the redemption of Creation Units will generally be
treated as long-term capital gain or loss if the Shares comprising the Creation
Units have been held for more than one year, and otherwise, will generally be
short-term capital gain or loss. Any capital loss realized upon a redemption of
Creation Units held for six (6) months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions to
the applicable Authorized Participant of long-term capital gains with respect to
the Creation Units (including any amounts credited to the Authorized Participant
as undistributed capital gains).
The
Fund has the right to reject an order for Creation Units if the purchaser (or a
group of purchasers) would, upon obtaining the Shares so ordered, own 80% or
more of the outstanding shares of the Fund and if, pursuant to section 351 of
the Internal Revenue Code, the Fund would have a basis in any deposit securities
different from the market value of such securities on the date of deposit. The
Fund also has the right to require information necessary to determine beneficial
Share ownership for purposes of the 80% determination. If the Fund does issue
Creation Units to a purchaser (or a group of purchasers) that would, upon
obtaining the Shares so ordered, own 80% or more of the outstanding shares of
the Fund, the purchaser (or a group of purchasers) may not recognize gain or
loss upon the exchange of securities for Creation Units.
74
If
the Fund redeems Creation Units in cash, it may bear additional costs and
recognize more capital gains than it would if it redeems Creation Units in kind.
Persons
purchasing or redeeming Creation Units should consult their own tax advisors
with respect to the tax treatment of any creation or redemption transaction.
CERTAIN
POTENTIAL TAX REPORTING REQUIREMENTS
Under
promulgated Treasury regulations, if a shareholder recognizes a loss on
disposition of the Fund’s shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder (or certain
greater amounts over a combination of years), the shareholder must file with the
IRS a disclosure statement on IRS Form 8886. Direct shareholders of portfolio
securities are in many cases excepted from this reporting requirement, but under
current guidance, shareholders of a RIC are not excepted. A shareholder who
fails to make the required disclosure to the IRS may be subject to adverse tax
consequences, including significant penalties. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
The
foregoing discussion is a summary only and is not intended as a substitute for
careful tax planning. Purchasers of Shares should consult their own tax advisors
as to the tax consequences of investing in such Shares, including under state,
local and other tax laws. Finally, the foregoing discussion is based on
applicable provisions of the Internal Revenue Code, regulations, judicial
authority and administrative interpretations in effect on the date hereof.
Changes in applicable authority could materially affect the conclusions
discussed above, and such changes often occur.
STATE
TAX MATTERS
The
discussion of state and local tax treatment is based on the assumptions that the
Fund will qualify for treatment under Subchapter M of the Internal Revenue
Code as a RIC and that the Fund will distribute all interest and dividends it
receives to its shareholders. The tax discussion summarizes general state and
local tax laws which are currently in effect and which are subject to change by
legislative, judicial or administrative action; any such changes may be
retroactive with respect to the Fund’s applicable transactions. Investors should
consult a tax advisor for more detailed information about state and local taxes
to which they may be subject.
Many
states grant tax-free status to
dividends paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by the Fund. Investment in Government National Mortgage Association
(“Ginnie Mae”) or Federal National Mortgage Association (“Fannie Mae”)
securities, banker’s acceptances, commercial paper, and repurchase agreements
collateralized by U.S. government securities do not generally qualify for such
tax-free treatment. The rules on
exclusion of this income are different for corporate shareholders.
75
CAPITAL STOCK AND OTHER SECURITIES
The
Fund issues Shares of beneficial interest, with no par value per Share. The
Board may designate additional funds.
Each
Share issued by the Trust has a pro rata interest in the assets of the
corresponding series of the Trust. Shares have no preemptive, exchange,
subscription or conversion rights and are freely transferable. Each Share is
entitled to participate equally in dividends and distributions declared by the
Board with respect to the Fund, and in the net distributable assets of the Fund
on liquidation.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all series of the Trust (“Funds”) vote
together as a single class except that if the matter being voted on affects only
a particular fund it will be voted on only by that fund and if a matter affects
a particular fund differently from other Funds, that fund will vote separately
on such matter. Under Massachusetts law, the Trust is not required to hold an
annual meeting of shareholders unless required to do so under the 1940 Act. The
policy of the Trust is not to hold an annual meeting of shareholders unless
required to do so under the 1940 Act. All Shares of the Trust (regardless of the
fund) have noncumulative voting rights for the election of Trustees. Under
Massachusetts law, Trustees of the Trust may be removed by vote of the
shareholders.
Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Trust. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
obligations include such disclaimer, and provides for indemnification and
reimbursement of expenses out of the Trust’s property for any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations. Given the above limitations on shareholder personal liability, and
the nature of the Fund’s assets and operations, the risk to shareholders of
personal liability is believed to be remote.
Shareholder
inquiries may be made by writing to the Trust, c/o the Distributor, State Street
Global Advisors Funds Distributors, LLC at One Iron Street, Boston,
Massachusetts 02210.
76
COUNSEL AND INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue NW,
Washington, DC 20004, serves as counsel to the Trust. Ernst & Young
LLP, located at 200 Clarendon Street, Boston, MA 02116, serves as the
independent registered public accounting firm of the Trust. Ernst &
Young, LLP performs annual audits of the Fund’s financial statements and
provides other audit, tax and related services.
LOCAL MARKET HOLIDAY SCHEDULES
The
Trust generally intends to effect deliveries of portfolio securities on T+1. The
ability of the Trust to effect in-kind
redemptions within one Business Day of receipt of a redemption request is
subject, among other things, to the condition that, within the time period from
the date of the request to the date of delivery of the securities, there are no
days that are local market holidays on the relevant Business Days. For every
occurrence of one or more intervening holidays in the local market that are not
holidays observed in the United States, the redemption settlement cycle may be
extended by the number of such intervening local holidays. In addition to
holidays, other unforeseeable closings in a foreign market due to emergencies
may also prevent the Trust from delivering securities within one Business Day.
The
securities delivery cycles currently practicable for transferring portfolio
securities to redeeming investors, coupled with local market holiday schedules,
may require a delivery process longer than the standard settlement period. In
certain circumstances during the calendar year, the settlement period may be
greater than seven calendar days.
FINANCIAL STATEMENTS
The
Fund had not commenced operations as of the date of this SAI and therefore does
not have financial information to report for the Trust’s October 31 fiscal
year end.
77
APPENDIX A
Standard &
Poor’s, a division of S&P Global (“S&P”), Corporate Long-Term Issue
Ratings:
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| AAA |
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An obligation rated ‘AAA’ has the highest rating assigned
by S&P Global Ratings. The obligor’s capacity to meet its financial
commitments on the obligation is extremely strong. |
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| AA |
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An obligation rated ‘AA’ differs from the highest-rated
obligations only to a small degree. The obligor’s capacity to meet its
financial commitments on the obligation is very strong. |
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| A |
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An obligation rated ‘A’ is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. However, the obligor’s capacity to
meet its financial commitments on the obligation is still strong. |
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| BBB |
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An obligation rated ‘BBB’ exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances
are more likely to weaken the obligor’s capacity to meet its financial
commitments on the obligation. |
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| BB, B, CCC, CC, and C |
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Obligations rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are
regarded as having significant speculative characteristics. ‘BB’ indicates
the least degree of speculation and ‘C’ the highest. While such
obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposure to
adverse conditions. |
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| BB |
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An obligation rated ‘BB’ is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to the obligor’s inadequate capacity to meet
its financial commitments on the obligation. |
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| B |
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An obligation rated ‘B’ is more vulnerable to nonpayment
than obligations rated ‘BB’, but the obligor currently has the capacity to
meet its financial commitments on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor’s
capacity or willingness to meet its financial commitments on the
obligation. |
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| CCC |
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An obligation rated ‘CCC’ is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitments on
the obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its
financial commitments on the obligation. |
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| CC |
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An obligation rated ‘CC’ is currently highly vulnerable to
nonpayment. The ‘CC’ rating is used when a default has not yet occurred
but S&P Global Ratings expects default to be a virtual certainty,
regardless of the anticipated time to default. |
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| C |
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An obligation rated ‘C’ is currently highly vulnerable to
nonpayment, and the obligation is expected to have lower relative
seniority or lower ultimate recovery compared with obligations that are
rated higher. |
A-1
Information
Classification: General
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| D |
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An obligation rated ‘D’ is in default or in breach of an
imputed promise. For non-hybrid
capital instruments, the ‘D’ rating category is used when payments on an
obligation are not made on the date due, unless S&P Global Ratings
believes that such payments will be made within five business days in the
absence of a stated grace period or within the earlier of the stated grace
period or 30 calendar days. The ‘D’ rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action and where
default on an obligation is a virtual certainty, for example due to
automatic stay provisions. A rating on an obligation is lowered to ‘D’ if
it is subject to a distressed exchange offer. |
| * |
Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the rating
categories. |
Moody’s
Investors Service, Inc.’s (“Moody’s”) Long-Term Obligation Ratings:
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| Aaa |
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Obligations rated Aaa are judged to be of the highest
quality, subject to the lowest level of credit risk. |
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| Aa |
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Obligations rated Aa are judged to be of high quality and
are subject to very low credit risk. |
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| A |
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Obligations rated A are judged to be upper-medium grade and
are subject to low credit risk. |
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| Baa |
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Obligations rated Baa are judged to be medium-grade and
subject to moderate credit risk and as such may possess certain
speculative characteristics. |
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| Ba |
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Obligations rated Ba are judged to be speculative and are
subject to substantial credit risk. |
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| B |
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Obligations rated B are considered speculative and are
subject to high credit risk. |
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| Caa |
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Obligations rated Caa are judged to be speculative of poor
standing and are subject to very high credit risk. |
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| Ca |
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Obligations rated Ca are highly speculative and are likely
in, or very near, default, with some prospect of recovery of principal and
interest. |
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| C |
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Obligations rated C are the lowest rated and are typically
in default, with little prospect for recovery of principal or
interest. |
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings of hybrid
securities issued by banks, insurers, finance companies, and securities firms.*
Note:
For more information on long-term ratings assigned to obligations in default,
please see the definition “Long-Term Credit Ratings for Defaulted or Impaired
Securities” in the Other Definitions section of Moody’s Rating Symbols and
Definitions publication.
