ck0001683471-20220731
Grizzle
Growth ETF (GRZZ)
a
series of Listed Funds Trust
Principal
U.S. Listing Exchange: NYSE Arca, Inc.
STATEMENT
OF ADDITIONAL INFORMATION
November
30, 2022
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with the prospectus dated November 30, 2022, as may be
supplemented from time to time (the “Prospectus”), of the Grizzle Growth ETF
(the “Fund”), a series of Listed Funds Trust (the “Trust”). Capitalized terms
used in this SAI that are not defined have the same meaning as in the
Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained,
without charge, by calling the Fund at 1-800-617-0004, visiting
www.etf.grizzle.com, or writing to the Fund, c/o U.S. Bank Global Fund Services,
P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
The
Fund’s audited financial statements for the most recent fiscal year are
incorporated into this SAI by reference to the Fund’s most recent Annual
Report
to Shareholders
(File No. 811-23226). You may obtain a copy of the Fund’s Annual Report at no
charge by contacting the Fund at the address or phone number noted
above.
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Non-Diversification |
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General
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Management
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Management |
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Investment
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Investment
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Appendix
A |
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GENERAL
INFORMATION ABOUT THE TRUST
The
Trust is an open-end management investment company consisting of multiple
investment series. This SAI relates only to the Fund. The Trust was organized as
a Delaware statutory trust on August 26, 2016. The Trust is registered with the
U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company
Act of 1940, as amended (together with the rules and regulations adopted
thereunder, as amended, the “1940 Act”), as an open-end management investment
company, and the offering of the Fund’s shares (the “Shares”) is registered
under the Securities Act of 1933, as amended (the “Securities Act”). The Trust
is governed by its Board of Trustees (the “Board”).
Grizzle
Investment Management LLC (the “Adviser”) serves as the Fund’s investment
adviser, and Exchange Traded Concepts, LLC (the “Sub-Adviser”) serves as the
Fund’s investment sub-adviser.
The
Fund offers and issues Shares at their net asset value (“NAV”) only in
aggregations of a specified number of Shares (each, a “Creation Unit”). The Fund
generally offers and issues Shares in exchange for a basket of securities
(“Deposit Securities”) together with the deposit of a specified cash payment
(“Cash Component”). The Trust reserves the right to permit or require the
substitution of a “cash in lieu” amount (“Deposit Cash”) to be added to the Cash
Component to replace any Deposit Security or other instrument in the Fund’s
portfolio. Shares are listed on the NYSE Arca, Inc. (the “Exchange”) and trade
on the Exchange at market prices that may differ from the Shares’ NAV. Shares
also are redeemable only in Creation Unit aggregations, primarily for a basket
of Deposit Securities together with a Cash Component. A Creation Unit of the
Fund generally consists of 10,000 Shares, though this may change from time to
time. As a practical matter, only institutions or large investors purchase or
redeem Creation Units. Except when aggregated in Creation Units, Shares are not
redeemable securities.
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain on deposit with the Trust cash
at least equal to a specified percentage of the value of the missing Deposit
Securities, as set forth in the Participant Agreement (as defined below). The
Trust may impose a transaction fee for each creation or redemption. In all
cases, such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities. As
in the case of other publicly traded securities, brokers’ commissions on
transactions in the secondary market will be based on negotiated commission
rates at customary levels.
ADDITIONAL
INFORMATION ABOUT INVESTMENT OBJECTIVE, POLICIES, AND RELATED RISKS
The
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments, see “Description
of Permitted Investments”
in this SAI.
With
respect to the Fund’s investments, unless otherwise noted, if a percentage
limitation on investment is adhered to at the time of investment or contract, a
subsequent increase or decrease as a result of market movement or redemption
will not result in a violation of such investment limitation.
NON-DIVERSIFICATION
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 total assets that may be invested in
the securities of a single issuer. This means that the Fund may invest a greater
portion of its total assets in the securities of a single issuer or a smaller
number of issuers than if it was 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. Moreover, in pursuing its
objective, the Fund may hold the securities of a single issuer in an amount
exceeding 10% of the value of the outstanding securities of the issuer, subject
to restrictions imposed by the Internal Revenue Code of 1986, as amended (the
“Code”). In particular, as the Fund’s size grows and its assets increase, it
will be more likely to hold more than 10% of the securities of a single issuer
if the issuer has a relatively small public float as compared to other
components of the Fund’s portfolio.
Although
the Fund is non-diversified for purposes of the 1940 Act, the Fund intends to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a “regulated investment company” (a “RIC”) for
purposes of the Code. Compliance with the diversification requirements of the
Code may limit the investment flexibility of the Fund and may make it less
likely that the Fund will meet its investment objective. To qualify as a RIC
under the Code, the Fund must meet the Diversification Requirement described in
the section titled “Federal Income Taxes” in this SAI.
GENERAL
RISKS
The
value of the Fund’s portfolio securities may fluctuate with changes in the
financial condition of an issuer or counterparty, changes in specific economic
or political conditions that affect a particular security or issuer and changes
in general economic or political conditions. An investor in the Fund could lose
money over short or long periods of time.
There
can be no guarantee that a liquid market for the securities held by the Fund
will be maintained. The existence of a liquid trading market for certain
securities may depend on whether dealers will make a market in such securities.
There can be no assurance that a market will be made or maintained or that any
such market will be or remain liquid. The price at which securities may be sold
and the
value
of Shares will be adversely affected if trading markets for the Fund’s portfolio
securities are limited or absent, or if bid/ask spreads are wide.
Cybersecurity
Risk. Investment
companies, such as the Fund, and their service providers may be subject to
operational and information security risks resulting from cyber-attacks.
Cyber-attacks include, among other behaviors, stealing or corrupting data
maintained online or digitally, denial of service attacks on websites, the
unauthorized release of confidential information or various other forms of
cybersecurity breaches. Cyber-attacks affecting the Fund or the Adviser,
Sub-Adviser, custodian, transfer agent, intermediaries and other third-party
service providers may adversely impact the Fund. For instance, cyber-attacks may
interfere with the processing of shareholder transactions, impact the Fund’s
ability to calculate its NAV, cause the release of private shareholder
information or confidential company information, impede trading, subject the
Fund to regulatory fines or financial losses, and cause reputational damage. The
Fund also may incur additional costs for cybersecurity risk management purposes.
Similar types of cybersecurity risks also are present for issuers of securities
in which the Fund invests, which could result in material adverse consequences
for such issuers and may cause the Fund’s investments in such portfolio
companies to lose value.
Recent
Events.
Beginning in the first quarter of 2020, financial markets in the United States
and around the world experienced extreme and in many cases unprecedented
volatility and severe losses due to the pandemic caused by COVID‑19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The
fall-out from these disruptions has included the rapid closure of businesses
deemed “non-essential” by federal, state, or local governments and rapidly
increasing unemployment, as well as greatly reduced liquidity for certain
instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. Such disruptions may continue for an
extended period of time or reoccur in the future to a similar or greater extent.
In response, the U.S. government and the Federal Reserve have taken
extraordinary actions to support the domestic economy and financial markets. It
is unknown how long circumstances related to the COVID-19 pandemic will persist,
whether they will reoccur in the future, whether efforts to support the economy
and financial markets will be successful, and what additional implications may
follow from the pandemic. The impact of these events and other pandemics or
epidemics in the future could adversely affect Fund performance.
DESCRIPTION
OF PERMITTED INVESTMENTS
The
following are descriptions of the Fund’s permitted investments and investment
practices and the associated risk factors. The Fund will only invest in any of
the following instruments or engage in any of the following investment practices
if such investment or activity is consistent with the Fund’s investment
objective and permitted by the Fund’s stated investment policies.
Borrowing
Although
the Fund does not intend to borrow money, the Fund may do so to the extent
permitted by the 1940 Act. Under the 1940 Act, the Fund may borrow up to
one-third (1/3) of its total assets. The Fund will borrow money only for
short-term or emergency purposes. Such borrowing is not for investment purposes
and will be repaid by the borrowing Fund promptly. Borrowing will tend to
exaggerate the effect on NAV of any increase or decrease in the market value of
the borrowing Fund’s portfolio. Money borrowed will be subject to interest costs
that may or may not be recovered by earnings on the securities purchased. The
Fund also may be required to maintain minimum average balances in connection
with a borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate.
Depositary
Receipts
To
the extent the Fund invests in stocks of foreign corporations, the Fund’s
investment in securities of foreign companies may be in the form of depositary
receipts or other securities convertible into securities of foreign issuers.
American Depositary Receipts (“ADRs”) are dollar-denominated receipts
representing interests in the securities of a foreign issuer, which securities
may not necessarily be denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically issued by U.S. banks
and trust companies which evidence ownership of underlying securities issued by
a foreign corporation. Generally, ADRs in registered form are designed for use
in domestic securities markets and are traded on exchanges or over-the-counter
in the United States.
Global
Depositary Receipts (“GDRs”), European Depositary Receipts (“EDRs”), and
International Depositary Receipts (“IDRs”) are similar to ADRs in that they are
certificates evidencing ownership of shares of a foreign issuer; however, GDRs,
EDRs, and IDRs may be issued in bearer form and denominated in other currencies
and are generally designed for use in specific or multiple securities markets
outside the U.S. EDRs, for example, are designed for use in European securities
markets, while GDRs are designed for use throughout the world. Depositary
receipts will not necessarily be denominated in the same currency as their
underlying securities.
The
Fund will not invest in any unlisted depositary receipts or any depositary
receipt that the Adviser or Sub-Adviser deems to be illiquid or for which
pricing information is not readily available. In addition, all depositary
receipts generally must be sponsored. However, the Fund may invest in
unsponsored depositary receipts under certain limited circumstances. The issuers
of unsponsored depositary receipts are not obligated to disclose material
information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such
information and the value of the depositary receipts.
Equity
Securities
Equity
securities, such as the common stock of an issuer, are subject to stock market
fluctuations and therefore may experience volatile changes in value as market
conditions, consumer sentiment or the financial condition of the issuers change.
A decrease in value of the equity securities in the Fund’s portfolio also may
cause the value of the Fund’s Shares to decline.
An
investment in the Fund should be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the
value of the Fund’s portfolio securities and therefore a decrease in the value
of Shares).
Common
stocks are susceptible to general stock market fluctuations and to volatile
increases and decreases in value as market confidence and perceptions change.
These investor perceptions are based on various and unpredictable factors,
including expectations regarding government, economic, monetary and fiscal
policies; inflation and interest rates; economic expansion or contraction; and
global or regional political, economic or banking crises.
Holders
of common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, generally have
inferior rights to receive payments from the issuer in comparison with the
rights of creditors or holders of debt obligations or preferred stocks. Further,
unlike debt securities, which typically have a stated principal amount payable
at maturity (whose value, however, is subject to market fluctuations prior
thereto), or preferred stocks, which typically have a liquidation preference and
which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are
subject to market fluctuations as long as the common stock remains
outstanding.
Types
of Equity Securities:
Common
Stocks
— Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company’s board of directors.
Preferred
Stocks —
Preferred stocks also are units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated to the liabilities of the issuer. Unlike common stocks, preferred
stocks are generally not entitled to vote on corporate matters. Types of
preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred
stock.
Generally,
the market values of preferred stock with a fixed dividend rate and no
conversion element vary inversely with interest rates and perceived credit
risk.
Rights
and Warrants —
A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitles the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Large-Capitalization
Companies —
Investments in large-capitalization companies may go in and out of favor based
on market and economic conditions and may underperform other market segments.
Some large-capitalization companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer tastes, and
may not be able to attain the high growth rate of successful smaller companies,
especially during extended periods of economic expansion. As such, returns on
investments in stocks of large-capitalization companies could trail the returns
on investments in stocks of small- and mid-capitalization
companies.
Small-
and Mid-Capitalization Companies —
The securities of small- and mid-capitalization companies may be more vulnerable
to adverse issuer, market, political, or economic developments than securities
of larger-capitalization companies. The securities of small- and
mid-capitalization companies generally trade in lower volumes and are subject to
greater and more unpredictable price changes than larger capitalization stocks
or the stock market as a whole. Some small- or mid-capitalization companies have
limited product lines, markets, and financial and managerial resources and tend
to concentrate on fewer geographical markets relative to larger capitalization
companies. There is typically less publicly available information concerning
small- and mid-capitalization companies
than
for larger, more established companies. Small- and mid-capitalization companies
also may be particularly sensitive to changes in interest rates, government
regulation, borrowing costs, and earnings.
Tracking
Stocks —
A tracking stock is a separate class of common stock whose value is linked to a
specific business unit or operating division within a larger company and which
is designed to “track” the performance of such business unit or division. The
tracking stock may pay dividends to shareholders independent of the parent
company. The parent company, rather than the business unit or division,
generally is the issuer of tracking stock. However, holders of the tracking
stock may not have the same rights as holders of the company’s common
stock.
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.
The
Fund may not be able to sell illiquid securities when its Adviser or
Sub-Adviser, as applicable, considers it desirable to do so or may have to sell
such securities at a price that is lower than the price that could be obtained
if the securities were more liquid. In addition, the sale of illiquid securities
also may require more time and may result in higher dealer discounts and other
selling expenses than does the sale of securities that are not illiquid.
Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on NAV.
Investment
Company Securities
The
Fund may invest in the securities of other investment companies, including
exchange-traded funds (“ETFs”) and money market funds, subject to applicable
limitations under Section 12(d)(1) of the 1940 Act and the rules thereunder.
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; or (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. Under certain circumstances, including in
compliance with Rule 12d1-4 under the 1940 Act, the Fund may invest its assets
in securities of investment companies, including money market funds, in excess
of the limits discussed above.
Investing
in another pooled vehicle exposes the Fund to all the risks of that pooled
vehicle. In addition, 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.
Options
The
Fund may purchase and write (sell) put and call options on indices and enter
into related closing transactions. A put option on a security gives the
purchaser of the option the right to sell, and the writer of the option the
obligation to buy, the underlying security at any time during the option period.
A call option on a security gives the purchaser of the option the right to buy,
and the writer of the option the obligation to sell, the underlying security at
any time during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option
contract.
Put
and call options on indices are similar to options on securities except that
options on an index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying index is
greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
All
options written on indices or securities must be covered. The SEC staff has
indicated that a written call option on a security may be covered if the fund
(1) owns the security underlying the call until the option is exercised or
expires, (2) holds an American-style call on the same security as the call
written with an exercise price (i) no greater than the exercise price of the
call written or (ii) greater than the exercise price of the call written if the
difference is maintained by the fund in cash or other liquid assets designated
on the fund’s records or placed in a segregated account with the fund’s
custodian, (3) has an absolute and immediate right to acquire the security
without additional cost (or if additional consideration is required, cash or
other liquid assets in such amount have been segregated), or (4) segregates cash
or other liquid assets on the fund’s records or with the custodian in an amount
equal to (when added to any margin on deposit) the current market value of the
call option, but not less than the exercise price, marked to market daily. If
the call option is exercised by the purchaser during the option period, the
seller is required to deliver the underlying security
against
payment of the exercise price or pay the difference. The seller’s obligation
terminates upon expiration of the option period or when the seller executes a
closing purchase transaction with respect to such option.