| * |
By their terms, hybrid securities allow for the omission of
scheduled dividends, interest, or principal payments, which can
potentially result in impairment if such an omission occurs. Hybrid
securities may also be subject to contractually allowable write-downs of
principal that could result in impairment. Together with the hybrid
indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that
security. |
A-2
Information
Classification: General
Fitch
Ratings Ltd.’s (“Fitch”) Corporate Finance Obligations – Long-Term Ratings:
AAA:
Highest Credit Quality. ‘AAA’ ratings denote the lowest expectation of credit
risk. They are assigned only in cases of exceptionally strong capacity for
payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA:
Very High Credit Quality. ‘AA’ ratings denote expectations of very low credit
risk. They indicate very strong capacity for payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A:
High Credit Quality. ‘A’ ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB:
Good Credit Quality. ‘BBB’ ratings indicate that expectations of credit risk are
currently low. The capacity for payment of financial commitments is considered
adequate, but adverse business or economic conditions are more likely to impair
this capacity.
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to credit risk,
particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial alternatives may be available to allow
financial commitments to be met.
B:
Highly Speculative. ‘B’ ratings indicate that material credit risk is present.
CCC:
Substantial Credit Risk. ‘CCC’ ratings indicate that substantial credit risk is
present.
CC:
Very High Levels of Credit Risk. ‘CC’ ratings indicate very high levels of
credit risk.
C:
Exceptionally High Levels of Credit Risk. ‘C’ indicates exceptionally high
levels of credit risk.
A-3
Information
Classification: General
APPENDIX B - ADVISER’S PROXY VOTING
PROCEDURES AND GUIDELINES
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Effective March 25, 2024, for voting decisions as of
March 26, 2024
Global Proxy Voting and Engagement Policy
State Street Global Advisors is the investment management arm of
State Street Corporation, a leading provider of financial services to
institutional investors. As an asset manager, State Street Global Advisors votes
its clients’ proxies where the client has delegated proxy voting authority to
it, and State Street Global Advisors votes these proxies and engages with
companies in the manner that we believe will most likely protect and promote the
long-term economic value of client investments, as described in this
document.1
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This Policy is applicable to SSGA Funds
Management, Inc., State Street Global Advisors Trust Company, and other
advisory affiliates of State Street Corporation.
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| Introduction |
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At
State Street Global Advisors, we take our fiduciary duties as an asset
manager very seriously. Our primary fiduciary obligation to our clients is
to maximize the long-term value of their investments. State Street Global
Advisors focuses on risks and opportunities that may impact long-term
value creation for our clients. We rely on the elected representatives of
the companies in which we invest — the board of directors — to oversee
these firms’ strategies. We expect effective independent board oversight
of the material risks and opportunities to its business and operations. We
believe that appropriate consideration of these risks and opportunities is
an essential component of a firm’s long-term business strategy, and expect
boards to actively oversee the management of this strategy. |
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| Our Asset
Stewardship Program |
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State Street Global Advisors’ Asset Stewardship Team is
responsible for developing and implementing this Global Proxy Voting and
Engagement Policy (the “Policy”), the implementation of third-party proxy
voting guidelines where applicable, case-by- case voting items, issuer
engagement activities, and research and analysis of corporate governance
issues and proxy voting items. The Asset Stewardship Team’s activities are
overseen by our internal governance body, State Street Global Advisors’
ESG Committee (the “ESG Committee”). The ESG Committee is responsible for
reviewing State Street Global Advisors’ stewardship strategy, engagement
priorities, the Policy, and for monitoring the delivery of voting
objectives.
In order to facilitate our proxy voting process, we retain
Institutional Shareholder Services Inc. (“ISS”), a firm with expertise in
proxy voting and corporate governance. We utilize ISS to: (1) act as
our proxy voting agent (providing State Street Global Advisors with vote
execution and administration services), (2) assist in applying the Policy,
and (3) provide research and analysis relating to general corporate
governance issues and specific proxy items.
All voting decisions and engagement activities for which
State Street Global Advisors has been given voting discretion are
undertaken in accordance with this Policy, ensuring that the interests of
our clients remain the sole consideration when discharging our stewardship
responsibilities. Exceptions to this policy is the use of an independent
third party to vote on State Street Corporation (“State Street”) stock and
the stock of other State Street affiliated entities, to mitigate a
conflict of interest of voting on our parent company or affiliated
entities, and other situations where we believe we may be conflicted from
voting (for example, stock of a public company for which a State Street
director also serves as a director, or due to an outside business
interest). In such cases, delegated third parties exercise vote decisions
based upon their independent voting policy.
We aim to vote at all shareholder meetings where our clients
have given us the authority to vote their shares and where it is feasible
to do so. However, when we deem appropriate, we could refrain from voting
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• Power of attorney documentation is
required. |
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• Voting will have a material impact on our ability to
trade the security. |
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• Voting is not permissible due to sanctions affecting a
company or individual. |
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• Issuer-specific special documentation is required or
various market or issuer certifications are required. |
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• Unless a client directs otherwise, in so-called “share blocking” markets
(markets where proxy voters have their securities blocked from trading
during the period of the annual meeting). |
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Additionally, we are unable to vote proxies when certain
custodians, used by our clients, do not offer proxy voting in a
jurisdiction or when they charge a meeting-specific fee in excess of the
typical custody service agreement.
Voting authority attached to certain securities held by
State Street Global Advisors pooled funds may be delegated to an
independent third party as required by regulatory or other requirements.
Under such arrangements, voting will be conducted by the independent third
party pursuant to its proxy voting policy and not pursuant to this
Policy. |
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| The State Street Global Advisors Proxy Voting
Program |
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In
addition to the option of delegating proxy voting authority to State
Street Global Advisors pursuant to this Policy, clients may alternatively
choose to participate in the State Street Global Advisors Proxy Voting
Program (the “Proxy Voting Program”) which empowers clients to direct the
proxy voting of shares held by the eligible fund or segregated account2 they own. Clients that
participate in the Proxy Voting Program have the option of selecting a
third-party proxy voting guideline from among policies included in the
Proxy Voting Program to apply to the vote of the client’s pro rata share
of the securities held by the eligible fund or segregated account they
own. This Policy does not apply to shares voted under the Proxy Voting
Program. |
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Voted Pursuant to the Policy |
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Where State Street Global Advisors’ clients have asked it to
vote their shares on the client’s behalf, including where a pooled fund
fiduciary has delegated the responsibility to vote the fund’s securities
to State Street Global Advisors, State Street Global Advisors votes those
securities in a unified manner, consistent with the principles described
in this Policy. Exceptions to this unified voting policy are:
(1) where State Street Global Advisors has made its Proxy Voting
Program available to its separately managed account clients and investors
within a fund managed by State Street Global Advisors, in which case a pro
rata portion of shares held by the fund or segregated account attributable
to clients who choose to participate in the Proxy Voting Program will be
voted consistent with the third-party proxy voting guidelines selected by
the clients, (2) where a pooled investment vehicle managed by State
Street |
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2 “Eligible funds and segregated accounts” include all fund
and client accounts managed by State Street Global Advisors that employ an
equity index strategy and which have granted, or are able to grant, proxy
voting authority to State Street Global
Advisors. |
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Global Advisors utilizes a third party proxy voting
guideline as set forth in that fund’s organizational and/or offering
documents, and (3) where voting authority with respect to certain
securities held by State Street Global Advisors pooled funds may be
delegated to an independent third party as required by
regulatory or other requirements. With respect to such funds
and separately managed accounts utilizing third-party proxy voting
guidelines, the terms of the applicable third-party proxy voting
guidelines shall apply in place of the Policy described herein and the
proxy votes implemented with respect to such a fund or account may differ
from and be contrary to the votes implemented for other portfolios managed
by State Street Global Advisors pursuant to this Policy.
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| Regional Nuances |
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When
voting and engaging with companies, we may consider market-specific
nuances that may be relevant to that company. We expect companies to
observe the relevant laws and regulations of their respective markets, as
well as country specific best practice guidelines and corporate governance
codes and to publicly disclose their level of compliance with the
applicable provisions and requirements. Except where specified, this
Policy applies globally. |
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| Our Proxy Voting and Engagement
Principles |
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We have
organized our proxy voting and engagement program around three broad
principles: |
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Board Oversight |
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We believe that well-governed companies can protect and
pursue shareholder interests better and withstand the challenges of an
uncertain economic environment. As such, we seek to vote director
elections in a way that we believe will maximize long-term value.
Principally, a board acts on behalf of shareholders by protecting their
interests and preserving their rights. In order to carry out their primary
responsibilities, directors undertake activities that include setting
strategy and providing guidance on strategic matters, selecting the CEO
and other senior executives, overseeing executive management, creating a
succession plan for the board and management, and providing effective
oversight of material risks and opportunities relevant to their business.
Further, good corporate governance necessitates the existence of effective
internal controls and risk management systems, which should be governed by
the board.
We view board quality as a measure of director independence,
director succession planning, board diversity, evaluations and
refreshment, and company governance practices. We believe independent
directors are crucial to good corporate governance; they help management
establish sound corporate governance policies and practices. We believe a
sufficiently independent board is key to effectively monitoring
management, maintaining appropriate governance practices, and performing
oversight functions necessary to protect shareholder interests. We also
believe the right mix of skills, independence, diversity, and
qualifications among directors provides boards with the knowledge and
direct experience to manage risks and operating structures that are often
complex and industry-specific. We vote for the (re-)election of directors on a case-by-case basis after
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factors set forth in this Policy, including, but not limited
to, board quality, general market practice, and availability of
information on director skills and expertise. When voting in director
elections, we do so on behalf of and in the best interest of the funds and
client accounts we manage and do not seek to change or influence control
of the company.
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| Disclosure |
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It is
important for shareholders to receive timely and accurate reporting of a
company’s financial performance and strategy so that they are able to
assess both the value and risk of their investment. In addition to
information related to strategy and performance, companies should also
provide disclosure relating to their approach to corporate governance and
shareholder rights. Such information allows investors to determine whether
their economic interests have been protected by the board and provides
insights into the quality of the board’s oversight of management.
Ultimately, the board of directors is accountable for the oversight and
disclosure of the material risks and opportunities faced by the
company. |
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State
Street Global Advisors believes it is in the best interest of shareholders
for companies to have appropriate shareholder rights and accountability
mechanisms in place. As a starting place for voting rights, it is
necessary for ownership rights to reflect one vote for one share to ensure
that economic interests and proxy voting power are aligned. This share
structure best supports the shareholders’ right to exercise their proxy
vote on matters that are important to the protection of their investment
such as share issuances and other dilutive events, authorization of
strategic transactions, approval of a shareholder rights plan, and changes
to the corporate bylaws or charter, among others. In terms of
accountability mechanisms, we believe there should be annual elections of
the full board of directors. The ability to elect, remove and nominate
directors on at least an annual basis provides the appropriate checks and
balances to ensure that the board of directors are undertaking their
responsibilities in the best interests of their shareholders. |
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| Shareholder Proposals |
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When
voting our clients’ proxies, we may be presented with shareholder
proposals at portfolio companies that must be evaluated on a case-by-case basis and in
accordance with the principles set forth above. For proposals related to
commonly requested disclosure topics, we have also developed the criteria
found in Appendix A to assess the effectiveness of disclosure on such
topics in connection with these types of proposals. |
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| Engagement |
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State Street Global Advisors’
engagement activities provides a meaningful shareholder tool that we
believe protects and enhances the long-term economic value of the holdings
in our clients’ accounts. We conduct issuer-specific engagements with
companies to discuss the principles set forth in this Policy, including
sustainability-related risks and opportunities. In addition, we encourage
issuers to increase the amount of direct communication board members have
with shareholders. We believe direct communication
with |
B-7
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8
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executive board members and independent non-executive directors is critical to
helping companies understand shareholder concerns. |
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Section I.
Effective Board Oversight
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| Board
Independence |
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We believe independent directors are
crucial to good corporate governance; they help management establish sound
corporate governance policies and practices. We believe a sufficiently
independent board is key to effectively monitoring management, maintaining
appropriate governance practices, and performing oversight functions
necessary to protect shareholder interests. We have developed a set of
criteria for determining board independence, which varies by region and/or
local jurisdiction. These criteria generally follow relevant listing
standards, local regulatory requirements and/or local market practice
standards. Such criteria, may include, for example: |
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• Participation in related-party transactions and other
material business relations with the company |
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• Employment history with company |
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• Founder and member of founding family |
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• Government representative |
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• Excessive tenure and a preponderance of long-tenured
directors |
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• Relations with significant shareholders |
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• Close family ties with any of the company’s advisers,
directors or senior employees |
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• Cross-directorships |
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• Receipt of non-board related compensation from the
issuer, its auditors or advisors |
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• Company classification of a director as non-independent |
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In some cases, State Street Global
Advisors’ criteria may be more rigorous than applicable local or listing
requirements. |
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Separation of Chair/CEO Our
primary focus is to ensure there is strong independent leadership of the
board, in accordance with the principles discussed above. We generally
support the board choosing the governance structure that is most
appropriate for that company. |
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We may take voting action against
the chair or members of the nominating committee at companies in the
following indexes that have combined the roles of chair and CEO and have
not appointed a lead independent director: |
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• S&P 500 |
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• STOXX Europe 600 |
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Board Committees We believe that board committees are
crucial to robust corporate governance and should be composed of a
sufficient number of independent directors. We use the same criteria for
determining committee independence as we do for determining director
independence, which varies by region and/or local jurisdiction. Although
we recognize that board structures may vary by jurisdiction, where a board
has established an audit committee and/or compensation/remuneration
committee, we generally expect the committee to be primarily, and in some
cases, fully independent. |
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| Board
Composition |
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State Street Global Advisors
believes that a well-constituted board of directors, with a balance of
skills, expertise, and independence, provides the foundation for a
well-governed company. |
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Refreshment and Tenure We may
withhold votes from directors if overall average board tenure is
excessive. In assessing excessive tenure, we consider factors such as the
preponderance of long tenured directors, board refreshment practices, and
classified board structures. |
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Generally, we may vote against age
and term limits unless the company is found to have poor board refreshment
and director succession practices, and has a preponderance of non-executive directors with
excessively long tenures serving on the board. |
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Director Time Commitments We
consider if a company publicly discloses its director time commitment
policy (e.g., within corporate governance guidelines, proxy statement,
company website). This policy or associated disclosure must
include: |
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• Description of the annual review process undertaken by
the nominating committee to evaluate director time
commitments |
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• Numerical limit(s) on public company board seat(s) the
company’s directors can serve on |
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For companies in the S&P 500, we
may vote against the nominating committee chair at companies that do not
publicly disclose a policy compliant with the above criteria, or do not
commit to doing so within a reasonable
timeframe. |
B-9
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10
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For other companies in certain
markets3 that do
not publicly disclose a policy compliant with the above criteria, we will
consider the number of outside board directorships that the company’s
non-executive and executive
directors may undertake. Thus, State Street Global Advisors may take
voting action against a director who exceeds the number of board mandates
listed below:4
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• Named Executive Officers (NEOs) of a public company who
sit on more than two public company boards |
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• Non-executive
board chairs or lead independent directors who sit on more than three
public company boards |
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• Non-executive
directors who sit on more than four public company boards |
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If a director is imminently leaving
a board and this departure is disclosed in a written, time-bound and
publicly-available manner, we may consider waiving our withhold vote when
evaluating the director for excessive time commitments. |
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Board Diversity We believe
effective board oversight of a company’s long-term business strategy
necessitates a diversity of perspectives, especially in terms of gender,
race and ethnicity. |
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a. Board Gender
Diversity |
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We expect boards of all listed
companies to have at least one female board member. If a company does not
meet the applicable expectation for three consecutive years, State Street
Global Advisors may vote against all incumbent members of the nominating
committee or those persons deemed responsible for the nomination
process. |
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In addition, we expect the boards of
companies in the following indices to be composed of at least 30-percent female
directors. |
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• Russell 3000 |
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• TSX |
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• FTSE 350 |
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• STOXX 600
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3. Such markets include the United States (ex-S&P 500), Australia, Canada,
United Kingdom, Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland. |
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4. Service on a mutual fund board, the board of a UK
investment trust or a Special Purpose Acquisition Company (SPAC) board is
not considered when evaluating directors for excessive commitments.
However, we do expect these roles to be considered by nominating
committees when evaluating director time
commitments. |
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11
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• ASX 300 |
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If a company does not meet the
applicable expectation, State Street Global Advisors may vote against the
chair of the board’s nominating committee or the board leader in the
absence of a nominating committee. |
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We may waive the 30-percent voting guideline if a
company engages with State Street Global Advisors and provides a specific,
timebound plan for reaching the 30-percent threshold. |
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b. Board Racial & Ethnic
Diversity (US & UK Only) |
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We may withhold support from the
chair of the nominating committee when a company in the S&P 500 or
FTSE 100 does not have at least one director from an underrepresented
racial/ethnic community on its board. We may waive this voting guideline
if a company engages with State Street Global Advisors and provides a
specific, timebound plan for reaching this threshold. |
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Board Member Expertise We believe board members
should have adequate skills to provide effective oversight of corporate
strategy, operations, and risks, including sustainability-related issues.