All
put options written by the Fund will be covered by (1) segregating cash, cash
equivalents, such as U.S. Treasury securities or overnight repurchase
agreements, or other liquid assets on the Fund’s records or with the custodian
having a value at least equal to exercise price of the option (less cash
received, if any) or (2) holding a put option on the same security as the option
written where the exercise price of the written put option is (i) equal to or
higher than the exercise price of the option written or (ii) less than the
exercise price of the option written provided the Fund segregates cash or other
liquid assets in the amount of the difference.
The
Fund may trade put and call options on securities, securities indices and
currencies, as the Adviser determines is appropriate in seeking the Fund’s
investment objective, and except as restricted by the Fund’s investment
limitations.
The
initial purchase (sale) of an option contract is an “opening transaction.” In
order to close out an option position, the Fund may enter into a “closing
transaction,” which is simply the purchase of an option contract on the same
security with the same exercise price and expiration date as the option contract
originally opened. If the Fund is unable to effect a closing purchase
transaction with respect to an option it has written, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
security upon exercise.
The
Fund may purchase put and call options on securities to protect against a
decline in the market value of the securities in its portfolio or to anticipate
an increase in the market value of securities that the Fund may seek to purchase
in the future. The Fund purchasing put and call options pays a premium;
therefore, if price movements in the underlying securities are such that
exercise of the options would not be profitable for the Fund, loss of the
premium paid may be offset by an increase in the value of the Fund’s securities
or by a decrease in the cost of acquisition of securities by the
Fund.
The
Fund may write covered call options on securities as a means of increasing the
yield on its assets and as a means of providing limited protection against
decreases in its market value. When the Fund writes an option, if the underlying
securities do not increase or decrease to a price level that would make the
exercise of the option profitable to the holder thereof, the option generally
will expire without being exercised and the Fund will realize as profit the
premium received for such option. When a call option of which the Fund is the
writer is exercised, the Fund will be required to sell the underlying securities
to the option holder at the strike price, and will not participate in any
increase in the price of such securities above the strike price. When a put
option of which the Fund is the writer is exercised, the Fund will be required
to purchase the underlying securities at a price in excess of the market value
of such securities.
The
Fund may purchase and write options on an exchange or over-the-counter. OTC
options differ from exchange-traded options in several respects. They are
transacted directly with dealers and not with a clearing corporation, and
therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of
expiration dates and exercise prices than are available for exchange-traded
options. Because OTC options are not traded on an exchange, pricing is done
normally by reference to information from a market maker. It is the SEC’s
position that OTC options are generally illiquid.
The
market value of an option generally reflects the market price of an underlying
security. Other principal factors affecting market value include supply and
demand, interest rates, the pricing volatility of the underlying security and
the time remaining until the expiration date.
Risks
associated with options transactions include (1) the success of a hedging
strategy may depend on an ability to predict movements in the prices of
individual securities, fluctuations in markets and movements in interest rates,
(2) there may be an imperfect correlation between the movement in prices of
options and the securities underlying them, (3) there may not be a liquid
secondary market for options, and (4) while the Fund will receive a premium when
it writes covered call options, it may not participate fully in a rise in the
market value of the underlying security.
Real
Estate Investment Trusts (“REITs”)
A
U.S. REIT is a corporation or business trust (that would otherwise be taxed as a
corporation) which meets the definitional requirements of the Code. The Code
permits a qualifying REIT to deduct from taxable income the dividends paid,
thereby effectively eliminating corporate level federal income tax. To meet the
definitional requirements of the Code, a REIT must, among other things: invest
substantially all of its assets in interests in real estate (including mortgages
and other REITs), cash and government securities; derive most of its income from
rents from real property or interest on loans secured by mortgages on real
property; and, in general, distribute annually 90% or more of its taxable income
(other than net capital gains) to shareholders.
REITs
are sometimes informally characterized as Equity REITs and Mortgage REITs. An
Equity REIT invests primarily in the fee ownership or leasehold ownership of
land and buildings (e.g.,
commercial equity REITs and residential equity REITs); a Mortgage REIT invests
primarily in mortgages on real property, which may secure construction,
development or long-term loans.
REITs
may be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent that REITs in which the Fund invests may
concentrate investments in particular geographic regions or property types.
Additionally, rising interest rates may cause investors in REITs to demand a
higher annual yield from future distributions, which may in turn decrease market
prices for equity securities issued by REITs. Rising interest rates also
generally increase the costs of obtaining financing, which could
cause
the value of the Fund’s investments to decline. During periods of declining
interest rates, certain Mortgage REITs may hold mortgages that the mortgagors
elect to prepay, which prepayment may diminish the yield on securities issued by
such Mortgage REITs. In addition, Mortgage REITs may be affected by the ability
of borrowers to repay when due the debt extended by the REIT and Equity REITs
may be affected by the ability of tenants to pay rent.
Certain
REITs have relatively small market capitalization, which may tend to increase
the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his or her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
In
addition to these risks, Equity REITs may be affected by changes in the value of
the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the favorable U.S. federal income tax
treatment generally available to REITs under the Code or fail to maintain their
exemptions from registration under the 1940 Act. The above factors may also
adversely affect a borrower’s or a lessee’s ability to meet its obligations to
the REIT. In the event of default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
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). 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.
Securities
Lending
The
Fund may lend portfolio securities in an amount up to one-third of its total
assets to brokers, dealers and other financial institutions. In a portfolio
securities lending transaction, the Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. The Fund may share the interest it receives on the
collateral securities with the borrower. The terms of the Fund’s loans permit it
to reacquire loaned securities on five business days’ notice or in time to vote
on any important matter. Loans are subject to termination at the option of the
Fund or borrower at any time, and the borrowed securities must be returned when
the loan is terminated. The Fund may pay fees to arrange for securities
loans.
The
SEC currently requires that the following conditions must be met whenever the
Fund’s portfolio securities are loaned: (1) the Fund must receive at least
100% cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights on
the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs; and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from such loans. These
conditions may be subject to future modification. Such loans will be terminable
at any time upon specified notice. The Fund might experience the risk of loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund. In addition, the Fund will not enter into
any portfolio security lending arrangement having a duration of longer than one
year. The principal risk of portfolio lending is potential default or insolvency
of the borrower. In either of
these
cases, the Fund could experience delays in recovering securities or collateral
or could lose all or part of the value of the loaned securities. As part of
participating in a lending program, the Fund may be required to invest in
collateralized debt or other securities that bear the risk of loss of principal.
In addition, all investments made with the collateral received are subject to
the risks associated with such investments. If such investments lose value, the
Fund will have to cover the loss when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that the Fund may receive as collateral
will not become part of the Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which the Fund is permitted to invest. During the time securities are on
loan, the borrower will pay the Fund any accrued income on those securities, and
the Fund may invest the cash collateral and earn income or receive an
agreed-upon fee from a borrower that has delivered cash-equivalent collateral.
Short-Term
Instruments
The
Fund may invest in short-term instruments, including money market instruments,
on an ongoing basis to provide liquidity or for other reasons. Money market
instruments are generally short-term investments that may include but are not
limited to: (i) shares of money market funds; (ii) obligations issued
or guaranteed by the U.S. government, its agencies or instrumentalities
(including government-sponsored enterprises); (iii) negotiable certificates
of deposit (“CDs”), bankers’ acceptances, fixed time deposits and other
obligations of U.S. and foreign banks (including foreign branches) and similar
institutions; (iv) commercial paper rated at the date of purchase “Prime-1”
by Moody’s or “A-1” by S&P or, if unrated, of comparable quality as
determined by the Adviser; (v) non-convertible corporate debt securities
(e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than 397 days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of
the 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. Money market instruments also include shares of money
market funds. Time deposits are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates. Bankers’
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international transactions.
Swap
Agreements
The
Fund intends to enter into swap agreements, including total return swaps. The
Fund may utilize swap agreements in an attempt to gain exposure to the
securities in a market without actually purchasing those securities, or to hedge
a position. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a day to more than one-year. In
a standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,”
(i.e.,
the return on or increase in value of a particular dollar amount invested in a
basket of securities representing a particular index). Total return swaps are
swap agreements in which one party makes payments based on a set rate, either
fixed or variable, while the other party makes payments based on the return of
an underlying asset, to seek exposure to certain securities.
Forms
of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or “cap” interest rate floors, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates fall below a specified level, or “floor;” and
interest rate collars, under which a party sells a cap and purchases a floor or
vice versa in an attempt to protect itself against interest rate movements
exceeding given minimum or maximum levels.
The
Fund’s obligations under a swap agreement will be accrued daily (offset against
any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by segregating assets determined to be liquid.
Obligations under swap agreements so covered will not be construed to be “senior
securities” for purposes of the Fund’s investment restriction concerning senior
securities. Because they are two-party contracts which may have terms of greater
than seven days, swap agreements may be considered to be illiquid for purposes
of the Fund’s illiquid investment limitations. The Fund will not enter into any
swap agreement unless the Advisor believes that the other party to the
transaction is creditworthy. The Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty.
The
Fund may enter into swap agreements to invest in a market without owning or
taking physical custody of the underlying securities in circumstances in which
direct investment is restricted for legal reasons or is otherwise impracticable.
The counterparty to any swap agreement will typically be a bank, investment
banking firm or broker-dealer. The counterparty will generally agree to pay the
Fund the amount, if any, by which the notional amount of the swap agreement
would have increased in value had it been invested in the particular stocks,
plus the dividends that would have been received on those stocks. The Fund will
agree to pay to the counterparty a floating rate of interest on the notional
amount of the swap agreement plus the amount, if any, by which the notional
amount would have decreased in value had it been invested in such stocks.
Therefore, the return to the Fund on any swap agreement should be the gain or
loss on the notional amount plus dividends on the stocks less the interest paid
by the Fund on the notional amount.
Swap
agreements typically are settled on a net basis, which means that the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. Payments may be made at the
conclusion of a swap
agreement
or periodically during its term. Other swap agreements, may require initial
premium (discount) payments as well as periodic payments (receipts) related to
the interest leg of the swap or to the default of a reference obligation. The
Fund will earmark and reserve assets necessary to meet any accrued payment
obligations when it is the buyer of a credit default swap.
Swap
agreements do not involve the delivery of securities or other underlying assets.
Accordingly, the risk of loss with respect to swap agreements is limited to the
net amount of payments that the Fund is contractually obligated to make. If a
swap counterparty defaults, the Fund’s risk of loss consists of the net amount
of payments the Fund is contractually entitled to receive, if any. The net
amount of the excess, if any, of the Fund’s obligations over its entitlements
with respect to each equity swap will be accrued on a daily basis and an amount
of cash or liquid assets, having an aggregate NAV at least equal to such accrued
excess will be maintained in a segregated account by the Fund’s custodian.
Inasmuch as these transactions are entered into for hedging purposes or are
offset by segregated cash of liquid assets, as permitted by applicable law, the
Fund and the Advisor believe that these transactions do not constitute senior
securities under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund’s borrowing restrictions.
The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with the markets for other similar instruments,
which are traded in the OTC market. The Advisor, under the supervision of the
Board, is responsible for determining and monitoring the liquidity of Fund
transactions in swap agreements.
The
use of swap agreements is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If a counterparty’s creditworthiness
declines, the value of the swap would likely decline. Moreover, there is no
guarantee that the Fund could eliminate its exposure under an outstanding swap
agreement by entering into an offsetting swap agreement with the same or another
party.
U.S.
Government Securities
The
Fund may invest in U.S. government securities. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities include U.S.
Treasury securities, which are backed by the full faith and credit of the U.S.
Treasury and which differ only in their interest rates, maturities, and times of
issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S.
government securities are issued or guaranteed by agencies or instrumentalities
of the U.S. government including, but not limited to, obligations of U.S.
government agencies or instrumentalities such as the Federal National Mortgage
Association (“Fannie Mae”), the Government National Mortgage Association
(“Ginnie Mae”), the Small Business Administration, the Federal Farm Credit
Administration, the Federal Home Loan Banks, Banks for Cooperatives (including
the Central Bank for Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, the National Credit
Union Administration and the Federal Agricultural Mortgage Corporation (Farmer
Mac).
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass- through
certificates, are supported by the full faith and credit of the U.S. Treasury.
Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury, while the U.S. government provides financial support to
such U.S. government-sponsored federal agencies, no assurance can be given that
the U.S. government will always do so, since the U.S. government is not so
obligated by law. U.S. Treasury notes and bonds typically pay coupon interest
semi- annually and repay the principal at maturity.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury’s funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth over the next three years. As a result of this
Agreement, the investments of holders, including the Fund, of mortgage-backed
securities and other obligations issued by Fannie Mae and Freddie Mac are
protected.
The
total public debt of the United States as a percentage of gross domestic product
has grown rapidly since the beginning of the 2008-2009 financial downturn.
Although high debt levels do not necessarily indicate or cause economic
problems, they may create certain systemic risks if sound debt management
practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when
they are due. This increase also has necessitated the need for the U.S. Congress
to negotiate adjustments to the statutory debt limit to increase the cap on the
amount the U.S. government is permitted to borrow to meet its existing
obligations and finance current budget deficits. In August 2011, S&P lowered
its long-term
sovereign
credit rating on the U.S. In explaining the downgrade at that time, S&P
cited, among other reasons, controversy over raising the statutory debt limit
and growth in public spending. An increase in national debt levels also may
necessitate the need for the U.S. Congress to negotiate adjustments to the
statutory debt ceiling to increase the cap on the amount the U.S. government is
permitted to borrow to meet its existing obligations and finance current budget
deficits. Future downgrades could increase volatility in domestic and foreign
financial markets, result in higher interest rates, lower prices of U.S.
Treasury securities and increase the costs of different kinds of debt. Any
controversy or ongoing uncertainty regarding the statutory debt ceiling
negotiations may impact the U.S. long-term sovereign credit rating and may cause
market uncertainty. As a result, market prices and yields of securities
supported by the full faith and credit of the U.S. government may be adversely
affected.
INVESTMENT
RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Fund. These restrictions cannot be changed with respect to
the Fund without the approval of the holders of a majority of the Fund’s
outstanding voting securities. For the purposes of the 1940 Act, a “majority of
outstanding shares” means the vote of the lesser of: (1) 67% or more of the
voting securities of the Fund present at the meeting if the holders of more than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of the
Fund.