Boards should also have a regular evaluation process in place to assess
the effectiveness of the board and the skills of board members to address
issues, such as emerging risks, changes to corporate strategy, and
diversification of operations and geographic footprint. We believe
nominating committees are best positioned to evaluate the skillset and
expertise of both existing and prospective board members. However, we may
take such considerations into account in certain circumstances, such as
contested elections.
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| Board
Accountability |
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Oversight of Strategy and Risk
We believe that risk management is a key function of the board, which
is responsible for setting the overall risk appetite of a company and for
providing oversight on the risk management process established by senior
executives at a company. We allow boards to have discretion regarding the
ways in which they provide oversight in this area. However, we expect
companies to disclose how the board provides oversight on its risk
management system and risk identification. Boards should also review
existing and emerging risks that evolve in tandem with the changing
political and economic landscape or as companies diversify or expand their
operations into new areas. |
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As responsible stewards, we believe
in the importance of effective risk management and oversight of issues
that are material to a company. To effectively manage and assess the risk
of our clients’ portfolios, we expect our portfolio companies to manage
risks and opportunities that are material and industry-specific and that
have a demonstrated link to long-term value creation, and to provide
high-quality disclosure of this process to shareholders. Consistent with
this perspective, we may seek to engage with our
portfolio |
B-11
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12
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companies to better understand how their boards are
overseeing risks and opportunities the company has deemed to be material
to its business or operations. If we believe that a company has failed to
implement and communicate effective oversight of these risks, we may
consider voting against the responsible directors. We may withhold votes
from directors who we determine have been remiss in their
duties. |
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We may vote against directors due to
failure to demonstrate effective oversight in the following three areas
for relevant companies: |
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• Governance |
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• Climate risk management at companies in carbon-intensive
industries5 or
companies receiving shareholder proposals that exhibit significant
misalignment with our TCFD disclosure assessment criteria |
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• Human capital management at our largest global
holdings |
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When evaluating a board’s oversight
of risks and opportunities, we assess the following factors, based on
disclosures by, and engagements with, portfolio companies: |
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• Oversees Long-term Strategy |
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— Articulates the material risks and opportunities and how
those risks and opportunities fit into the firm’s long-term business
strategy |
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— Regularly assesses the effectiveness of the company’s
long-term strategy, and management’s execution of this
strategy |
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• Demonstrates an Effective Oversight
Process |
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— Describes which committee(s) have oversight over specific
risks and opportunities, as well as which topics are overseen and/or
discussed at the full-board level |
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— Includes risks and opportunities in board and/or
committee agendas, and articulates how often specific topics are discussed
at the committee and/or full-board level
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5 State Street Global Advisors defines carbon-intensive
industries as the following Global Industry Classification Standard (GICS)
subindustries: Electric Utilities, Integrated Oil &Gas,
Multi-Utilities, Steel, Construction Materials, Independent Power
Producers & Energy Traders, Oil & Gas
Refining & Marketing, Oil & Gas Exploration &
Production, Diversified Metals & Mining, Airlines, Commodity
Chemicals, Industrial Gases, Aluminum, Oil & Gas
Storage & Transportation, Multi-Sector Holdings, Diversified
Chemicals, Fertilizers & Agricultural Chemicals, Air
Freight & Logistics, Agricultural Products,
Environmental & Facilities Services, Coal & Consumable
Fuels, Paper Packaging, Railroads, Marine, Automotive Retail,
Oil & Gas Drilling, Food Retail, Paper Products, Hotels,
Resorts & Cruise Lines, Internet & Direct Marketing
Retail, Hypermarkets & Supercenters, Precious Metals &
Minerals. |
B-12
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13
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— Utilizes KPIs or metrics to assess the effectiveness of
risk management processes |
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— Engages with key stakeholders including employees and
investors |
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• Ensures Effective Leadership |
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— Holds management accountable for progress on relevant
metrics and targets |
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— Integrates necessary skills and perspectives into the
board nominating and executive hiring processes, and provides training to
directors and executives on topics material to the company’s business or
operations |
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— Conducts a periodic effectiveness review |
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• Ensures Disclosures of Material
Information |
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— Ensures publication of relevant disclosures, including
those regarding material topics |
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— For example, we expect companies to disclose against the
four pillars of the Task Force on Climate-related Financial Disclosures
(TCFD) framework. |
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Proxy Contests We believe
nominating committees that are comprised of independent directors are best
placed to assess which individuals can properly fulfill the duties of the
board, and act as effective fiduciaries. As long-term shareholders, we
vote proxies in director elections, including related to nominating
committee members, who play a critical role in determining board
composition. While our default position is to support the committees’
judgement, we consider the following factors when evaluating dissident
nominees: |
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• Strategy presented by dissident nominees versus that of
current management, as overseen by the incumbent board |
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• Effectiveness, quality, and experience of the management
slate |
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• Material governance failures and the level of
responsiveness to shareholder concerns and market signals by the incumbent
board |
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• Quality of disclosure and engagement practices to support
changes to shareholder rights, capital allocation and/or governance
structure |
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• Company performance and, if applicable, the merit of a
recovery plan |
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Board Oversight of Geopolitical
Risk As stewards of our clients’ assets, we are aware of the financial
risks associated with geopolitical risk, including risks arising from
unexpected conflict between or among nations. We expect our portfolio
companies that may be impacted by geopolitical risk to: |
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• Manage and mitigate risks related to operating in
impacted markets, which may include financial, sanctions-related,
regulatory, and/or reputational risks, among
others; |
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• Strengthen board oversight of these efforts;
and |
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• Describe these efforts in public
disclosures. |
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Compensation and Remuneration
We consider it the board’s responsibility to identify the appropriate
level of executive compensation. Despite the differences among the
possible types of plans and the awards, there is a simple underlying
philosophy that guides our analysis of executive compensation: we believe
that there should be a direct relationship between executive compensation
and company performance over the long term. |
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Shareholders should have the
opportunity to assess whether pay structures and levels are aligned with
business performance. When assessing remuneration reports, we consider
factors such as adequate disclosure of various remuneration elements,
absolute and relative pay levels, peer selection and benchmarking, the mix
of long-term and short-term incentives, alignment of pay structures with
shareholder interests, as well as with corporate strategy and performance.
We may oppose remuneration reports where pay seems misaligned with
shareholders’ interests. We may also consider executive compensation
practices when re-electing
members of the compensation committee. |
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For example, criteria we may
consider include the following: |
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• Overall quantum relative to company
performance |
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• Vesting periods and length of performance
targets |
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• Mix of performance, time and options-based stock
units |
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• Use of special grants and one-time awards |
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• Retesting and repricing features |
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• Disclosure and transparency |
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Board Responsiveness to Advisory
Votes |
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a. Executive Pay |
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We may vote against the re-election of members of the
compensation committee if we have serious concerns about remuneration
practices and if the company has not been responsive to shareholder
feedback to review its approach. In addition, if the level of dissent
against a management proposal on executive pay is consistently high, and
we have determined that a vote against a pay-related proposal is warranted in
the third consecutive year, we may vote against the Chair of the
compensation committee. |
B-14
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b. Shareholder Proposals with
Significant Shareholder Support |
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We may withhold votes from directors
of companies that have not been responsive to a shareholder proposal that
received a majority shareholder support at the last annual or special
meeting. |
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Attendance We may withhold votes from directors if
they attend less than 75 percent of board meetings without providing
appropriate explanation for their failure to meet the attendance
threshold.
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Section II.
Disclosure |
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It is important for shareholders to receive timely and
accurate reporting of a company’s financial performance and strategy so
that they are able to assess both the value and risk of their investment.
In addition to information related to strategy and performance, companies
should provide disclosure relating to their approach to corporate
governance and shareholder rights. Such information allows investors to
determine whether their economic interests have been protected by the
board and provides insights into the quality of the board’s oversight of
management. Ultimately, the board of directors is accountable for the
oversight and disclosure of the material risks and opportunities faced by
the company.
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| Board
Composition Disclosures |
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We view board quality as a measure
of director independence, director succession planning, board diversity,
evaluations and refreshment, and company governance practices. We also
believe the right mix of skills, independence, diversity, and
qualifications among directors provides boards with the knowledge and
direct experience to manage risks and operating structures that are often
complex and industry-specific. |
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Board Demographics (US and UK)
If a company in the Russell 1000 or FTSE 350 does not disclose the
gender, racial and ethnic composition of its board, we may vote against
the Chair of the nominating committee. Acceptable disclosures
include: |
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• Aggregate-level (e.g., “5% of our Directors are Black”,
“Seven of our Directors are people of color”, “30% chose not to
self-identify”); or |
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• Individual-level (e.g., “Jane Doe is African-American,
John Smith is Caucasian,” etc.)
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| Reporting |
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Financial Statements We
believe the disclosure and availability of reliable financial statements
in a timely manner is imperative for investment analysis. We expect
external auditors to provide assurance of a company’s financial condition.
Hence, we may vote against the approval of financial statements if
(i) they have not been disclosed or audited; (ii) the auditor
opinion is qualified/adverse, or the auditor has issued a disclaimer of
opinion; or (iii) the auditor opinion is not
disclosed. |
B-15
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Climate-Related Disclosures
We believe that managing climate-related risks and opportunities is a
key element in maximizing long-term risk-adjusted returns for our clients.
As a result, we have a longstanding commitment to enhancing
investor-useful disclosure around this topic. |
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We find that the recommendations of
the Taskforce on Climate-related Financial Disclosures (TCFD) provide an
effective framework for disclosure of climate-related risks and
opportunities. We believe all companies should provide public disclosures
in accordance with the following four pillars of the Taskforce for
Climate-related Financial Disclosures (TCFD) framework: |
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• Governance The TCFD recommends companies describe
the board’s oversight of, and management’s role in, assessing and managing
climate-related risks and opportunities. |
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• Strategy The TCFD recommends companies describe
identified climate-related risks and opportunities and the impact of these
risks and opportunities on their businesses, strategy, and financial
planning. |
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• Risk Management The TCFD recommends companies
describe processes for identifying, assessing, and managing
climate-related risks and describe how these processes are integrated into
overall risk management. |
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• Metrics and Targets The TCFD recommends companies
disclose metrics and targets used to assess and manage climate-related
risks and opportunities. |
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— State Street Global Advisors is not prescriptive on
target setting. We expect companies that have adopted net zero ambitions
to disclose interim climate targets.6 If a company chooses
not to disclose any climate targets, we expect the company to provide an
explanation on how the company measures and monitors progress on managing
climate-related risks and opportunities in line with the recommendations
of TCFD. |
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— TCFD recommends the disclosure of Scope 1, Scope 2, and,
if appropriate, Scope 3 emissions. We expect companies to identify and
disclose the most relevant categories of Scope 3 emissions as defined by
the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and
Reporting Standard. However, we recognize that Scope 3 emissions estimates
have a high degree of uncertainty; therefore, if the company determines
that categories of Scope 3 are impracticable to estimate, we instead
encourage companies to explain these limitations. We do not expect
companies to set Scope 3 targets. We do encourage companies to explain any
efforts to address Scope 3 emissions in line with TCFD, such as engagement
with suppliers, customers, or other stakeholders across the value chain,
where relevant.
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6. “Net zero ambitions” are defined by State Street Global
Advisors as a public statement/commitment to align the company’s emissions
to third party frameworks or pathways for net
zero. |
B-16
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17
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We may take voting action against
directors serving at companies in the following indexes that fail to
provide sufficient disclosure regarding: (i) board oversight of
climate-related risks and opportunities; (ii) total direct and
indirect GHG emissions (“Scope 1” and “Scope 2” emissions); (iii)
climate-related targets, in accordance with the TCFD
framework: |
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• S&P 500 |
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• S&P/TSX Composite |
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• FTSE 350 |
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• STOXX 600 |
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• ASX 200 |
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• TOPIX 100 |
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• Hang Seng |
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• Straits Times Index |
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We may waive the guideline if a
company engages with State Street Global Advisors and provides a specific,
timebound plan for providing the expected disclosures. |
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Say-on-Climate Proposals
While we are generally supportive of effective climate- related
disclosure, we currently do not endorse an annual advisory climate vote.
We have reservations with the potential unintended consequences of such a
vote, including insulating directors from accountability, distracting from
existing disclosure frameworks, and straining investors’ limited proxy
voting resources. Where management chooses to include a Say-on-Climate vote, we assess
the company’s disclosure in accordance with the criteria listed in
Appendix A. |
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Workforce Disclosures (US Only)
We may vote against the chair of the compensation committee at
companies in the S&P 500 that do not disclose their EEO-1 reports. Acceptable disclosures
include: |
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• The original EEO-1 report response;
or |
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• The exact content of the report translated into custom
graphics
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Section III.
Shareholder Protection |
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| Capital |
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Share Capital Structure The
ability to raise capital is critical for companies to carry out strategy,
to grow, and to achieve returns above their cost of capital. The approval
of capital raising activities is fundamental to a
shareholder’s |
B-17
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18
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ability to monitor the amounts of proceeds and to ensure
capital is deployed efficiently. Altering the capital structure of a
company is a critical decision for boards. When making such a decision, we
believe the company should disclose a comprehensive business rationale
that is consistent with corporate strategy and not overly dilutive to its
shareholders. |
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Our approach to share capital
structure matters may vary by local market and jurisdiction, due to
regional nuances. Such proposals may include: |
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• Increase in Authorized Common Shares |
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• Increase in Authorized Preferred Shares |
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• Unequal Voting Rights |
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• Share Repurchase Programs |
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Dividend Payouts We generally
support dividend payouts that constitute 30 percent or more of net
income. We may vote against a dividend payout if the dividend payout ratio
has been consistently below 30 percent without adequate explanation.
We may also vote against if the payout is excessive given the company’s
financial position. Particular attention will be warranted when the
payment may damage the company’s long-term financial health. |
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Reorganization, Mergers and
Acquisitions The reorganization of the structure of a company or
mergers often involve proposals relating to reincorporation,
restructurings, liquidations, and other major changes to the
corporation. |
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Proposals that are in the best
interests of the shareholders, demonstrated by enhancing share value or
improving the effectiveness of the company’s operations, will generally be
supported. |
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We evaluate mergers and structural
reorganizations on a case-by-case basis. We will
generally support transactions that maximize shareholder value. Some of
the considerations include the following: |
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• Offer premium |
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• Strategic rationale |
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• Board oversight of the process for the recommended
transaction, including, director and/ or management conflicts of
interest |
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• Offers made at a premium and where there are no other
higher bidders |
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• Offers in which the secondary market price is
substantially lower than the net asset
value |
B-18
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19
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We may vote against a transaction
considering the following: |
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• Offers with potentially damaging consequences for
minority shareholders because of illiquid stock |
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• Offers where we believe there is a reasonable prospect
for an enhanced bid or other bidders |
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• The current market price of the security exceeds the bid
price at the time of voting |
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Related-Party Transactions
Some companies have a controlled ownership structure and complex
cross-shareholdings between subsidiaries and parent companies (“related
companies”). Such structures may result in the prevalence of related-party
transactions between the company and its various stakeholders, such as
directors and management, subsidiaries and shareholders. In markets where
shareholders are required to approve such transactions, we expect
companies to disclose details of the transaction, such as the nature, the
value and the purpose of such a transaction. We also encourage independent
directors to ratify such transactions. Further, we encourage companies to
describe the level of independent board oversight and the approval
process, including details of any independent valuations provided by
financial advisors on related-party transactions. |
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Cross-Shareholdings (Japan Only)
“Cross-shareholdings” are a long-standing feature of the balance
sheets of many Japanese companies, but, in our view, can be detrimental
for corporate governance practices and ultimately shareholder
returns. |
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Therefore, State Street Global
Advisors may vote against the board leader at the TOPIX 500 companies
where the “cross-shareholdings” (strategic listed shares) held by a
company exceed 30 percent of the company’s net assets (as in the
securities report disclosed for the previous fiscal year). |
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We may waive the guideline if a
company engages with State Street Global Advisors and provides a specific,
timebound, and publicly available plan for reducing its exposure to
“cross-shareholdings”: |
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• To less than 30% by 2025; or |
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• By 50% of current level by 2025
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| Shareholder
Rights |
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Proxy Access (North America Only)
In general, we believe that proxy access is a fundamental right and an
accountability mechanism for all long-term shareholders. We consider
proposals relating to proxy access on a case-by-case basis. We generally
support shareholder proposals that set parameters to empower long-term
shareholders while providing management the flexibility to design a
process that is appropriate for the company’s
circumstances. |
B-19
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20
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Vote Standards |
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a. Annual Elections We
generally support the establishment of annual elections of the board of
directors. Consideration is given to the overall level of board
independence and the independence of the key committees, as well as the
existence of a shareholder rights plan. |
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b. Majority Voting We
generally support a majority vote standard based on votes cast for the
election of directors. We generally vote to support amendments to bylaws
that would require simple majority of voting shares (i.e. shares cast) to
pass or to repeal certain provisions. |
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Shareholder
Meetings |
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a. Special Meetings and Written
Consent In general, we support the ability for shareholders to call
special meetings, as well as act by written consent. We believe an
appropriate threshold for both calling a special meeting and acting by
written consent can be 25% of outstanding shares or less. |
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b. Notice Period to
Convene a General Meeting We expect companies to give as much notice
as is practicable when calling a general meeting. Generally, we are not
supportive of authorizations seeking to reduce the notice period to less
than 14 days. |
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c. Virtual/Hybrid Shareholder
Meetings We generally support proposals that grant boards the right to
hold shareholder meetings in a virtual or hybrid format as long as
companies uphold the following best practices: |
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• Afford virtual attendee shareholders the same rights as
would normally be granted to in-person attendee
shareholders |
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• Commit to time-bound renewal (five years or less) of
meeting format authorization by shareholders |
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• Provide a written record of all questions posed during
the meeting, and |
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• Comply with local market laws and regulations relating to
virtual and hybrid shareholder meeting practices |
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• If a company breaches any of the criteria above, we may
vote against the chair of the nominating committee. |
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• In evaluating these proposals we also consider the
operating environment of the company, including local regulatory
developments and specific market circumstances impacting virtual meeting
practices.