Except
with the approval of a majority of the outstanding voting securities, the Fund
may not:
1.Borrow
money, except to the extent permitted by the Investment Company Act, the rules
and regulations thereunder and any applicable exemptive relief.
2.Issue
senior securities, except to the extent permitted by the Investment Company Act,
the rules and regulations thereunder and any applicable exemptive
relief.
3.Engage
in the business of underwriting securities except to the extent that the Fund
may be considered an underwriter within the meaning of the 1933 Act in the
acquisition, disposition or resale of its portfolio securities or in connection
with investments in other investment companies, or to the extent otherwise
permitted under the Investment Company Act, the rules and regulations thereunder
and any applicable exemptive relief.
4.Purchase
or sell real estate, except to the extent permitted under the Investment Company
Act, the rules and regulations thereunder and any applicable exemptive
relief.
5.Purchase
or sell commodities, contracts relating to commodities or options on contracts
relating to commodities except to the extent permitted under the Investment
Company Act, the rules and regulations thereunder and any applicable exemptive
relief. This policy shall not prevent the Fund from purchasing or selling
foreign currency or purchasing, selling or entering into futures contracts,
options, forward contracts, swaps, caps, floors, collars and other financial
instruments as currently exist or may in the future be developed.
6.Make
loans, except to the extent permitted under the Investment Company Act, the
rules and regulations thereunder and any applicable exemptive
relief.
7.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities, investment companies and
tax-exempt securities of state or municipal governments and their political
subdivisions are not considered to be issued by members of any
industry.
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitation with respect to the borrowing of money will be
observed continuously.
EXCHANGE
LISTING AND TRADING
Shares
are listed for trading and trade throughout the day on the
Exchange.
There
can be no assurance that the Fund will continue to meet the requirements of the
Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the
Shares under any of the following circumstances: (i) if any of the requirements
set forth in the Exchange rules are not continuously maintained, including
compliance with Rule 6c-11(c) under the 1940 Act; (ii) if, following the initial
12-month period beginning at the commencement of trading of the Fund, there are
fewer than 50 beneficial owners of the Shares of the Fund; or (iii) if such
other event shall occur or condition shall exist that, in the opinion of the
Exchange, makes further dealings on the Exchange inadvisable. The Exchange will
remove the Shares of the Fund from listing and trading upon termination of the
Fund.
The
Trust reserves the right to adjust the price levels of Shares in the future to
help maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the Fund.
MANAGEMENT
OF THE TRUST
Board
Responsibilities. The
management and affairs of the Trust and its series are overseen by the Board,
which elects the officers of the Trust who are responsible for administering the
day-to-day operations of the Trust and the Fund. The Board has approved
contracts, as described below, under which certain companies provide essential
services to the Trust.
The
day-to-day business of the Trust, including the management of risk, is performed
by third-party service providers, such as the Adviser, the Sub-Adviser, the
Distributor, and the Administrator. The Board is responsible for overseeing the
Trust’s service providers and, thus, has oversight responsibility with respect
to risk management performed by those service providers. Risk management seeks
to identify and address risks, i.e.,
events or circumstances that could have material adverse effects on the
business, operations, shareholder services, investment performance or reputation
of 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
Board’s role in risk oversight begins before the inception of the Fund, at which
time certain of the Fund’s service providers present the Board with information
concerning the investment objective, strategies and risks of the Fund as well as
proposed investment limitations for the Fund. Additionally, the Adviser and
Sub-Adviser provide the Board with an overview of, among other things, its
investment philosophy, brokerage practices and compliance infrastructure.
Thereafter, the Board continues its oversight function of various personnel,
including the Trust’s Chief Compliance Officer, as well as personnel of the
Adviser, Sub-Adviser, and other service providers such as the Fund’s independent
registered public accounting firm, make periodic reports to the Audit Committee
or to the Board with respect to various aspects of risk management. The Board
and the Audit Committee oversee efforts by management and service providers to
manage risks to which the 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 the Sub-Adviser and receives
information about those services at its regular meetings. In addition, on an
annual basis (following the initial two-year period), in connection with its
consideration of whether to renew the Advisory Agreement with the Adviser and
the Sub-Advisory Agreement with the Sub-Adviser, the Board or its designee may
meet with the Adviser and/or the Sub-Adviser to review such services. Among
other things, the Board regularly considers the Adviser’s and the 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 performance and investments,
including, for example, portfolio holdings schedules.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund, Adviser, and Sub-Adviser’s risk assessments.
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.
Annually, the Fund’s 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, the 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 Board 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 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 Trust’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.
Members
of the Board.
There are four members of the Board, three of whom are not interested persons of
the Trust, as that term is defined in the 1940 Act (the “Independent Trustees”).
The Chairman of the Board, Paul R. Fearday, is an interested person of the Trust
as that term is defined in the 1940 Act.
The
Board is comprised of a super-majority (75 percent) of Independent Trustees.
There is an Audit Committee of the Board that is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Audit Committee chair
presides at the Audit Committee meetings, participates in formulating agendas
for Audit Committee meetings, and coordinates with management to serve as a
liaison between the Independent Trustees and management on matters within the
scope of responsibilities of the Audit Committee as set forth in its
Board-approved charter. The Trust has not designated a lead Independent Trustee
but has determined its leadership structure is appropriate given the specific
characteristics and circumstances of the Trust. The Trust made this
determination in consideration of, among other things, the fact that the
Independent Trustees of the Trust constitute a super-majority of the Board, the
number of Independent Trustees that constitute the Board, the amount of assets
under management in the Trust, and the number of funds overseen by the Board.
The Board also believes that its leadership structure facilitates the orderly
and efficient flow of information to the Independent Trustees from Fund
management.
Additional
information about each Trustee of the Trust is set forth below. The address of
each Trustee of the Trust is c/o U.S. Bank Global Fund Services,
615 E. Michigan Street, Milwaukee, Wisconsin 53202.
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex* Overseen by Trustee |
Other
Directorships Held by Trustee During Past 5 Years |
Independent
Trustees |
John
L. Jacobs
Year
of birth: 1959 |
Trustee
and Audit Committee Chair |
Indefinite
term; since 2017 |
Chairman
of Alerian, Inc. (since June 2018); Founder and CEO of Q3 Advisors, LLC
(financial consulting firm) (since 2015); Executive Director of Center for
Financial Markets and Policy (2016–2022); Distinguished Policy Fellow and
Executive Director, Center for Financial Markets and Policy, Georgetown
University (2015–2022); Senior Advisor, Nasdaq OMX Group (2015–2016);
Executive Vice President, Nasdaq OMX Group (2013–2015) |
51 |
Independent
Trustee, SHP ETF Trust (since 2021) (2 portfolios); Director, tZERO Group,
Inc. (since 2020); Independent Trustee, Procure ETF Trust II (since 2018)
(1 portfolio); Independent Trustee, Horizons ETF Trust I
(2015-2019) |
Koji
Felton
Year
of birth: 1961 |
Trustee |
Indefinite
term; since 2019 |
Retired;
formerly Counsel, Kohlberg Kravis Roberts & Co. L.P. (investment firm)
(2013–2015); Counsel, Dechert LLP (law firm) (2011–2013) |
51 |
Independent
Trustee, Series Portfolios Trust (since 2015)
(10 portfolios) |
Pamela
H. Conroy
Year
of birth: 1961 |
Trustee
and Nominating and Governance Committee Chair |
Indefinite
term; since 2019 |
Retired;
formerly Executive Vice President, Chief Operating Officer & Chief
Compliance Officer, Institutional Capital Corporation (investment firm)
(1994–2008) |
51 |
Independent
Trustee, Frontier Funds, Inc. (since 2020)
(6 portfolios) |
Interested
Trustee** |
Paul
R. Fearday, CPA
Year
of birth: 1979 |
Trustee
and Chairman |
Indefinite
term; since 2019 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since
2008) |
51 |
None |
* The
Trust is the only registered investment company in the Fund
Complex.
** Mr.
Fearday is deemed to be an “interested person” of the Trust under the 1940 Act
by reason of his position with the Trust’s administrator, U.S. Bancorp Fund
Services, LLC, which also provides other third-party services to the Trust.
Individual
Trustee Qualifications.
The Trust has concluded that each of the Trustees should serve on the Board
because of their ability to review and understand information about the Fund
provided to them by management, to identify and request other information they
may deem relevant to the performance of their duties, to question management and
other service providers regarding material factors bearing on the management and
administration of the Fund, and to exercise their business judgment in a manner
that
serves
the best interests of the Fund’s shareholders. The Trust has concluded that each
of the Trustees should serve as a Trustee based on his or her own experience,
qualifications, attributes and skills as described below.
The
Trust has concluded that Mr. Jacobs should serve as a Trustee because of his
substantial industry experience. He most recently served as the CEO of Q3
Advisors, LLC and as the Distinguished Policy Fellow and Executive Director of
the Center for Financial Markets and Policy, and as Adjunct Professor of Finance
at the McDonough School of Business at Georgetown University. He also served as
Senior Advisor and principal consultant to Nasdaq’s CEO and President. Mr.
Jacobs has been determined to qualify as an Audit Committee Financial Expert for
the Trust.
The
Trust has concluded that Mr. Felton should serve as a Trustee because of his
substantial industry experience, including over two decades working in the asset
management industry providing legal, regulatory compliance, governance and risk
management advice to registered investment companies, their advisers and boards.
Prior to that, he gained experience and perspective as a regulator while serving
as an enforcement attorney and branch chief for the SEC. He also represented
public companies and their boards of directors in securities class actions,
derivative litigation and SEC investigations as a litigation associate at a
national law firm. Mr. Felton currently serves as an independent trustee and
chair of the nominating and governance committee of a mutual fund complex.
The
Trust has concluded that Ms. Conroy should serve as a Trustee because of her
substantial industry experience, including over 25 years of achievements at both
a large, multi-location financial institution as well as a small,
entrepreneurial firm. She has expertise in all facets of portfolio accounting,
securities processing, trading operations, marketing, as well as legal and
compliance.
The
Trust has concluded that Mr. Fearday should serve as Trustee because of the
experience he gained as a senior officer of U.S. Bancorp Fund Services, LLC,
doing business as U.S. Bank Global Fund Services, since 2008, and in his past
role with a national audit firm.
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 series of the Trust.
Board
Committees.
The Board has established the following standing committees of the
Board:
Audit
Committee.
The Board has a standing Audit Committee that is composed of each of the
Independent Trustees of the Trust. The Audit Committee operates under a written
charter approved by the Board. The principal responsibilities of the Audit
Committee include: recommending which firm to engage as the Fund’s independent
registered public accounting firm and when and whether to terminate this
relationship, as necessary; reviewing the independent registered public
accounting firm’s compensation, the proposed scope and terms of its engagement,
and the firm’s independence; pre-approving audit and non-audit services provided
by the Fund’s independent registered public accounting firm to the Trust and
certain other affiliated entities; serving as a channel of communication between
the independent registered public accounting firm and the Trustees; reviewing
the results of each external audit, including any qualifications in the
independent registered public accounting firm’s opinion, any related management
letter, management’s responses to recommendations made by the independent
registered public accounting firm in connection with the audit, reports
submitted to the Audit Committee by the internal auditing department of the
Trust’s Administrator that are material to the Trust as a whole, if any, and
management’s responses to any such reports; reviewing the Fund’s audited
financial statements and considering any significant disputes between the
Trust’s management and the independent registered public accounting firm that
arose in connection with the preparation of those financial statements;
considering, in consultation with the independent registered public accounting
firm and the Trust’s senior internal accounting executive, if any, the
independent registered public accounting firms’ report on the adequacy of the
Trust’s internal financial controls; reviewing, in consultation with the Fund’s
independent registered public accounting firm, major changes regarding auditing
and accounting principles and practices to be followed when preparing the Fund’s
financial statements; and other audit related matters.
During the Fund’s fiscal period ended July 31, 2022, the Audit Committee met two
times.
The
Audit Committee also serves as the Qualified Legal Compliance Committee (“QLCC”)
for the Trust for the purpose of compliance with Rules 205.2(k) and 205.3(c) of
the Code of Federal Regulations, regarding alternative reporting procedures for
attorneys retained or employed by an issuer who appear and practice before the
SEC on behalf of the issuer (the “issuer attorneys”). An issuer attorney who
becomes aware of evidence of a material violation by the Trust, or by any
officer, director, employee, or agent of the Trust, may report evidence of such
material violation to the QLCC as an alternative to the reporting requirements
of Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities).
Nominating
and Governance Committee.
The Board has a standing Nominating and Governance Committee that is composed of
each of the Independent Trustees of the Trust. The Nominating and Governance
Committee operates under a written charter approved by the Board. The principal
responsibility of the Nominating and Governance Committee is to consider,
recommend and nominate candidates to fill vacancies on the Board, if any. The
Nominating and Governance Committee generally will not consider nominees
recommended by shareholders. The Nominating and Governance Committee meets
periodically, as necessary. During the fiscal period ended July 31, 2022, the
Nominating and Governance Committee met once.
Principal
Officers of the Trust
The
officers of the Trust conduct and supervise the Trust’s and the Fund’s daily
business. The address of each officer of the Trust is c/
o
U.S. Bank Global Fund Services, 615 E. Michigan Street, Milwaukee, Wisconsin
53202. Additional information about each officer of the Trust is as
follows:
|
|
|
|
|
|
|
|
|
|
| |
Name
and Year of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Gregory
Bakken
Year
of birth: 1983 |
President
and Principal Executive Officer |
Indefinite
term, February 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2006) |
Travis
G. Babich
Year
of birth: 1980 |
Treasurer
and Principal Financial Officer |
Indefinite
term, September 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2005) |
Kacie
G. Briody Year of birth: 1992 |
Assistant
Treasurer |
Indefinite
term, March 2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2021); Officer,
U.S. Bancorp Fund Services, LLC (2014 to 2021) |
Kent
Barnes
Year
of birth: 1968 |
Secretary |
Indefinite
term, February 2019 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2018); Chief Compliance
Officer, Rafferty Asset Management, LLC (2016 to 2018); Vice President,
U.S. Bancorp Fund Services, LLC (2007 to 2016) |
Christi
C. James Year of birth: 1974 |
Chief
Compliance Officer and Anti-Money Laundering Officer |
Indefinite
term, July 2022 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Principal
Consultant, ACA Group (2021 to 2022); Lead Manager, Communications
Compliance, T. Rowe Price Investment Services, Inc. (2018 to 2021);
Compliance & Legal Manager, CR Group LP (2017 to
2018) |
Joshua
J. Hinderliter Year of birth: 1983 |
Assistant
Secretary |
Indefinite
term, May 2022 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Managing
Associate, Thompson Hine LLP (2016 to
2022) |
Trustee
Ownership of Shares.
The Fund is required to show the dollar amount ranges of each Trustee’s
“beneficial ownership” of Shares and each other series of the Trust as of the
end of the most recently completely calendar year. Dollar amount ranges
disclosed are established by the SEC. “Beneficial ownership” is determined in
accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). As of December 31, 2021, no Trustee or officer of
the Trust owned Shares of the Fund or any other fund within the Trust’s Fund
Complex.
Board
Compensation. Effective
January 1, 2022, each Independent Trustee receives an annual stipend of $60,000
and reimbursement for all reasonable travel expenses relating to their
attendance at Board Meetings. The chair of the Audit Committee receives an
annual stipend of $5,000 and the chair of the Nominating and Governance
Committee receives an annual stipend of $2,500. The Interested Trustee is not
compensated for his service as a Trustee. The following table shows the
compensation earned by each Trustee during the fiscal period ended July 31,
2022.
|
|
|
|
|
|
|
| |
Name |
Aggregate
Compensation From the Fund |
Total
Compensation From Fund Complex* Paid to Trustees |
Interested
Trustee |
Paul
R. Fearday |
$0 |
$0 |
Independent
Trustees |
John
L. Jacobs |
$0 |
$32,500 |
Koji
Felton |
$0 |
$30,000 |
Pamela
H. Conroy |
$0 |
$31,250 |
* The
Trust is the only registered investment company in the Fund
Complex.
PRINCIPAL
SHAREHOLDERS, CONTROL PERSONS, AND MANAGEMENT OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding Shares. A control person is a shareholder that owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter affecting and voted on by shareholders of the Fund. As of October 31,
2022, no Trustees and officers of the Trust owned Shares of the Fund, and the
following shareholders were considered to be principal shareholders and control
persons of the Fund:
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Goldman
Sachs Asset Management, L.P. 200 West Street New York, NY
10282
|
24.19% |
Record |
TD
Ameritrade, Inc. P.O. Box 2226 Omaha, NE 68103-2226
|
22.29% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905
|
15.67% |
Record |
Pershing,
LLC P.O. Box 2052 Jersey City,NJ 07303-2052
|
15.27% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281
|
9.62% |
Record |
Bank
of America Four World Financial Center 250 Vesey Street New York,
NY 10281 |
4.92% |
Record |
CODES
OF ETHICS
The
Trust, the Adviser and the Sub-Adviser have each adopted codes of ethics
pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics are designed to
prevent affiliated persons of the Trust, the Adviser and the Sub-Adviser from
engaging in deceptive, manipulative or fraudulent activities in connection with
securities held or to be acquired by the Fund (which also may be held by persons
subject to the codes of ethics). Each code of ethics permits personnel subject
to that code of ethics to invest in securities for their personal investment
accounts, subject to certain limitations, including limitations related to
securities that may be purchased or held by the Fund. The Distributor (as
defined below) relies on the principal underwriters exception under Rule
17j-1(c)(3), specifically where the Distributor is not affiliated with the
Trust, the Adviser or the Sub-Adviser, and no officer, director, or general
partner of the Distributor serves as an officer, director, or general partner of
the Trust, the Adviser or the Sub-Adviser.
There
can be no assurance that the codes of ethics will be effective in preventing
such activities. Each code of ethics may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the SEC’s website at
https://www.sec.gov.
PROXY
VOTING POLICIES
The
Fund has delegated proxy voting responsibilities to the Adviser, subject to the
Board’s oversight, and the Adviser has, in turn, delegated such responsibilities
to the Sub-Adviser, subject to the Adviser’s and Board’s oversight. In
delegating proxy responsibilities, the Board has directed that proxies be voted
consistent with the Fund’s and its shareholders’ best interests and in
compliance with all applicable proxy voting rules and regulations. The
Sub-Adviser has adopted proxy voting policies and guidelines for this purpose
(“Proxy Voting Policies”)
and
has engaged a third-party proxy solicitation firm to assist with voting proxies
in a timely manner. The Trust’s Chief Compliance Officer is responsible for
monitoring the effectiveness of the Proxy Voting Policies. The Proxy Voting
Policies have been adopted by the Trust as the policies and procedures that the
Sub-Adviser will use when voting proxies on behalf of the Fund.
In
the absence of a conflict of interest, the Sub-Adviser will generally vote “for”
routine proposals, such as the election of directors, approval of auditors, and
amendments or revisions to corporate documents to eliminate outdated or
unnecessary provisions. Unusual or disputed proposals will be reviewed and voted
on a case-by-case basis.
The
Proxy Voting Policies address, among other things, material conflicts of
interest that may arise between the interests of the Fund and the interests of
the Adviser and Sub-Adviser. The Proxy Voting Policies will ensure that all
issues brought to shareholders are analyzed in light of the Adviser’s and
Sub-Adviser’s fiduciary responsibilities.
When
available, information on how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available (1) without charge, upon request, by calling 800-617-0004,
and
(2) on the SEC’s website at https://www.sec.gov.
MANAGEMENT
Investment
Adviser
Grizzle
Investment Management LLC, a Delaware limited liability company, serves as the
investment adviser to the Fund. The Adviser is located at 573 Coldstream Drive,
Berwyn, Pennsylvania 19312.
The
Adviser provides investment advice to the Fund and manages the day-to-day
operations of the Fund, subject to the general supervision and oversight of the
Board of the Trust. The Adviser is responsible for the investment and
reinvestment of the assets of the Fund in accordance with the investment
objective, policies, and limitations of the Fund. In addition, the Adviser
arranges for transfer agency, custody, fund administration, distribution, and
all other services necessary for the Fund to operate. For the services it
provides to the Fund, the Adviser is entitled to a unified management fee, which
is calculated daily and paid monthly, at an annual rate of 0.75% of the Fund’s
average daily net assets.
Pursuant
to an investment advisory agreement between the Trust, on behalf of the Fund,
and the Adviser (the “Advisory Agreement”), the Adviser has agreed to pay all
expenses of the Fund except the fee payable to the Adviser under the Advisory
Agreement, interest charges on any borrowings, dividends and other expenses on
securities sold short, taxes, brokerage commissions and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, accrued deferred tax liability,
extraordinary expenses, , and distribution fees and expenses paid by the Trust
under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act.
The Adviser, in turn, compensates the Sub-Adviser from the management fee it
receives from the Fund.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund paid the following advisory fees to the Adviser:
|
| |
Advisory
Fee Paid During Fiscal Period Ended July 31, 2022 |
$4,975 |
Investment
Sub-Adviser
Exchange
Traded Concepts, LLC, an Oklahoma limited liability company located at 10900
Hefner Pointe Drive, Suite 400, Oklahoma City, Oklahoma 73120, serves as the
sub-adviser to the Fund. The Sub-Adviser is majority owned by Cottonwood ETF
Holdings LLC.
Pursuant
to a sub-advisory agreement between the Adviser and the Sub-Adviser (the
“Sub-Advisory Agreement”), the Sub-Adviser is responsible for trading portfolio
securities on behalf of the Fund, including selecting broker-dealers to execute
purchase and sale transactions as instructed by the Adviser or in connection
with any rebalancing or reconstitution of the Fund’s portfolio, subject to the
supervision of the Adviser and the Board. For its services, the Sub-Adviser is
entitled to a fee by the Adviser, which fee is calculated daily and paid
monthly, at an annual rate 0.05% of the Fund’s average daily net
assets.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Adviser paid the following sub-advisory fees to the
Sub-Adviser:
|
| |
Sub-Advisory
Fee Paid During Fiscal Period Ended July 31, 2022 |
$4,975 |
Portfolio
Managers
Thomas
George and Scott Willis serve as the Fund’s portfolio managers (the “Portfolio
Managers”) and are jointly and primarily responsible for day-to-day management
of the Fund’s portfolio. This section includes information about the Portfolio
Managers, including information about compensation, other accounts managed, and
the dollar range of Shares owned.
Share
Ownership
The
Fund is required to show the dollar ranges of the Portfolio Managers’
“beneficial ownership” of Shares as of the end of the most recently completed
fiscal year or a more recent date for a new portfolio manager. Dollar amount
ranges disclosed are established by the SEC. “Beneficial ownership” is
determined in accordance with Rule 16a-1(a)(2) under the 1934 Act. As of July
31, 2022, Thomas George owned $219,282, and Scott Willis owned $170,790 of the
Fund.
Other
Accounts
The
Portfolio Managers do not manage any other accounts.
Compensation
Messrs.
George and Willis each receive a fixed base salary and have equity ownership in
the Adviser that are not tied to the performance of the Fund.
Conflicts
of Interest
A
portfolio manager’s management of “other accounts” may give rise to potential
conflicts of interest in connection with his/her management of the Fund’s
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have similar investment objectives or strategies
as the Fund. A potential conflict of interest may arise as a result, whereby a
portfolio manager could favor one account over another. Another potential
conflict could include a portfolio manager’s knowledge about the size, timing,
and possible market impact of Fund trades, whereby the portfolio manager could
use this information to the advantage of other accounts and to the disadvantage
of the Fund. However, the Adviser has established policies and procedures to
ensure that the purchase and sale of securities among all accounts the Adviser
manages are fairly and equitably allocated.
DISTRIBUTOR
The
Trust and Foreside Fund Services, LLC (the “Distributor”) are parties to a
distribution agreement (the “Distribution Agreement”), whereby the Distributor
acts as principal underwriter for the Trust and distributes Shares of the Fund.
Shares are continuously offered for sale by the Distributor only in Creation
Units. The Distributor will not distribute Shares in amounts less than a
Creation Unit and does not maintain a secondary market in Shares. The principal
business address of the Distributor is Three Canal Plaza, Suite 100, Portland,
Maine 04101.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will
receive orders for the purchase and redemption of Creation Units, provided that
any subscriptions and orders will not be binding on the Trust until accepted by
the Trust. The Distributor is a broker-dealer registered under the Exchange Act
and a member of the Financial Industry Regulatory Authority
(“FINRA”).
The
Distributor also may enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers also may be Authorized Participants (as discussed in
“Procedures
for Purchase of Creation Units”
below) or DTC participants (as defined below).
The
Distribution Agreement will continue for two years from its effective date and
is renewable annually thereafter. The continuance of the Distribution Agreement
must be specifically approved at least annually (i) by the vote of the Trustees
or by a vote of the shareholders of the Fund and (ii) by the vote of a majority
of the Independent Trustees who have no direct or indirect financial interest in
the operations of the Distribution Agreement or any related agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement is terminable without penalty by the Trust on 60 days’
written notice when authorized either by majority vote of its outstanding voting
Shares or by a vote of a majority of its Board (including a majority of the
Independent Trustees), or by the Distributor on 60 days’ written notice, and
will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Distributor, or reckless disregard by it of
its obligations thereunder, the Distributor shall not be liable for any action
or failure to act in accordance with its duties thereunder.
Intermediary
Compensation. The
Adviser, the Sub-Adviser, or their affiliates, out of their own resources and
not out of Fund assets (i.e.,
without additional cost to the Fund or its shareholders), may pay certain broker
dealers, banks and other financial intermediaries (“Intermediaries”) for certain
activities related to the Fund, including participation in activities that are
designed to make Intermediaries more knowledgeable about exchange-traded
products, including the Fund, or for other activities, such as marketing and
educational training or support. These arrangements are not financed by the Fund
and, thus, do not result in increased Fund expenses. They are not reflected in
the fees and expenses listed in the fees and expenses sections of the Fund’s
Prospectus and they do not change the price paid by investors for the purchase
of Shares or the amount received by a shareholder as proceeds from the
redemption of Shares.
Such
compensation may be paid to Intermediaries that provide services to the Fund,
including marketing and education support (such as through conferences, webinars
and printed communications). The Adviser and the Sub-Adviser will periodically
assess the advisability of continuing to make these payments. Payments to an
Intermediary may be significant to the Intermediary, and amounts that
Intermediaries pay to your adviser, broker or other investment professional, if
any, also may be significant to such adviser, broker or investment professional.
Because an Intermediary may make decisions about what investment options it will
make available or recommend, and what services to provide in connection with
various products, based on payments it receives or is eligible to receive, such
payments create conflicts of interest between the Intermediary and its clients.
For example, these financial incentives may cause the Intermediary to recommend
the Fund rather than other investments. The same conflict of interest exists
with respect to your financial adviser, broker or investment professional if he
or she receives similar payments from his or her Intermediary firm.
Intermediary
information is current only as of the date of this SAI. Please contact your
adviser, broker, or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the
Adviser, the Sub-Adviser, or their affiliates to an Intermediary may create the
incentive for an Intermediary to encourage customers to buy Shares.
If
you have any additional questions, please call 1-800-617-0004.
Distribution
and Service Plan. The
Board has adopted a Distribution and Service Plan (the “Plan”) in accordance
with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. No payments pursuant to the
Plan are expected to be made during the twelve (12) month period from the date
of this SAI. Rule 12b-1 fees to be paid by the Fund under the Plan may only be
imposed after approval by the Board.
Continuance
of the Plan must be approved annually by a majority of the Trustees of the Trust
and by a majority of the Trustees who are not interested persons (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the Plan or in any agreements related to the Plan (“Qualified Trustees”). The
Plan requires that quarterly written reports of amounts spent under the Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding shares of the Fund.
All material amendments of the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
The
Plan provides that the Fund pays the Distributor an annual fee of up to a
maximum of 0.25% of the average daily net assets of the Shares. Under the Plan,
the Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations and
insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor’s affiliates and subsidiaries (collectively,
“Agents”) as compensation for services and reimbursement of expenses incurred in
connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with FINRA’s
rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, the Fund
is authorized to compensate the Distributor up to the maximum amount to finance
any activity primarily intended to result in the sale of Creation Units of the
Fund or for providing or arranging for others to provide shareholder services
and for the maintenance of shareholder accounts. Such activities may include,
but are not limited to: (i) delivering copies of the Fund’s then current
reports, prospectuses, notices, and similar materials, to prospective purchasers
of Creation Units; (ii) marketing and promotional services, including
advertising; (iii) paying the costs of and compensating others, including
Authorized Participants with whom the Distributor has entered into written
Authorized Participant Agreements, for performing shareholder servicing on
behalf of the Fund; (iv) compensating certain Authorized Participants for
providing assistance in distributing the Creation Units of the Fund, including
the travel and communication expenses and salaries and/or commissions of sales
personnel in connection with the distribution of the Creation Units of the Fund;
(v) payments to financial institutions and intermediaries such as banks, savings
and loan associations, insurance companies and investment counselors,
broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of
the Trust’s service providers as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance; (vi) facilitating
communications with beneficial owners of Shares, including the cost of providing
(or paying others to provide) services to beneficial owners of Shares,
including, but not limited to, assistance in answering inquiries related to
Shareholder accounts; and (vii) such other services and obligations as are set
forth in the Distribution Agreement.