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B-20
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21
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| Governance
Documents & Miscellaneous Items |
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Article Amendments |
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a. Unilateral Amendments
We may withhold votes from directors of companies that have
unilaterally adopted/amended company bylaws that negatively impact
shareholder rights (such as fee-shifting, forum selection, and
exclusion service bylaws) without putting such amendments to a shareholder
vote. |
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b. Super-Majority We generally vote against
amendments to bylaws requiring super-majority shareholder votes to pass or
repeal certain provisions.
We generally vote for the reduction or elimination of
super-majority vote requirements, unless management of the issuer was
concurrently seeking to or had previously made such a reduction or
elimination. |
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c. Board Size We generally
support proposals seeking to fix the board size or designate a range for
the board size and vote against proposals that give management the ability
to alter the size of the board outside of a specified range without
shareholder approval. |
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Anti-Takeover Issues
Occasionally, companies add anti-takeover provisions that reduce the
chances of a potential acquirer to make an offer, or to reduce the
likelihood of a successful offer. We generally do not support proposals
that reduce shareholders’ rights, entrench management, or reduce the
likelihood of shareholders’ right to vote on reasonable offers. Our
approach to anti-takeover issues may vary by local market and
jurisdiction, due to regional nuances. However, we will generally support
mandates requiring shareholder approval of a shareholder rights plans
(“poison pill”) and repeals of various anti-takeover related
provisions. |
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When appropriate, we may vote for an
amendment to a shareholder rights plan where the terms of the new plans
are more favorable to shareholders’ ability to accept unsolicited offers
(i.e., if one of the following conditions are met: (i) minimum
trigger, flip-in or flip-over of
20 percent, (ii) maximum term of three years, (iii) no
“dead hand,” “slow hand,” “no hand” nor similar feature that limits the
ability of a future board to redeem the pill, and (iv) inclusion of a
shareholder redemption feature (qualifying offer clause), permitting ten
percent of the shares to call a special meeting or seek a written consent
to vote on rescinding the pill if the board refuses to redeem the pill 90
days after a qualifying offer is announced). |
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Accounting and Audit-Related
Issues Companies should have robust internal audit and internal
control systems designed for effective management of any potential and
emerging risks to company operations and strategy. The responsibility of
setting out an internal audit function lies with the audit committee,
which should have independent non-executive directors designated as
members. |
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We believe the disclosure and
availability of reliable financial statements in a timely manner is
imperative for investment analysis. As a result, board oversight of the
internal controls and the independence of the audit process are essential
if investors are to rely upon financial statements. It is
important |
B-21
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22
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for the audit committee to appoint external auditors who are
independent from management as we expect auditors to provide assurance of
a company’s financial condition. |
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State Street Global Advisors
believes that a company’s external auditor is an essential feature of an
effective and transparent system of external independent assurance.
Shareholders should be given the opportunity to vote on their appointment
or to re-appoint at the annual
meeting. When appointing external auditors and approving audit fees, we
will take into consideration the level of detail in company disclosures.
We generally do not support resolutions if adequate breakdown is not
provided and/or if non-audit fees
are more than 50 percent of audit fees. In addition, we may vote
against members of the audit committee if we have concerns with
audit-related issues or if the level of non-audit fees to audit fees is
significant. In certain circumstances, we may consider auditor tenure when
evaluating the audit process. |
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In circumstances where “other” fees
include fees related to initial public offerings, bankruptcy emergence,
and spin-offs, and the company makes public disclosure of the amount and
nature of those fees which are determined to be an exception to the
standard “non-audit fee”
category, then such fees may be excluded from the non-audit fees considered in
determining the ratio of non-audit to audit/audit-related
fees/tax compliance and preparation for purposes of determining whether
non-audit fees are
excessive. |
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We generally support the discharge
of auditors in the absence of pending litigation, governmental
investigation, charges or fraud or other indication of significant
concern, as well as requirements that auditors attend the annual meeting
of shareholders. |
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Indemnification and Liability Generally, we support
proposals to limit directors’7 liability and/ or
expand indemnification and liability protection if he or she has not acted
in bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office.
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Section IV.
Shareholder Proposals |
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We
believe that company boards do right by investors and are responsible for
overseeing strategy and company management. Towards that end, we generally
vote against a shareholder proposal if it appears to impose changes to
business strategy or operations, such as increasing or decreasing
investment in certain products or businesses or phasing out a product or
business line or if it is not a topic that the company has deemed to be
material in their public disclosure documents. |
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When assessing shareholder
proposals, we fundamentally consider whether the adoption of the
resolution would promote long-term shareholder value in the context of our
core governance principles: |
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1. Effective board oversight
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7. In Japan, this includes statutory
auditors. |
B-22
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23
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2. Quality disclosure |
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3. Shareholder
protection |
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We will consider supporting a
shareholder proposal if: |
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• the request is focused on enhanced disclosure of the
company’s governance and/or risk oversight |
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• the adoption of the request would protect our clients’
interests as minority shareholders; or |
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• for common proposal topics for which we have developed
assessment criteria, the extent to which the request satisfies the
criteria found in Appendix A
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Section V.
Engagement |
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As a
fiduciary, State Street Global Advisors takes a comprehensive approach to
engaging with our portfolio companies. Our stewardship prioritization
process allows us to proactively identify companies for engagement and
voting in order to mitigate risks in our portfolio. Through engagement, we
aim to build long-term relationships with the issuers in which we invest
on behalf of our clients and to address a broad range of topics relating
to the promotion of long-term shareholder value creation. |
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| Equity
Engagements |
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In general, there are three types of
engagements that State Street Global Advisors may hold on behalf of equity
holders: |
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1. Engagements with Portfolio
Companies in Connection with a Ballot Item or
Other Topic In our
Policy — Engagements held with portfolio companies to
discuss a
ballot item, event or other established topic found in our Policy.
Such
engagements generally, but not necessarily, occur during
“proxy
season.” They may be held at the request of State Street Global
Advisors or
the portfolio company. |
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2. Off-Season Engagement at the Request of
a Portfolio Company — From
time-to-time, portfolio
companies may seek to engage with State Street
Global Advisors in the
‘off- season’ to discuss a particular topic. |
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3. Off-Season Proactive Engagement
Campaigns — Each year, State Street
Global Advisors will identify
thematic engagement campaigns on important
topics for which we are
seeking more information to potentially inform our
future voting
positions.
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| Fixed Income
Engagements |
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From time-to-time, certain corporate
action election events, reclassifications or other changes to the
investment terms of debt holdings may occur or an issuer may seek to
engage with State Street Global Advisors to discuss matters pertaining to
the debt instruments that State Street Global Advisors holds on behalf of
its clients. In such instances, State Street Global Advisors
may |
B-23
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24
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engage with the issuer to obtain further information about
the matter for purposes of its investment decision making. Such
engagements are the responsibility of the Fixed Income portfolio
management team, but may be supported by State Street Global Advisors’
Asset Stewardship Team. All election decisions are the responsibility of
the relevant portfolio management team. |
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In addition, State Street Global Advisors may also identify
themes for engagement campaigns with issuers on topics that it believes
may affect value of its clients’ debt investments. State Street Global
Advisors may proactively engage with portfolio companies on these topics
to help inform our views on the subject. Where such themes align with
those relating to equities, such engagements may be carried out jointly on
behalf of both equity and fixed income holdings where there is mutual
benefit for both asset classes. Such engagements are led by the State
Street Global Advisors Asset Stewardship Team, but could be attended by
the relevant portfolio management teams.
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| The Use of
R-Factor in Engagements |
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R-Factor™ is a scoring system
created by State Street Global Advisors that leverages multiple data
sources and aligns them to widely accepted, transparent Sustainability
Accounting Standards Board (SASB) Materiality Framework for over 12,000
publicly listed companies. R-Factor™ scores are among the
many inputs the Asset Stewardship Team may review when performing analysis
on portfolio companies before engagements. |
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State Street Global Advisors uses R-Factor as a consideration when
prioritizing engagements. State Street Global Advisors may also engage
with a company regarding its R-Factor score at the request of the
company.
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| Engaging with
Other Investors Soliciting State Street Global Advisors’ Votes in
Connection with Vote-No Campaigns
or Shareholder Proposals |
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We believe it is good practice for
us to speak to other investors that are running proxy contests, putting
forth vote-no campaigns, or
proposing shareholder proposals at investee companies. However, we
generally limit such discussions with investors to one engagement with the
proponent unless we believe that it is necessary for us to have a follow-up discussion, and will seek to
also engage with the company. We welcome the opportunity to review
materials sent in advance of the proposed discussion. To the extent
possible, we review all materials made publicly available by the investor
or the company on a contested ballot item before making our own
independent voting decision. |
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Our primary purpose of engaging with
investors is: |
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• To gain a better understanding of their position or
concerns at investee companies. |
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• In proxy contest situations: |
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— To assess possible director candidates where investors
are seeking board representation in proxy contest
situations |
B-24
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25
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— To understand the investor’s proposed strategy for the
company and investment time horizon to assess their alignment with State
Street Global Advisors’ views and interests as a long-term
shareholder |
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All requests for engagement should be sent to
[email protected].