TRANSFER
AGENT AND ADMINISTRATOR
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
(“Fund Services” or the “Transfer Agent”), located at 615 East Michigan Street,
Milwaukee, Wisconsin 53202, serves as the Fund’s transfer agent and
administrator.
Pursuant
to a fund servicing agreement between the Trust and Fund Services, Fund Services
provides the Trust with administrative and management services (other than
investment advisory services) and accounting services, including portfolio
accounting services, tax accounting services, and furnishing financial reports.
In this capacity, Fund Services does not have any responsibility or authority
for the management of the Fund, the determination of investment policy, or for
any matter pertaining to the distribution of Shares. As compensation for the
administration, accounting and management services, the Adviser pays Fund
Services a fee based on the Fund’s average daily net assets, subject to a
minimum annual fee. Fund Services also is entitled to certain out-of-pocket
expenses for the services mentioned above, including pricing
expenses.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund incurred the following administrative fees, which were paid
by the Adviser to Fund Services:
|
| |
Administration
Fee Paid During Fiscal Period Ended July 31, 2022 |
$35,102 |
CUSTODIAN
Pursuant
to a custody agreement between the Trust and U.S. Bank National Association
(“U.S. Bank” or the “Custodian”) (the “Custody Agreement”), U.S. Bank, located
at 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212, serves
as the custodian of the Fund’s assets. The Custodian holds and administers the
assets in the Fund’s portfolio. Pursuant to the Custody Agreement, U.S. Bank
receives an annual fee from the Adviser based on the Trust’s total average daily
net assets, subject to a minimum annual fee, and certain settlement charges. The
Custodian also is entitled to certain out-of-pocket expenses.
LEGAL
COUNSEL
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue, NW, Washington, DC
20004-2541, serves as legal counsel for the Trust.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Cohen
& Company, Ltd., located at 1350 Euclid Avenue, Suite 800, Cleveland, Ohio
44115, serves as the independent registered public accounting firm for the
Fund.
PORTFOLIO
HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The
Board has adopted a policy regarding the disclosure of information about the
Fund’s security holdings. The Fund’s entire portfolio holdings are publicly
disseminated each day the Fund is open for business and may be available through
financial reporting and news services, including publicly available internet web
sites. In addition, the composition of the Deposit Securities is publicly
disseminated daily prior to the opening of the Exchange via the facilities of
the National Securities Clearing Corporation (“NSCC”).
DESCRIPTION
OF SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of funds and
shares. Each share represents an equal proportionate interest in the Fund with
each other share. Shares are entitled upon liquidation to a pro rata share in
the net assets of the Fund. Shareholders have no preemptive rights. The
Declaration of Trust provides that the Trustees may create additional series or
classes of shares. All consideration received by the Trust for shares of any
additional funds and all assets in which such consideration is invested would
belong to that fund and would be subject to the liabilities related thereto.
Share certificates representing Shares will not be issued. Shares, when issued,
are fully paid and non-assessable.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required, consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all funds in the Trust vote together as a
single class, except that if the matter being voted on affects only a particular
fund it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. As a Delaware statutory trust, the Trust is not required, and does not
intend, to hold annual meetings of shareholders. Approval of shareholders will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Upon the written request
of shareholders owning at least 10% of the Trust’s shares, the Trust will call
for a meeting of shareholders to consider the removal of one or more Trustees
and other certain matters. In the event that such a meeting is requested, the
Trust will provide appropriate assistance and information to the shareholders
requesting the meeting.
Under
the Declaration of Trust, the Trustees have the power to liquidate the Fund
without shareholder approval. While the Trustees have no present intention of
exercising this power, they may do so if the Fund fails to reach a viable size
within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION
OF TRUSTEES’ LIABILITY
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees shall not
be responsible or liable in any event for any neglect or wrong doing of any
officer, agent, employee, adviser or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee.
The Declaration of Trust also provides that the Trust shall indemnify each
person who is, or has been, a Trustee, officer, employee or agent of the Trust,
any person who is serving or has served at the Trust’s request as a Trustee,
officer, trustee, employee or agent of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise to the extent and in
the manner provided in the Amended and Restated By-laws. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee.
Nothing contained in this section attempts to disclaim a Trustee’s individual
liability in any manner inconsistent with the federal securities
laws.
BROKERAGE
TRANSACTIONS
The
policy of the Trust regarding purchases and sales of securities for the Fund is
that primary consideration will be given to obtaining the most favorable prices
and efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust’s policy is
to pay commissions which are considered fair and reasonable without necessarily
determining
that the lowest possible commissions are paid in all circumstances. The Trust
believes that a requirement always to seek the lowest possible commission cost
could impede effective portfolio management and preclude the Fund from obtaining
a high quality of brokerage and research services. In seeking to determine the
reasonableness of brokerage commissions paid in any transaction, the Sub-Adviser
will rely upon its experience and knowledge regarding commissions generally
charged by various brokers and on its judgment in evaluating the brokerage
services received from the broker effecting the transaction. Such determinations
are necessarily subjective and imprecise, as in most cases, an exact dollar
value for those services is not ascertainable. The Trust has adopted policies
and procedures that prohibit the consideration of sales of Shares as a factor in
the selection of a broker or dealer to execute its portfolio
transactions.
The
Sub-Adviser owes a fiduciary duty to its clients to seek to provide best
execution on trades effected. In selecting a broker/dealer for each specific
transaction, the Sub-Adviser chooses the broker/dealer deemed most capable of
providing the services necessary to obtain the most favorable execution. “Best
execution” is generally understood to mean the most favorable cost or net
proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when
making this judgment, which may include, but is not limited to: liquidity,
price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker/dealers. The Sub-Adviser also will use electronic crossing
networks (“ECNs”) when appropriate.
Subject
to the foregoing policies, brokers or dealers selected to execute the Fund’s
portfolio transactions may include the Fund’s Authorized Participants (as
discussed in “Procedures for Purchase of Creation Units” below) or their
affiliates. An Authorized Participant or its affiliates may be selected to
execute the Fund’s portfolio transactions in conjunction with an all-cash
creation unit order or an order including “cash-in-lieu” (as described below
under “Purchase and Redemption of Shares in Creation Units”), so long as such
selection is in keeping with the foregoing policies. As described below under
“Purchase and Redemption of Shares in Creation Units— Creation Transaction Fee”
and “—Redemption Transaction Fee”, the Fund may determine to not charge a
variable fee on certain orders when the Adviser has determined that doing so is
in the best interests of Fund shareholders, e.g.,
for creation orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such order, even if the
decision to not charge a variable fee could be viewed as benefiting the
Authorized Participant or its affiliate selected to execute the Fund’s portfolio
transactions in connection with such orders.
The
Sub-Adviser may use the Fund’s assets for, or participate in, third-party soft
dollar arrangements, in addition to receiving proprietary research from various
full-service brokers, the cost of which is bundled with the cost of the broker’s
execution services. The Sub-Adviser does not “pay up” for the value of any such
proprietary research. Section 28(e) of the Exchange Act permits the Sub-Adviser,
under certain circumstances, to cause the Fund to pay a broker or dealer a
commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction in
recognition of the value of brokerage and research services provided by the
broker or dealer. The Sub-Adviser may receive a variety of research services and
information on many topics, which it can use in connection with its management
responsibilities with respect to the various accounts over which it exercises
investment discretion or otherwise provides investment advice. The research
services may include qualifying order management systems, portfolio attribution
and monitoring services and computer software and access charges which are
directly related to investment research. Accordingly, the Fund may pay a broker
commission higher than the lowest available in recognition of the broker’s
provision of such services to the Sub-Adviser, but only if the Sub-Adviser
determines the total commission (including the soft dollar benefit) is
comparable to the best commission rate that could be expected to be received
from other brokers. The amount of soft dollar benefits received depends on the
amount of brokerage transactions effected with the brokers. A conflict of
interest exists because there is an incentive to: 1) cause clients to pay a
higher commission than the firm might otherwise be able to negotiate;
2) cause clients to engage in more securities transactions than would
otherwise be optimal; and 3) only recommend brokers that provide soft dollar
benefits.
The
Sub-Adviser faces a potential conflict of interest when it uses client trades to
obtain brokerage or research services. This conflict exists because the
Sub-Adviser can use the brokerage or research services to manage client accounts
without paying cash for such services, which reduces the Sub-Adviser’s expenses
to the extent that the Sub-Adviser would have purchased such products had they
not been provided by brokers. Section 28(e) permits the Sub-Adviser to use
brokerage or research services for the benefit of any account it manages.
Certain accounts managed by the Sub-Adviser may generate soft dollars used to
purchase brokerage or research services that ultimately benefit other accounts
managed by the Sub-Adviser, effectively cross subsidizing the other accounts
managed by the Sub-Adviser that benefit directly from the product. The
Sub-Adviser may not necessarily use all of the brokerage or research services in
connection with managing the Fund whose trades generated the soft dollars used
to purchase such products.
The
Sub-Adviser is responsible, subject to oversight by the Adviser and the Board,
for placing orders on behalf of the Fund for the purchase or sale of portfolio
securities. If purchases or sales of portfolio securities of the Fund and one or
more other investment companies or clients supervised by the Sub-Adviser are
considered at or about the same time, transactions in such securities are
allocated among the several investment companies and clients in a manner deemed
equitable and consistent with its fiduciary
obligations
to all by the Sub-Adviser. In some cases, this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. However, in other cases, it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Fund. The primary consideration is prompt execution of
orders at the most favorable net price.
The
Fund may deal with affiliates in principal transactions to the extent permitted
by exemptive order or applicable rule or regulation.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund paid the following brokerage commissions:
|
| |
Brokerage
Commissions Paid During Fiscal Period Ended July 31, 2022 |
$794 |
Directed
Brokerage. For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund did not pay any commissions on brokerage transactions
directed to brokers pursuant to an agreement or understanding whereby the broker
provides research or other brokerage services to the Sub-Adviser.
Brokerage
with Fund Affiliates.
The Fund may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Fund, the Adviser, the Sub-Adviser, or the
Distributor for a commission in conformity with the 1940 Act, the Exchange Act
and rules promulgated by the SEC. These rules require that commissions paid to
the affiliate by the Fund for exchange transactions not exceed “usual and
customary” brokerage commissions. The rules define “usual and customary”
commissions to include amounts which are “reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time.” The Trustees, including those who are not “interested persons” of the
Fund, have adopted procedures for evaluating the reasonableness of commissions
paid to affiliates and review these procedures periodically.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund did not pay any brokerage commissions to any registered
broker-dealer affiliates of the Fund.
Securities
of “Regular Broker-Dealers.” The
Fund is required to identify any securities of its “regular brokers or dealers”
(as such term is defined in the 1940 Act) that it may hold at the close of its
most recent fiscal year. “Regular brokers or dealers” of the Fund are the ten
brokers or dealers that, during the most recent fiscal year: (i) received the
greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Fund; or (iii) sold the largest dollar amounts of
Shares.
For
the fiscal period December 16, 2021 (commencement of operations) through July
31, 2022, the Fund did not hold any securities of its “regular
broker-dealers.
PORTFOLIO
TURNOVER RATE
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services. For
the fiscal period ended July 31, 2022, the Fund’s portfolio turnover rate was
102%.
BOOK
ENTRY ONLY SYSTEM
The
Depository Trust Company (“DTC”) acts as securities depositary for Shares.
Shares are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
Shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and
FINRA. Access to the DTC system also is available to others such as banks,
brokers, dealers, and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to in this SAI as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to
their
purchase of Shares. The Trust recognizes DTC or its nominee as the record owner
of all Shares for all purposes. Beneficial Owners of Shares are not entitled to
have Shares registered in their names and will not receive or be entitled to
physical delivery of Share certificates. Each Beneficial Owner must rely on the
procedures of DTC and any DTC Participant and/or Indirect Participant through
which such Beneficial Owner holds its interests, to exercise any rights of a
holder of Shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as described in the ensuing paragraphs. DTC will make available to the
Trust upon request and for a fee a listing of Shares held by each DTC
Participant. The Trust shall obtain from each such DTC Participant the number of
Beneficial Owners holding Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with copies of
such notice, statement, or other communication, in such form, number and at such
place as such DTC Participant may reasonably request, in order that such notice,
statement or communication may be transmitted by such DTC Participant, directly
or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to
each such DTC Participant a fair and reasonable amount as reimbursement for the
expenses attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in 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 aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in Shares, or for maintaining, supervising, or reviewing any
records relating to such beneficial ownership interests, or for any other aspect
of the relationship between DTC and the DTC Participants or the relationship
between such DTC Participants and the Indirect Participants and Beneficial
Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to the Fund at
any time by giving reasonable notice to the Fund and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Fund shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
PURCHASE
AND REDEMPTION OF CREATION UNITS
The
Fund issues and redeems its shares on a continuous basis, at NAV, only in a
large, specified number of shares called a “Creation Unit,” either principally
in-kind for securities or in cash for the value of such securities. The NAV of
Shares is determined once each Business Day, as described below under
“Determination
of Net Asset Value.”
The Creation Unit size may change. Authorized Participants will be notified of
such change.
Purchase
(Creation).
The Trust issues and sells Shares only in Creation Units on a continuous basis
through the Distributor, without a sales load (but subject to transaction fees,
if applicable), at the NAV per share next determined after receipt, on any
Business Day, of an order in proper form. The NAV of Shares is calculated each
Business Day as of the scheduled close of regular trading on the NYSE, generally
4:00 p.m., Eastern time. The Fund will not issue fractional Creation Units. A
“Business Day” is any day on which the NYSE is open for business. As of the date
of this SAI, the NYSE observes the following holidays: New Year’s Day, Martin
Luther King, Jr. Day, President’s Day (Washington’s Birthday), Good Friday,
Memorial Day (observed), Juneteenth Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Fund
Deposit.
The Fund has adopted policies and procedures governing the process of
constructing baskets of Deposit Securities (defined below), Fund Securities
(defined below) and/or cash, and acceptance of the same (the “Basket
Procedures”). The consideration for purchase of a Creation Unit of the Fund
generally consists of either: (i) the in-kind deposit of a designated portfolio
of securities (the “Deposit Securities”) per each Creation Unit, constituting a
substantial replication, or a portfolio sampling representation, of the
securities included in the Fund’s portfolio and the Cash Component (defined
below), computed as described below, or (ii) the cash value of the Deposit
Securities (“Deposit Cash”) and the Cash Component to replace any Deposit
Security. 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. These additional costs
may be recoverable from the purchaser of Creation Units.
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” is an amount equal to the difference between the NAV of Shares (per
Creation Unit) and the market value of the Deposit Securities or Deposit Cash,
as applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the value of the Deposit Securities or Deposit
Cash, as applicable), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the value of the Deposit Securities or
Deposit Cash, as applicable), the Cash Component shall be such negative amount
and the creator will be entitled to receive cash in an amount equal to the Cash
Component.
The Cash Component serves the function of compensating for any differences
between the NAV per Creation Unit and the 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
Fund, through NSCC, makes available on each Business Day, prior to the opening
of business on the Exchange (currently, 9:30 a.m., Eastern time), the list of
the names and the required number of Shares of each Deposit Security or the
required amount of Deposit Cash, as applicable, to be included in the current
Fund Deposit (based on information at the end of the previous Business Day) for
the Fund. Such Fund Deposit is subject to any applicable adjustments as
described below, 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.
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 by the Adviser, in accordance with the Basket Procedures, with
a view to the investment objective of the Fund. Information regarding the 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. The composition of the Deposit Securities also may
change in response to portfolio adjustments, interest payments and corporate
action events.
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
or the investor for which it is acting; (iv) would be restricted under the
securities laws or where the delivery of the Deposit Security to the Authorized
Participant would result in the disposition of the Deposit Security by the
Authorized Participant becoming restricted under the securities laws; or (v) in
certain other situations (collectively, “custom orders”). The Trust also
reserves the right to permit or require the substitution of Deposit Securities
in lieu of Deposit Cash.
Cash
Purchase.
The Trust may at its discretion permit full or partial cash purchases of
Creation Units of the Fund. When full or partial cash purchases of Creation
Units are available or specified for the Fund, they will be effected in
essentially the same manner as in-kind purchases thereof. In the case of a full
or partial cash purchase, the Authorized Participant must pay the cash
equivalent of the Deposit Securities it would otherwise be required to provide
through an in-kind purchase, plus the same Cash Component required to be paid by
an in-kind purchaser together with a creation transaction fee and non-standard
charges, as may be applicable.
Procedures
for Purchase of Creation Units. To
be eligible to place orders with the Distributor 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 Distributor, and that has been accepted by the Transfer Agent, with respect
to purchases and redemptions of Creation Units. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or
any investor on whose behalf it will act, to certain conditions, including that
it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below), if applicable, and
any other applicable fees and taxes.
All
orders to purchase Shares directly from the Fund, including custom 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 applicable order form. With respect to
the Fund, the order cut-off time for orders to purchase Creation Units is 4:00
p.m. Eastern time, which time may be modified by the Fund from time-to-time by
amendment to the Participant Agreement and/or applicable order form. In
addition, orders to purchase Creation Units on the next Business Day may be
submitted as a “Future Dated Trade” between 4:30 p.m. Eastern time and 5:30 p.m.
Eastern time on the prior Business Day. Such times may be modified by the Fund
from time-to-time by amendment to the Participant Agreement and/or applicable
order form. The date on which an order to purchase Creation Units (or an order
to redeem Creation Units, as set forth below) 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 closes 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 also will generally not accept orders on such day(s). Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Transfer Agent pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order
form. On behalf of the Fund, the Transfer Agent will notify the Custodian of
such order. The Custodian will then provide such
information
to the appropriate local sub-custodian(s). Those placing orders through an
Authorized Participant should allow sufficient time to permit proper submission
of the purchase order to the Transfer Agent by the cut-off time on such Business
Day. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Transfer Agent or an
Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities) and/or through such other arrangements
allowed by the Trust or its agents. With respect to foreign Deposit Securities,
the Custodian shall cause the subcustodian of the 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 (or Deposit Cash for
all or a part of such securities, as permitted or required), with any
appropriate adjustments as advised by the Trust. Foreign Deposit Securities must
be delivered to an account maintained at the applicable local subcustodian. A
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion 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 12:00 p.m. Eastern time (or such other time as specified by the
Trust) on the Settlement Date. If the Fund or its agents do not receive all of
the Deposit Securities, or the required Deposit Cash in lieu thereof, by such
time, then the order may be deemed rejected and the Authorized Participant shall
be liable to the Fund for losses, if any, resulting therefrom. The “Settlement
Date” for the Fund is generally the second Business Day after the Order
Placement Date. All questions as to the number of Deposit Securities or Deposit
Cash to be delivered, as applicable, and the validity, form and eligibility
(including time of receipt) for the deposit of any tendered securities or cash,
as applicable, will be determined by the Trust, whose determination shall be
final and binding. The amount of cash represented by the Cash Component must be
transferred directly to the Custodian through the Federal Reserve Bank wire
transfer system in a timely manner to be received by the Custodian no later than
the Settlement Date. If the Cash Component and the Deposit Securities or Deposit
Cash, as applicable, are not received by the Custodian in a timely manner by the
Settlement Date, the creation order may be cancelled. Upon written notice to the
Transfer Agent, such canceled order may be resubmitted the following Business
Day using a Fund Deposit as newly constituted to reflect the then current NAV of
the Fund.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in the appropriate amount are deposited with
the Custodian on the Settlement Date. If the order is not placed in proper form
as required, or federal funds in the appropriate amount are not received on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom.
A creation request is in “proper form” if all procedures set forth in the
Participant Agreement, order form and this SAI are properly
followed.
Issuance
of a Creation Unit. Except
as provided in this SAI, Creation Units will not be issued until the transfer of
good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities
(or the cash value thereof) have been delivered to the account of the relevant
subcustodian or subcustodians, the Distributor and the Adviser shall be notified
of such delivery, and the Trust will issue and cause the delivery of the
Creation Units. The delivery of Creation Units so created generally will occur
no later than the second Business Day following the day on which the purchase
order is deemed received by the Transfer Agent. The Authorized Participant shall
be liable to the Fund for losses, if any, resulting from unsettled
orders.
In
instances where the Trust accepts Deposit Securities for the purchase of a
Creation Unit, the Creation Units may be purchased in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of Shares on the date the order is placed in proper form since, in
addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) an additional amount of
cash equal to a percentage of the value as set forth in the Participant
Agreement, of the undelivered Deposit Securities (the “Additional Cash
Deposit”), which shall be maintained in a separate non-interest bearing
collateral account. The Authorized Participant must deposit with the Custodian
the Additional Cash Deposit, as applicable, by 12:00 p.m. Eastern time (or such
other time as specified by the Trust) on the Settlement Date. If the Fund or its
agents do not receive the Additional Cash Deposit in the appropriate amount, by
such time, then the order may be deemed rejected and the Authorized Participant
shall be liable to the Fund for losses, if any, resulting therefrom. An
additional amount of cash shall be required to be deposited with the Trust,
pending delivery of the missing Deposit Securities to the extent necessary to
maintain the Additional Cash Deposit with the Trust in an amount at least equal
to the applicable percentage, as set forth in the Participant Agreement, of the
daily market value of the missing Deposit Securities. The Participant Agreement
will permit the Trust to buy the missing Deposit Securities at any time.
Authorized Participants will be liable to the Trust for the costs incurred by
the Trust in connection with any such purchases. These costs will be deemed to
include the amount by which the actual purchase price of the Deposit Securities
exceeds the value of such Deposit Securities on the day the purchase order was
deemed received by the Transfer Agent plus the brokerage and related transaction
costs associated with such purchases. The Trust will return any unused portion
of the Additional Cash Deposit once all of the missing Deposit Securities have
been properly received by the Custodian or purchased by the Trust and deposited
into the Trust. In addition, a transaction fee, as described below under
“Creation Transaction Fee,” may be charged and an additional variable charge
also may be applied, as described below. 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 Fund Deposit delivered does not consist
of the securities the Custodian specified; (b) the investor(s), upon obtaining
the Shares ordered, would own 80% or more of the currently outstanding Shares of
the Fund; (c) 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; (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, 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 Distributor, 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 Distributor are under no duty,
however, to give notification of any defects or irregularities in the delivery
of Fund Deposits nor shall either of them incur any liability for the failure to
give any such notification. The Trust, the Transfer Agent, the Custodian and the
Distributor shall not be liable for the rejection of any purchase order for
Creation Units. Given the importance of the ongoing issuance of Creation Units
to maintaining a market price that is at or close to the underlying NAV of the
Fund, the Trust does not intend to suspend the acceptance of orders for Creation
Units, unless it believes doing so would be in the best interests of the
Fund.
All
questions as to the number of shares of each security in the Deposit Securities
and the validity form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
Creation
Unit Transaction Fee.
A fixed purchase (i.e.,
creation) transaction fee, payable to the Fund’s custodian, may be imposed for
the transfer and other transaction costs associated with the purchase of
Creation Units (“Creation Order Costs”). The standard fixed creation unit
transaction fee for the Fund, regardless of the number of Creation Units created
in the transaction, is $300. The Fund may adjust the standard fixed creation
unit transaction fee from time to time. The fixed creation unit transaction fee
may be waived on certain orders if the Fund’s custodian has determined to waive
some or all of the Creation Order Costs associated with the order or another
party, such as the Adviser, has agreed to pay such fee.
In
addition, a variable fee, payable to the Fund, of up to a maximum of 2% of the
value of the Creation Units subject to the transaction may be imposed for cash
purchases, non-standard orders, or partial cash purchases of Creation Units. The
variable charge is primarily designed to cover additional costs (e.g.,
brokerage, taxes) involved with buying the securities with cash. The Fund may
determine to not charge a variable fee on certain orders when the Adviser has
determined that doing so is in the best interests of Fund shareholders,
e.g.,
for creation orders that facilitate the rebalance of the Fund’s portfolio in a
more tax efficient manner than could be achieved without such
order.
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their
order.
Risks
of Purchasing Creation Units.
There are certain legal risks unique to investors purchasing Creation Units
directly from the Fund. Because Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. Certain activities that
a shareholder performs as a dealer could, depending on the circumstances, result
in the shareholder being deemed a participant in the distribution in a manner
that could render the shareholder a statutory underwriter and subject to the
prospectus delivery and liability provisions of the Securities Act. For example,
a shareholder could be deemed a statutory underwriter if it purchases Creation
Units from the Fund, breaks them down into the constituent Shares, and sells
those Shares directly to customers, or if a shareholder chooses to couple the
creation of a supply of new Shares with an active selling effort involving
solicitation of secondary-market demand for Shares. Whether a person is an
underwriter depends upon all of the facts and circumstances pertaining to that
person’s activities, and the examples mentioned here should not be considered a
complete description of all the activities that could cause you to be deemed an
underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
Shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C)
of the Securities Act, will be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities
Act.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by 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 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 the Fund’s
portfolio securities
that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as defined below) on that day (“Fund
Securities”). Fund Securities received on redemption may not be identical to
Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or a
combination thereof, as determined by the Trust in accordance with the Basket
Procedures. With respect to in-kind redemptions of the Fund, redemption proceeds
for a Creation Unit will consist of Fund Securities—as announced by the
Custodian on the Business Day of the request for redemption received in proper
form plus cash in an amount equal to the difference between the NAV of Shares
being redeemed, as next determined after a receipt of a request in proper form,
and the value of the Fund Securities (the “Cash Redemption Amount”), less a
fixed redemption transaction fee, as applicable, and additional variable charge
as set forth below. In the event that the Fund Securities have a value greater
than the NAV of Shares, a compensating cash payment equal to the differential is
required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an
Authorized Participant may receive the corresponding cash value of the
securities in lieu of the in-kind securities value representing one or more Fund
Securities.
Cash
Redemption. Full
or partial cash redemptions of Creation Units will be effected in essentially
the same manner as in-kind redemptions thereof. In the case of full or partial
cash redemptions, the Authorized Participant receives the cash equivalent of the
Fund Securities it would otherwise receive through an in-kind redemption, plus
the same Cash Redemption Amount to be paid to an in-kind redeemer.
Redemption
Transaction Fee.
A fixed redemption transaction fee, payable to the Fund’s custodian, may be
imposed for the transfer and other transaction costs associated with the
redemption of Creation Units (“Redemption Order Costs”). The standard fixed
redemption transaction fee for the Fund, regardless of the number of Creation
Units redeemed in the transaction, is $300. The Fund may adjust the redemption
transaction fee from time to time. The fixed redemption fee may be waived on
certain orders if the Fund’s custodian has determined to waive some or all of
the Redemption Order Costs associated with the order or another party, such as
the Adviser, has agreed to pay such fee.
In
addition, a variable fee, payable to the Fund, of up to a maximum of 2% of the
value of the Creation Units subject to the transaction may be imposed for cash
redemptions, non-standard orders, or partial cash redemptions (when cash
redemptions are available) of Creation Units. The variable charge is primarily
designed to cover additional costs (e.g.,
brokerage, taxes) involved with selling portfolio securities to satisfy a cash
redemption. The Fund may determine to not charge a variable fee on certain
orders when the Adviser has determined that doing so is in the best interests of
Fund shareholders, e.g.,
for redemption orders that facilitate changes to the Fund’s portfolio in a more
tax efficient manner than could be achieved without such order.
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their
order.
Procedures
for Redemption of Creation Units.
Orders to redeem Creation Units of the Fund must be submitted in proper form to
the Transfer Agent prior to 4:00 p.m. Eastern time. In addition, orders to
redeem Creation Units on the next Business Day may be submitted as a “Future
Dated Trade” between 4:30 p.m. Eastern time and 5:30 p.m. Eastern time on the
prior Business Day. A redemption request is considered to be in “proper form” if
(i) an Authorized Participant has transferred or caused to be transferred to the
Trust’s Transfer Agent the Creation Unit(s) being redeemed through the
book-entry system of DTC so as to be effective by the time as set forth in the
Participant Agreement and (ii) a request in form satisfactory to the Trust is
received by the Transfer Agent from the Authorized Participant on behalf of
itself or another redeeming investor within the time periods specified in the
Participant Agreement. If the Transfer Agent does not receive the investor’s
Shares through DTC’s facilities by the times and pursuant to the other terms and
conditions set forth in the Participant Agreement, the redemption request shall
be rejected.
The
Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement, and that, therefore, requests to redeem Creation Units may have to be
placed by the investor’s broker through an Authorized Participant who has
executed an Authorized Participant Agreement. Investors making a redemption
request should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Transfer Agent; such
investors should allow for the additional time that may be required to effect
redemptions through their banks, brokers or other financial intermediaries if
such intermediaries are not Authorized Participants.
Additional
Redemption Procedures. In
connection with taking delivery of Shares of Fund Securities upon redemption of
Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank, or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account
such Fund Securities will be delivered. Deliveries of redemption proceeds
generally will be made within two business days of the trade date.
The
Trust may, in its discretion and in accordance with the Basket Procedures,
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 Fund next determined after the redemption
request is received in proper form (minus a redemption transaction fee, if
applicable, and additional charge for requested cash redemptions specified
above, to offset the Trust’s brokerage and other transaction costs associated
with the disposition of Fund Securities). The Fund also may, in its sole
discretion, and in accordance with the Basket Procedures, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities but does not differ in
NAV.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the 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 Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
“qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status to receive Fund Securities.