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| Section VI. Other Matters |
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| Securities On
Loan |
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As a responsible investor and
fiduciary, we recognize the importance of balancing the benefits of voting
shares and the incremental lending revenue for the pooled funds that
participate in State Street Global Advisors’ securities lending program
(the “Funds”). Our objective is to recall securities on loan and restrict
future lending until after the record date for the respective vote in
instances where we believe that a particular vote could have a material
impact on the Funds’ long-term financial performance and the benefit of
voting shares will outweigh the forgone lending income. |
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Accordingly, we have set systematic
recall and lending restriction criteria for shareholder meetings involving
situations with the highest potential financial implications (such as
proxy contests and strategic transactions including mergers and
acquisitions, going dark transactions, change of corporate form, or
bankruptcy and liquidation). |
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Generally, these criteria for recall
and restriction for lending only apply to certain large cap indices in
developed markets. |
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State Street Global Advisors
monitors the forgone lending revenue associated with each recall to
determine if the impact on the Funds’ long-term financial performance and
the benefit of voting shares will outweigh the forgone lending
income. |
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Although our objective is to systematically recall
securities based on the aforementioned criteria, we must receive notice of
the vote in sufficient time to recall the shares on or before the record
date. When we do not receive timely notice, we may be unable to recall the
shares on or before the record date.
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| Reporting |
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We provide transparency for our
stewardship activities through our regular client reports and relevant
information reported online. We publish an annual stewardship report that
provides details of our stewardship approach, engagement and voting
policies, and activities during the year. The annual stewardship report is
complemented by quarterly stewardship activity reports as well as the
publication of thought leadership on governance and sustainability on our
website. Our voting record information is available on Vote View, an
interactive platform that provides relevant company details, proposal
types, resolution descriptions, and records of our votes
cast. |
B-25
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26
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| Appendix A |
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| Assessment Criteria for Common Disclosure
Topics |
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As
outlined above, the pillars of our Asset Stewardship Program rest on
effective board oversight, quality disclosure and shareholder protection.
We are frequently asked to evaluate shareholder proposals on various
topics, including requests for enhanced disclosure. We have developed the
below criteria, which we believe represents quality disclosure on commonly
requested disclosure topics. |
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| Climate
Disclosure Criteria |
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We expect all companies to provide
public disclosures in accordance with the following four pillars of the
Taskforce for Climate-related Financial Disclosures (TCFD)
framework: |
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• Governance The TCFD recommends companies describe
the board’s oversight of, and management’s role in, assessing and managing
climate-related risks and opportunities. |
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• Strategy The TCFD recommends companies describe
identified climate-related risks and opportunities and the impact of these
risks and opportunities on their businesses, strategy, and financial
planning. |
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• Risk Management The TCFD recommends companies
describe processes for identifying, assessing, and managing
climate-related risks and describe how these processes are integrated into
overall risk management. |
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• Metrics and Targets The TCFD recommends companies
disclose metrics and targets used to assess and manage climate-related
risks and opportunities. |
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— State Street Global Advisors is not prescriptive on
target setting. We expect companies that have adopted net zero ambitions
to disclose interim climate targets. If a company chooses not to disclose
any climate targets, we expect the company to provide an explanation on
how the company measures and monitors progress on managing climate-related
risks and opportunities in line with the recommendations of
TCFD. |
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— TCFD recommends the disclosure of Scope 1, Scope 2, and,
if appropriate, Scope 3 emissions. We expect companies to identify and
disclose the most relevant categories of Scope 3 emissions as defined by
the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and
Reporting Standard. However, we recognize that Scope 3 emissions estimates
have a high degree of uncertainty; therefore, if the company determines
that categories of Scope 3 are impracticable to estimate, we instead
encourage companies to explain these limitations. We do not expect
companies to set Scope 3 targets. We do encourage
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8. “Net zero ambitions” are defined by State Street
Global Advisors as a public statement/commitment to align the company’s
emissions to third party frameworks or pathways for net
zero. |
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companies to explain any efforts to address Scope 3
emissions in line with TCFD, such as engagement with suppliers, customers,
or other stakeholders across the value chain, where
relevant. |
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Additionally, we expect companies in
carbon-intensive industries9 to
disclose: |
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• Public disclosure in accordance with all four pillars of
Taskforce for Climate-related Financial Disclosures (TCFD) framework:
(1) Governance, (2) Strategy, (3) Risk Management,
(4) Metrics and Targets |
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• Interim climate targets to accompany long-term climate
ambitions |
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• Discussion of scenario-planning on relevant risk
assessment and strategic planning processes10 |
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• Incorporation of relevant climate considerations in
financial planning and/or capital allocation decisions,
and |
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• Scope 1, 2, and relevant categories of Scope 3 greenhouse
gas emissions11
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| Say-on-Climate
Criteria |
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While we are generally supportive of the goals of “Say-on-Climate” proposals
because we support effective climate-related disclosure, we currently do
not endorse an annual advisory climate vote. We have reservations with the
potential unintended consequences of such a vote, including insulating
directors from accountability, distracting from existing disclosure
frameworks, and straining investors’ limited proxy voting resources. Where
management chooses to include a Say-on-Climate vote, we assess
the company’s disclosure on a case-by-case basis consistent
with our Assessment Criteria for Climate Transition Plan Disclosure
outlined below.
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9. State Street Global Advisors defines carbon-intensive
industries as the following Global Industry Classification Standard
(GICS) subindustries: Electric Utilities, Integrated Oil &Gas,
Multi-Utilities, Steel, Construction Materials, Independent Power
Producers & Energy Traders, Oil & Gas
Refining & Marketing, Oil & Gas Exploration &
Production, Diversified Metals & Mining, Airlines, Commodity
Chemicals, Industrial Gases, Aluminum, Oil & Gas
Storage & Transportation, Multi-Sector Holdings, Diversified
Chemicals, Fertilizers & Agricultural Chemicals, Air
Freight & Logistics, Agricultural Products,
Environmental & Facilities Services, Coal & Consumable
Fuels, Paper Packaging, Railroads, Marine, Automotive Retail,
Oil & Gas Drilling, Food Retail, Paper Products, Hotels,
Resorts & Cruise Lines, Internet & Direct Marketing
Retail, Hypermarkets & Supercenters, Precious Metals &
Minerals. |
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10. As recommended by TCFD, we believe quality disclosure on
scenario analysis includes the following: (i) the company has
evaluated and disclosed the resilience of their strategy and business
model to climate-related risks and opportunities using climate-related
scenario analysis (ii) the company has described the implications of
the scenario-planning exercise on the business including relevant risk
assessment and strategic planning processes. We are not prescriptive on
scenario selection. The company may choose to evaluate a range of
scenarios aligned with relevant jurisdictional commitments, sectoral
decarbonization approaches, or publicly available scenarios aligned with
limiting global temperature rise as recommended by TCFD. |
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11. TCFD recommends the disclosure of Scope 1, Scope 2, and,
if appropriate, Scope 3 emissions. We expect companies to identify and
disclose the most relevant categories of Scope 3 emissions as defined by
the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and
Reporting Standard. However, we recognize that Scope 3 emissions estimates
have a high degree of uncertainty and therefore if the company determines
that categories of Scope of 3 are impracticable to estimate, we instead
encourage companies to explain these
limitations. |
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We would consider supporting a “Say-on-Climate” shareholder
proposal if the company has not provided investors with meaningful
climate-related disclosure in line with our expectations, nor signaled the
intention to enhance disclosure in the future.