Because
the portfolio securities of the Fund may trade on other exchanges on days that
the Exchange is closed or are otherwise not Business Days for the Fund,
shareholders may not be able to redeem their Shares, or to purchase or sell
Shares on the Exchange, on days when the NAV of the Fund could be significantly
affecting by events in the relevant foreign markets.
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.
DETERMINATION
OF NET ASSET VALUE
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, rounded to the nearest cent. 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 Fund Services and
determined at the scheduled close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open, provided
that fixed-income assets may be valued as of the announced closing time for
trading in fixed-income instruments on any day that the Securities Industry and
Financial Markets Association (“SIFMA”) announces an early closing
time.
In
calculating the Fund’s NAV per Share, the Fund’s investments are generally
valued using market quotations to the extent such market quotations are readily
available. If market quotations are not readily available or, are deemed to be
unreliable by the Adviser, the Fund will fair value such investments and use the
fair value to calculate the Fund’s NAV. Pursuant to Rule 2a-5 under the 1940
Act, the Board has designated the Adviser to perform the fair value
determinations for the Fund’s portfolio investments subject to the Board’s
oversight. The Adviser has established procedures for its fair valuation of the
Fund’s portfolio investments. These procedures address, among other things,
determining when market quotations are not readily available or reliable and the
methodologies to be used for determining the fair value of investments, as well
as the use and oversight of third-party pricing services for fair valuation. The
Adviser’s fair value determinations will be carried out in compliance with Rule
2a-5 and based on fair value methodologies established and applied by the
Adviser and periodically tested to ensure such methodologies are appropriate and
accurate with respect to the Fund’s portfolio investments. The Adviser’s fair
value methodologies may involve obtaining inputs and prices from third-party
pricing services.
When
fair value pricing is employed, the prices of securities used by the Fund to
calculate its NAV may differ from quoted or published prices for the same
securities. Due to the subjective and variable nature of fair value pricing, it
is possible that the fair value determined for a particular security may be
materially different (higher or lower) from the price of the security quoted or
published by others, or the value when trading resumes or is realized upon its
sale. There may be multiple methods that can be used to value a portfolio
investment when market quotations are not readily available. The value
established for any portfolio investment at a point in time might differ from
what would be produced using a different methodology or if it had been priced
using market quotations.
DIVIDENDS
AND DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions and
Taxes.”
General
Policies.
Dividends from net investment income, if any, are declared and paid at least
annually by the Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but the Fund may make distributions
on a more frequent basis to comply with the distribution requirements of the
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.
The
Fund makes additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the Fund, plus any net capital gains and
(ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code.
Management of the Trust reserves the right to declare special dividends if, in
its reasonable discretion, such action is necessary or advisable to preserve the
Fund’s eligibility for treatment as a RIC or to avoid imposition of income or
excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of the Fund through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables to participate in the
dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend
distributions of both income and realized gains will be automatically reinvested
in additional whole Shares issued by the Trust of the Fund at NAV per Share.
Distributions reinvested in additional Shares will nevertheless be taxable to
Beneficial Owners acquiring such additional Shares to the same extent as if such
distributions had been received in cash.
FEDERAL
INCOME TAXES
The
following is only a summary of certain U.S. federal income tax considerations
generally affecting the Fund and its shareholders that supplements the
discussion in the Prospectus. No attempt is made to present a comprehensive
explanation of the federal, state, local or foreign tax treatment of the Fund or
its shareholders, and the discussion here and in the Prospectus is not intended
to be a substitute for careful tax planning.
The
following general discussion of certain U.S. federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders
are urged to consult their own tax advisors regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, foreign or local taxes.
Taxation
of the Fund.
The Fund intends to elect and to qualify each year to be treated as a RIC under
the Code. As such, the Fund should not be subject to federal income taxes 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. To qualify for
treatment as a RIC, the Fund must distribute annually to its shareholders at
least the sum of 90% of its net investment income (generally including the
excess of net short-term capital gains over net long-term capital losses) and
90% of its net tax-exempt interest income, if any (the “Distribution
Requirement”) and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Fund’s gross income each
taxable year must be derived from dividends, interest, payments with respect to
certain securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or foreign currencies and net
income derived from interests in qualified publicly traded partnerships (the
“Qualifying Income Requirement”); and (ii) at the end of each quarter of the
Fund’s taxable year, the Fund’s assets must be diversified so that (a) at least
50% of the value of the Fund’s total assets is represented by cash and cash
items, U.S. government securities, securities of other RICs, and other
securities, with such other securities limited, in respect to any one issuer, to
an amount not greater in value than 5% of the value of the Fund’s total assets
and to not more than 10% of the outstanding voting securities of such issuer,
including the equity securities of a qualified publicly traded partnership, and
(b) not more than 25% of the value of its total assets is invested, including
through corporations in which the Fund owns a 20% or more voting stock interest,
in the securities (other than U.S. government securities or securities of other
RICs) of any one issuer, the securities (other than securities of other RICs) of
two or more issuers which the Fund controls and which are engaged in the same,
similar, or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships (the “Diversification
Requirement”).
To
the extent the Fund makes investments that may generate income that is not
qualifying income, including certain derivatives, the Fund will seek to restrict
the resulting income from such investments so that the Fund’s non-qualifying
income does not exceed 10% of its gross income.
Although
the Fund intends to distribute substantially all of its net investment income
and may distribute its capital gains for any taxable year, the Fund will be
subject to federal income taxation to the extent any such income or gains are
not distributed. 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. The
requirements (other than certain organizational requirements) for qualifying RIC
status are determined at the fund level rather than at the Trust
level.
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. 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 regular corporate
rate without any deduction for distributions to shareholders, and its
distributions (including capital gains distributions) generally would be taxable
to the shareholders of the Fund as ordinary income dividends, subject to the
dividends received deduction for corporate shareholders and the lower tax rates
on qualified dividend income received by non- corporate shareholders, subject to
certain limitations. To requalify for treatment as a RIC in a subsequent taxable
year, 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. If the Fund
determines that it will not qualify as a RIC, the Fund will establish procedures
to reflect the anticipated tax liability in the Fund’s NAV.
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. The carryover of capital losses may be limited
under the general loss limitation rules if the Fund experiences an ownership
change as defined in the Code. For the fiscal period ended July 31, 2022, the
Fund had short-term capital losses of $71,117 remaining which will be carried
forward indefinitely to offset future realized capital gains.
The
Fund will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year an amount at least equal to 98% of its ordinary income for the
calendar year plus 98.2% of its capital gain net income for the one-year period
ending on October 31 of that year, subject to an increase for any shortfall in
the prior year’s distribution. For this purpose, any ordinary income or capital
gain net income retained by the Fund and subject to corporate income tax will be
considered to have been distributed. The Fund intends to declare and distribute
dividends and distributions in the amounts and at the times necessary to avoid
the application of the excise tax but can make no assurances that all such tax
liability will be eliminated. The Fund may in certain circumstances be required
to liquidate Fund investments to make sufficient distributions to avoid federal
excise tax liability at a time when the investment adviser might not otherwise
have chosen to do so, and liquidation of investments in such circumstances may
affect the ability of the Fund to satisfy the requirement for qualification as a
RIC.
If
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 tax liabilities, and (iii) will be entitled to increase their tax
basis, for federal income tax purposes, in their Shares by an amount equal to
the excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
Taxation
of Shareholders – Distributions.
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
distribution of investment company taxable income (as so computed) and net
realized capital gain will be taxable to Fund shareholders regardless of whether
the shareholder receives these distributions in cash or reinvests them in
additional Shares.
The
Fund (or your broker) will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount of distributions of net capital
gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for
treatment as qualified dividend income, which, subject to certain limitations
and requirements, is taxable to non-corporate shareholders at rates of up to
20%. Distributions from 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.
Qualified
dividend income includes, in general, subject to certain holding period and
other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign
corporations include those incorporated in possessions of the United States,
those incorporated in certain countries with comprehensive tax treaties with the
United States, and other foreign corporations if the stock with respect to which
the dividends are paid is readily tradable on an established securities market
in the United States. Dividends received by the Fund from an underlying fund
taxable as a RIC or from a REIT may be treated as qualified dividend income
generally only to the extent so reported by such underlying fund or REIT. 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.
Fund
dividends will not be treated as qualified dividend income if the Fund does not
meet holding period and other requirements with respect to dividend paying
stocks in its portfolio, and the shareholder does not meet holding period and
other requirements with respect to the Shares on which the dividends were paid.
Certain of the Fund’s investment strategies may limit its ability to distribute
dividends eligible to be treated as qualified dividend income.
Distributions
by the Fund of its net short-term capital gains will be taxable 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. Distributions may be subject to state and
local taxes.
In
the case of corporate shareholders, 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) and distributed and appropriately so reported by the Fund
may be eligible for the 50% dividends received deduction. Certain preferred
stock must have a holding period of at least 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes
ex-dividend as to that dividend to be eligible. Capital gain dividends
distributed to the Fund from other RICs and dividends distributed to the Fund
from REITs are generally not eligible for the dividends received deduction. To
qualify for the deduction, corporate shareholders must meet the minimum holding
period requirement stated above with respect to their Shares, taking into
account any holding period reductions from certain hedging or other transactions
or positions that diminish their risk of loss with respect to their Shares, and,
if they borrow to acquire or otherwise incur debt attributable to Shares, they
may be denied a portion of the dividends received deduction with respect to
those Shares. Certain of the Fund’s investment strategies may limit its ability
to distribute dividends eligible for the dividends received deduction for
corporate shareholders.
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.
Shareholders
who have not held Shares for a full year should be aware that the Fund may
report and distribute, as ordinary dividends or capital gain dividends, a
percentage of income that is not equal to the percentage of the Fund’s ordinary
income or net capital gain, respectively, actually earned during the applicable
shareholder’s period of investment in the Fund. A taxable shareholder may wish
to avoid investing in the Fund shortly before a dividend or other distribution,
because the distribution will generally be taxable even though it may
economically represent a return of a portion of the shareholder’s
investment.
To
the extent that the Fund makes a distribution of income received by the Fund in
lieu of dividends (a “substitute payment”) with respect to securities on loan
pursuant to a securities lending transaction, such income will not constitute
qualified dividend income to individual shareholders and will not be eligible
for the dividends received deduction for corporate shareholders.
If
the Fund’s distributions exceed its earnings and profits, all or a portion of
the distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in the Fund and result in
a higher capital gain or lower capital loss when the Shares on which the
distribution was received are sold. After a shareholder’s basis in the Shares
has been reduced to zero, distributions in excess of earnings and profits will
be treated as gain from the sale of the shareholder’s Shares.
Taxation
of Shareholders – Sale or Exchange of Shares.
A sale or exchange of Shares may give rise to a gain or loss. Assuming a
shareholder holds Shares as a capital asset, any gain or loss realized upon a
taxable disposition of Shares will be treated as long-term capital gain or loss
if Shares have been held for more than 12 months. Otherwise, the gain or loss on
the taxable disposition of Shares will generally be treated as short-term
capital gain or loss. Any loss realized upon a taxable disposition of Shares
held for six months or less will be treated as long-term capital loss, rather
than short-term capital loss, to the extent of any amounts treated as
distributions to the shareholder of long-term capital gain (including any
amounts credited to the shareholder as undistributed capital gains). All or a
portion of any loss realized upon a taxable disposition of Shares may be
disallowed if substantially identical Shares are acquired (through the
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the disposition. In such a case, the basis of
the newly acquired Shares will be adjusted to reflect the disallowed
loss.
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for Shares and then may be subsequently adjusted for other applicable
transactions as required by the Code. The difference between the selling price
and the cost basis of Shares generally determines the amount of the capital gain
or loss realized on the sale or exchange of Shares. Contact the broker through
whom
you purchased your Shares to obtain information with respect to the available
cost basis reporting methods and elections for your account.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. The ability of Authorized
Participants to receive a full or partial cash redemption of Creation Units of
the Fund may limit the tax efficiency of the Fund. An Authorized Participant who
redeems Creation Units will generally recognize a gain or loss equal to the
difference between the exchanger’s basis in the Creation Units and the sum of
the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The Internal Revenue Service (the “IRS”),
however, may assert that a loss realized upon an exchange of securities for
Creation Units cannot currently be deducted under the rules governing “wash
sales” (for a person who does not mark-to-market its portfolio) or on the basis
that there has been no significant change in economic position.
The
Trust, on behalf of the Fund, has the right to reject an order for Creation
Units if the purchaser (or a group of purchasers) would, upon obtaining the
Creation Units so ordered, own 80% or more of the outstanding Shares and if,
pursuant to Section 351 of the Code, the Fund would have a basis in the deposit
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require the provision of information
necessary to determine beneficial Share ownership for purposes of the 80%
determination. If the Fund does issue Creation Units to a purchaser (or a group
of purchasers) that would, upon obtaining the Creation Units so ordered, own 80%
or more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation
Units.
Authorized
Participants purchasing or redeeming Creation Units should consult their own tax
advisers with respect to the tax treatment of any creation or redemption
transaction and whether the wash sales rule applies and when a loss may be
deductible.
Taxation
of Shareholders – Net Investment Income Tax.
U.S. individuals with adjusted gross income (subject to certain adjustments)
exceeding certain threshold amounts ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases) are subject to a 3.8%
tax on all or a portion of their “net investment income,” which includes taxable
interest, dividends, and certain capital gains (generally including capital gain
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
Foreign
Investments.
Dividends and interest received by the Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax treaties between certain countries and the U.S. may reduce or
eliminate such taxes. The Fund does not expect to satisfy the requirements for
passing through to its shareholders any share of foreign taxes paid by the Fund,
with the result that shareholders will not include such taxes in their gross
incomes and will not be entitled to a tax deduction or credit for such taxes on
their own tax returns.
If
more than 50% of the value of the Fund’s assets at the close of any taxable year
consists of stock or securities of foreign corporations or ADRs, which for this
purpose may include obligations of foreign governmental issuers, the Fund may
elect, for U.S. federal income tax purposes, to treat any foreign income or
withholding taxes paid by the Fund as paid by its shareholders. For any year
that the Fund is eligible for and makes such an election, each shareholder of
the Fund will be required to include in income an amount equal to his or her
allocable share of qualified foreign income taxes paid by the Fund, and
shareholders will be entitled, subject to certain holding period requirements
and other limitations, to credit their portions of these amounts against their
U.S. federal income tax due, if any, or to deduct their portions from their U.S.
taxable income, if any. No deductions for foreign taxes paid by the Fund may be
claimed, however, by non- corporate shareholders who do not itemize deductions.