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| Climate
Transition Plan Disclosure Criteria for Companies that Have Adopted a
Climate Transition Plan |
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We do not require companies to adopt
net zero ambitions12
or join relevant industry initiatives. For companies that have
adopted a net zero ambition and/or climate transition plan, the disclosure
criteria set out below serve to provide transparency on the criteria we
assess.13 Given
that climate-related risks present differently across industries, our
assessment of the below criteria may vary to account for best practices in
specific industries. |
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• Ambition |
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— Disclosure of long-term climate
ambitions |
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• Targets |
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— Disclosure of short- and/or medium-term interim climate
targets |
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— Disclosure of alignment of climate targets with relevant
jurisdictional commitments, specific temperature pathways, and/or sectoral
decarbonization approaches |
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• TCFD Disclosure |
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— As recommended by TCFD: |
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○ Description of approach to
identifying and assessing climate-related risks and
opportunities |
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○ Disclosure of resilience of the
company’s strategy, taking into consideration a range of climate-related
scenarios |
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○ Disclosure of Scope 1, Scope 2,
and relevant categories of Scope 3 emissions and any
assurance |
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• Decarbonization Strategy |
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○ Disclosure of plans and actions to
support stated climate targets and ambitions |
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○ Disclosure of emissions management
efforts within the company’s operations and, as applicable, across the
value chain |
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○ Disclosure of carbon offsets
utilization, if any
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12. “Net zero ambitions” are defined by State Street
Global Advisors as a public statement/commitment to align the company’s
emissions to third party frameworks or pathways for net
zero. |
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13. State Street Global Advisors does not require companies
to adopt a climate transition plan. |
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○ Disclosure of the role of climate
solutions (e.g., carbon capture and storage) |
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○ Disclosure of potential social
risks and opportunities14
related to climate transition plan, if any
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• Capital Allocation |
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○ Disclosure of integration of
relevant climate considerations in financial planning |
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○ Disclosure of total actual and
planned capital deployed toward climate transition plan |
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○ Disclosure of approach to
assessing and prioritizing investments toward climate transition plan
(e.g., marginal abatement cost curves, internal carbon pricing, if
any) |
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• Climate Policy Engagement |
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○ Disclosure of position on
climate-related topics relevant to the company’s decarbonization
strategy |
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○ Disclosure of assessment of stated
positions on relevant climate-related topics versus those of associations
and other relevant policy-influencing entities, such as trade
associations, industry bodies, or coalitions, to which the company
belongs, and any efforts taken as a result of this review to address
potential misalignment. |
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• Climate Governance |
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○ Disclosure of the board’s role in
overseeing climate transition plan |
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○ Disclosure of management’s role in
overseeing climate transition plan |
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• Physical Risk |
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○ Disclosure of assessment of
climate-related physical risks |
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○ Disclosure of approach to managing
identified climate-related physical risks
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14. Social risks and opportunities refer to the potential
impacts on stakeholders, such as a company’s workforce, customers,
communities, or supply chains related to the company’s climate transition
plan, which may give rise to risks or opportunities related to human
capital management, human rights, and economic development, among
others. |
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• Stakeholder Engagement |
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○ Disclosure of engagement with
relevant internal stakeholders related to climate transition plan (e.g.,
workforce training, cross-functional collaboration) |
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○ Disclosure of engagement with
relevant external stakeholders related to climate transition plan (e.g.,
industry collaboration, customer engagement)
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| Methane
Disclosure Criteria |
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For companies that own or operate
oil and gas assets we believe quality disclosure includes the
following: |
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• Describe methane emissions detection and monitoring
efforts |
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• Explain efforts to enhance measurement, reporting, and
verification |
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• Describe the company’s strategy to manage methane
emissions |
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• Disclose any methane-related metrics and targets
utilized
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| Nature-Related Disclosure: Biodiversity,
Deforestation, Water Management, Wastewater Management, Plastics and
Packaging, Waste Management, Product Lifecycle |
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For companies that have determined
Biodiversity, Deforestation, Water Management, Wastewater Management,
Plastics and Packaging, Waste Management, or Product Lifecycle to present
a long-term risk and/or opportunity to their business and/or operations we
believe quality disclosure should include the following, which aligns with
the pillars of the TCFD framework: |
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• Governance |
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• Strategy |
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• Risk management |
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• Metrics and targets (when relevant) |
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In assessing these criteria, we may review the company’s
disclosure against industry and market practice (e.g., peer disclosure,
relevant frameworks, relevant industry guidance).
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| Human Capital Management Disclosure
Criteria |
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We believe quality public disclosure
includes the following: |
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• Board oversight Methods outlining how the board
oversees human capital-related risks and
opportunities |
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• Strategy Approaches to human capital management
and how these advance the long- term business strategy |
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• Compensation Strategies throughout the
organization that aim to attract and retain employees, and incentivize
contribution to an effective human capital strategy |
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• Voice Channels to ensure the concerns and ideas
from workers are solicited and acted upon, and how the workforce is
engaged and empowered in the organization, and |
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• Diversity, equity, and inclusion Efforts to
advance diversity, equity, and inclusion
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| Diversity,
Equity & Inclusion Disclosure |
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We believe quality public disclosure
includes the following: |
| Criteria |
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• Board Oversight Describe how the board executes
its oversight role in risks and opportunities related to diversity and
inclusion |
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• Strategy Articulate the role that diversity (of
race, ethnicity, and gender, at minimum) plays in the company’s broader
human capital management practices and long-term strategy |
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• Goals Describe what diversity, equity, and
inclusion-related goals exist, how these goals contribute to the company’s
overall strategy, and how they are managed and
progressing |
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• Metrics Provide measures of the diversity of the
company’s global employee base and board, including: |
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○ Workforce Employee
diversity by race, ethnicity, and gender (at minimum). We expect to see
this information to be broken down by industry-relevant employment
categories or levels of seniority, for all full-time employees. In the US,
companies are expected to at least use the disclosure framework set forth
by the United States Equal Employment Opportunity Commission’s EEO-1 Survey. Non-US companies are encouraged to
disclose this information in alignment with SASB guidance and nationally
appropriate frameworks; and, |
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○ Board Diversity
characteristics, including racial, ethnic, and gender makeup (at minimum)
of the board of directors; and |
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○ Board Diversity Articulate
goals and strategy related to diverse representation at the board
(including race, ethnicity, and gender, at minimum), including how the
board reflects the diversity of the company’s workforce, community,
customers, and other key stakeholders. |
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| Pay Equity
Disclosure Criteria (United States and United Kingdom |
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We believe quality disclosure for
companies in the United States and the United Kingdom includes the
following: |
| Only) |
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• Adjusted pay gaps related to race and gender within the
company (disclosure of the unadjusted pay gap is also encouraged, but not
expected outside of the United Kingdom market at this
time); |
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• Strategy to achieve and maintain pay equity;
and |
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• Role of the board in overseeing pay strategies as well as
diversity, equity and inclusion efforts
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| Civil Rights
Disclosure Criteria (United States Only) |
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We believe quality disclosure for
companies in the United States includes the following: |
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• Risks related to civil rights, including risks associated
with products, practices, and services; |
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• Plans to manage and mitigate these risks;
and |
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• Processes at the board for overseeing such risks (e.g.,
committee responsible, frequency of discussions, etc.).
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| Human Rights
Disclosure Criteria |
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We expect portfolio companies to
regularly identify whether there are risks related to human rights15 in their operations
and manage any material risks that emerge, providing relevant disclosures
to investors. |
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We believe all companies should disclose whether they have
established processes for identifying risks related to human
rights.
For companies where material human rights risks are
identified, we believe quality disclosure includes the
following: |
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• Human rights-related risks the company considers most
material |
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• Plans to manage and mitigate these risks |
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• Board oversight of these risks, and |
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• Assessment of the effectiveness of the human rights risk
management program
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15. As defined in the Universal Declaration of Human Rights
and the ILO Declaration on Fundamental Principles and Rights at
Work. |
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| Political
Contributions Disclosure Criteria (United States Only) |
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We believe quality disclosure companies
in the United States includes the following information: |
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• All contributions, no matter the dollar value, made by
the company, its subsidiaries, and/ or affiliated Political Action
Committees (PACs) to individual candidates, PACs, and other political
organizations at the state and federal levels in the United States;
and |
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• The role of the board in oversight of political
contributions.
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| Lobbying
Disclosure Criteria (United States Only) |
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We believe quality disclosure for
companies in the United States includes the following: |
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• Membership in United States trade associations (to which
payments are above $50,000 per year) and |
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• The role of the board in overseeing lobbying
activities.
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| Trade
Association Alignment Disclosure |
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We believe quality disclosure for
companies includes the following: |
| Criteria |
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• The board’s role in overseeing the company’s
participation in the political process, including membership in trade
associations or other policy-influencing entities; and |
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• Whether the company regularly performs a gap analysis of
its stated positions on relevant issues versus those of the trade
associations or other policy-influencing organizations of which it is a
member, and |
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• Whether the company disclosed a list of its trade
association memberships
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Note:We believe that
management is best suited to take positions on the matters related to
their company, and therefore we do not recommend any specific position.
Our support of these types of shareholder proposals, if any, solely
reflects our support for enhanced disclosure on assessing alignment
between stated company positions and the positions of associations and
other relevant policy-influencing entities to which the company belongs in
line with market expectations and effective risk
management. |
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| About
State Street Global Advisors |
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For
four decades, State Street Global Advisors has served the world’s
governments, institutions and financial advisors. With a rigorous,
risk-aware approach built on research, analysis and market-tested
experience, we build from a breadth of index and active strategies to
create cost-effective solutions. As pioneers in index, ETF, and ESG
investing, we are always inventing new ways to invest. As a result, we
have become the world’s fourth- largest asset manager* with US $4.13
trillion† under our
care. |
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* Pensions & Investments Research Center, as of
December 31, 2022. |
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† This figure is
presented as of December 31, 2023 and includes approximately
$64.44 billion USD of assets with respect to SPDR products for which
State Street Global Advisors Funds Distributors, LLC (SSGA FD) acts solely
as the marketing agent. SSGA FD and State Street Global Advisors are
affiliated. |
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| ssga.com |
|
ID2025966 0224 |
|
Exp. Date: 02/28/2025 |
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