No deduction for such taxes will be permitted to individuals in computing their
alternative minimum tax liability. Shareholders that are not subject to U.S.
federal income tax, and those who invest in the Fund through tax-advantaged
accounts (including those who invest through individual retirement accounts or
other tax-advantaged retirement plans), generally will receive no benefit from
any tax credit or deduction passed through by the Fund. Foreign taxes paid by
the Fund will reduce the return from the Fund’s investments. If the Fund makes
the election, the Fund’s shareholders will be notified annually by the Fund (or
their broker) of the respective amounts per share of the Fund’s income from
sources within, and taxes paid to, foreign countries and U.S. possessions. If
the Fund does not hold sufficient foreign securities to meet the above
threshold, then shareholders will not be entitled to claim a credit or further
deduction with respect to foreign taxes paid by the Fund.
If
the Fund holds shares in a “passive foreign investment company” (“PFIC”), it may
be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on the Fund in respect of deferred taxes
arising from such distributions or gains.
The
Fund may be eligible to treat a PFIC as a “qualified electing fund” (“QEF”)
under the Code in which case, in lieu of the foregoing requirements, the Fund
will be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts will be subject to the 90% and excise
tax distribution requirements described above. In order to make this election,
the Fund would be required to obtain certain annual information from the PFICs
in which it invests, which may be difficult or impossible to obtain.
Alternatively, the Fund may make a mark-to-market election
that
will result in the Fund being treated as if it had sold and repurchased its PFIC
stock at the end of each year. In such case, the Fund would report any gains
resulting from such deemed sales as ordinary income and would deduct any losses
resulting from such deemed sales as ordinary losses to the extent of previously
recognized gains. The election must be made separately for each PFIC owned by
the Fund and, once made, is effective for all subsequent taxable years, unless
revoked with the consent of the IRS. By making the election, the Fund could
potentially ameliorate the adverse tax consequences with respect to its
ownership of shares in a PFIC, but in any particular year may be required to
recognize income in excess of the distributions it receives from PFICs and its
proceeds from dispositions of PFIC stock. The Fund may have to distribute this
excess income to satisfy the 90% distribution requirement and to avoid
imposition of the 4% excise tax. In order to distribute this income and avoid a
tax at the fund level, the Fund might be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting
in additional taxable gain or loss. The Fund intends to make the appropriate tax
elections, if possible, and take any additional steps that are necessary to
mitigate the effect of these rules.
Amounts
included in income each year by the Fund arising from a QEF election will be
“qualifying income” under the Qualifying Income Requirement (as described above)
even if not distributed to the Fund, if the Fund derives such income from its
business of investing in stock, securities or currencies.
Under
Section 988 of the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such income or receivables or
pays such expenses or liabilities generally are treated as ordinary income or
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain other financial instruments (such as
forward currency contracts and currency swaps), gains or losses attributable to
fluctuations in the value of the foreign currency between the date of
acquisition of the security or contract and the date of settlement or
disposition are also treated as ordinary gain or loss. The gains and losses may
increase or decrease the amount of the Fund’s income to be distributed to its
shareholders as ordinary income. The Fund may elect out of the application of
Section 988 of the Code with respect to the tax treatment of each of its foreign
currency forward contracts to the extent that (i) such contract is a capital
asset in the hands of the Fund and is not part of a straddle transaction and
(ii) the Fund makes an election by the close of the day the contract is entered
into to treat the gain or loss attributable to such contract as capital gain or
loss.
Tax
Treatment of Complex Securities.
Certain
of the Fund’s investments may be subject to complex provisions of the Code
(including provisions relating to hedging transactions, straddles, integrated
transactions, foreign currency contracts, forward foreign currency contracts,
and notional principal contracts) that, among other things, may affect the
Fund’s ability to qualify as a RIC, 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 the Fund receiving cash with which to make distributions in
amounts sufficient to enable the Fund to satisfy the RIC distribution
requirements for avoiding income and excise taxes. The Fund intends to monitor
its transactions, intends to make appropriate tax elections, and intends to make
appropriate entries in its books and records to mitigate the effect of these
rules and preserve the Fund’s qualification for treatment as a RIC.
Certain
derivative investments by the Fund, such as exchange-traded products and
over-the-counter derivatives, may not produce qualifying income for purposes of
the Qualifying Income Requirement described above, which must be met in order
for the Fund to maintain its status as a RIC under the Code. In addition, the
determination of the value and the identity of the issuer of such derivative
investments are often unclear for purposes of the Diversification Requirement
described above. The Fund intends to carefully monitor such investments to
ensure that any non-qualifying income does not exceed permissible limits and to
ensure that it is adequately diversified under the Diversification Requirement.
The Fund, however, may not be able to accurately predict the non-qualifying
income from these investments and there are no assurances that the IRS will
agree with the Fund's determination of the Diversification Requirement with
respect to such derivatives. Failure to satisfy the Diversification Requirement
might also result from a determination by the IRS that financial instruments in
which the Fund invests are not securities.
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 and options contracts subject to section 1256 of the Code (“Section 1256
Contracts”) as of the end of the year as well as those actually realized during
the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. The Fund may be required to defer the recognition
of losses on Section 1256 Contracts to the extent of any unrecognized gains on
offsetting positions held by the Fund. These provisions 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 in amounts
necessary to satisfy the Distribution Requirement and for avoiding the excise
tax discussed above. Accordingly, to avoid certain income and excise taxes, the
Fund may be required to liquidate its investments at a time when the investment
adviser might not otherwise have chosen to do so.
Offsetting
positions held by the Fund involving certain derivative instruments, such as
options, forwards, and futures, as well as its long and short positions in
portfolio securities, may be considered to constitute “straddles” for federal
income tax purposes. In general, straddles are subject to certain rules that may
affect the amount, character and timing of the Fund’s gains and losses with
respect to the straddle positions by requiring, among other things, that: (1)
any loss realized on disposition of one position of a straddle may not be
recognized to the extent that the Fund has unrealized gains with respect to the
other positions in
straddle;
(2) the Fund’s holding
period
in straddle positions be suspended while the straddle exists (possibly resulting
in a gain being treated as short-term rather than long-term capital gain); (3)
the losses recognized with respect to certain straddle positions that are part
of a mixed straddle and are non-Section 1256 Contracts be treated as 60%
long-term and 40% short-term capital loss; (4) losses recognized with respect to
certain straddle positions that would otherwise constitute short-term capital
losses be treated as long-term capital losses; and (5) the deduction of interest
and carrying charges attributable to certain straddle positions may be deferred.
Various elections are available to the Fund, which may mitigate the effects of
the straddle rules, particularly with respect to mixed straddles.
In
general, the straddle rules described above do not apply to any straddles held
by the Fund if all of the offsetting positions consist of Section 1256
Contracts. The straddle rules described above also do not apply if all the
offsetting positions making up a straddle consist of one or more “qualified
covered call options” and the stock to be purchased under the options and the
straddle is not part of a larger straddle. A qualified covered call option is
generally any option granted by the Fund to purchase stock it holds (or stock it
acquires in connection with granting the option) if, among other things, (1) the
option is traded on a national securities exchange that is registered with the
SEC or other market the IRS determined has rules adequate to carry out the
purposes of the applicable Code provision, (2) the option is granted more than
30 days before it expires, (3) the option is not a “deep-in-the-money option,”
(4) such option is not granted by an options dealer in connection with the
dealer’s activity of dealing in options, and (5) gain or loss with respect to
the option is not ordinary income or loss. In addition, the straddle rules could
cause distributions from the Fund that would otherwise constitute “qualified
dividend income” or qualify for the dividends received deduction to fail to
satisfy the applicable holding period requirements.
To
the extent the Fund writes options that are not Section 1256 Contracts, the
amount of the premium received by the Fund for writing such options is likely to
be entirely short-term capital gain to the Fund. In addition, if such an option
is closed by the Fund, any gain or loss realized by the Fund as a result of
closing the transaction will also generally be short-term capital gain or loss.
If such an option is exercised any gain or loss realized by the Fund upon the
sale of the underlying security pursuant to such exercise will generally be
short-term or long-term capital gain or loss to the Fund depending on the Fund’s
holding period for the underlying security.
If
the Fund enters into a “constructive sale” of any appreciated financial position
in its portfolio, the applicable Fund will be treated as if it had sold and
immediately repurchased the property and must recognize gain (but not loss) with
respect to that position. A constructive sale of an appreciated financial
position occurs when the Fund enters into certain offsetting transactions with
respect to the same or substantially identical property, including, but not
limited to: (i) a short sale; (ii) an offsetting notional principal contract;
(iii) a futures or forward contract; or (iv) other transactions identified in
future Treasury Regulations. The character of the gain from constructive sales
will depend upon the Fund’s holding period in the appreciated financial
position. Losses realized from a sale of a position that was previously the
subject of a constructive sale will be recognized when the position is
subsequently disposed of. The character of such losses will depend upon the
Fund’s holding period in the position beginning with the date the constructive
sale was deemed to have occurred and the application of various loss deferral
provisions in the Code. Constructive sale treatment does not apply to certain
closed transactions, including if such a transaction is closed on or before the
30th day after the close of the Fund’s taxable year and the applicable Fund
holds the appreciated financial position unhedged throughout the 60-day period
beginning with the day such transaction was closed.
Backup
Withholding.
The Fund will be required in certain cases to withhold (as “backup withholding”)
on amounts payable to any shareholder who (1) fails to provide a correct
taxpayer identification number certified under penalty of perjury; (2) is
subject to backup withholding by the IRS for failure to properly report all
payments of interest or dividends; (3) fails to provide a certified statement
that he or she is not subject to “backup withholding”; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident
alien). The backup withholding rate is currently 24%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on
shareholders who are neither citizens nor permanent residents of the
U.S.
Non-U.S.
Shareholders.
Any non-U.S. investors in the Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisors prior to investing in the
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
The Fund may, under certain circumstances, report all or a portion of a dividend
as an “interest-related dividend” or a “short-term capital gain dividend,” which
would generally be exempt from this 30% U.S. withholding tax, provided certain
other requirements are met. Short-term capital gain dividends received by a
nonresident alien individual who is present in the U.S. for a period or periods
aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders from the sale or
other disposition of Shares of the Fund generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from the Fund. Backup withholding will not be applied to payments that are
subject to the 30% (or lower applicable treaty rate) withholding tax described
in this paragraph. Different tax consequences may result if the foreign
shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the
benefits of a tax treaty may be different than those described
above.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that fail to meet prescribed information reporting or certification
requirements. In
general,
no such withholding will be required with respect to a U.S. person or non-U.S.
person that timely provides the certifications required by the Fund or its agent
on a valid IRS Form W-9 or applicable series of IRS Form W-8, respectively.
Shareholders potentially subject to withholding include foreign financial
institutions (“FFIs”), such as non-U.S. investment funds, and non-financial
foreign entities (“NFFEs”). To avoid withholding under FATCA, an FFI generally
must enter into an information sharing agreement with the IRS in which it agrees
to report certain identifying information (including name, address, and taxpayer
identification number) with respect to its U.S. account holders (which, in the
case of an entity shareholder, may include its direct and indirect U.S. owners),
and an NFFE generally must identify and provide other required information to
the Fund or other withholding agent regarding its U.S. owners, if any. Such
non-U.S. shareholders also may fall into certain exempt, excepted or deemed
compliant categories as established by regulations and other guidance. A
non-U.S. shareholder resident or doing business in a country that has entered
into an intergovernmental agreement with the United States to implement FATCA
will be exempt from FATCA withholding provided that the shareholder and the
applicable foreign government comply with the terms of the
agreement.
A
non-U.S. entity that invests in the Fund will need to provide the fund with
documentation properly certifying the entity’s status under FATCA in order to
avoid FATCA withholding. Non-U.S. investors in the Fund should consult their tax
advisors in this regard.
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”). Tax-exempt
entities are not permitted to offset losses from one unrelated trade or business
against the income or gain of another unrelated trade or business. Certain net
losses incurred prior to January 1, 2018 are permitted to offset gain and
income created by an unrelated trade or business, if otherwise available. Under
current law, the Fund generally serves to block UBTI from being realized by its
tax-exempt shareholders with respect to their shares of Fund income. However,
notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by
virtue of their investment in the Fund if, for example, (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii)
the Fund invests in a REIT that is a taxable mortgage pool (“TMP”) or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC, or
(iii) Shares constitute debt-financed property in the hands of the tax-exempt
shareholders within the meaning of section 514(b) of the Code. Charitable
remainder trusts are subject to special rules and should consult their tax
advisers. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult with their tax advisers regarding these issues.
The
Fund’s shares held in a tax-qualified retirement account will generally not be
subject to federal taxation on income and capital gains distributions from the
Fund until a shareholder begins receiving payments from their retirement
account.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss on
disposition of Shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on IRS Form 8886. Direct shareholders of portfolio securities are in
many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
Other
Issues.
In those states which have income tax laws, the tax treatment of the Fund and of
Fund shareholders with respect to distributions by the Fund may differ from
federal tax treatment.
The
foregoing discussion is based on U.S. federal tax laws and regulations which are
in effect on the date of this SAI. Such laws and regulations may be changed by
legislative or administrative action. Shareholders are advised to consult their
tax advisors concerning their specific situations and the application of
foreign, federal, state, or local taxes.
FINANCIAL
STATEMENTS
The
Annual
Report
for the Fund for the fiscal period ended July 31, 2022 is a separate document
and the financial statements and accompanying notes appearing therein are
incorporated by reference into this SAI. You may request a copy of the Fund’s
Annual
Report
at no charge by calling 1-800-617-0004,
or
through the Fund’s website at www.etf.grizzle.com.
Appendix
A
EXCHANGE
TRADED CONCEPTS, LLC
PROXY
VOTING POLICY AND PROCEDURES
Exchange
Traded Concepts (“Exchange Traded Concepts”) recognizes its obligation to vote
proxies for investments held by clients over which it exercises discretionary
voting authority in the clients’ best interest. Accordingly, Exchange Traded
Concepts will vote all proxies and act on all other corporate actions in a
timely manner in accordance with these proxy voting policies and procedures (the
“Proxy Voting Policies”).
Exchange
Traded Concepts acts as fiduciary in relation to the portfolios of ETF Series
Solutions (each, a “Fund” and together, the “Funds”) and any other clients that
it may manage in the future and the assets entrusted by such clients to Exchange
Traded Concepts for their management. Except where the client has expressly, in
writing, reserved to itself or another party the duty to vote proxies, or where
a sub-adviser votes proxies on behalf of a Fund, it is Exchange Traded Concepts’
duty as a fiduciary to vote all proxies relating to such shares.
In
order to carry out its responsibilities in regard to voting proxies, Exchange
Traded Concepts must track all shareholder meetings convened by companies whose
shares are held in Exchange Traded Concepts’ client accounts, including the
Funds, identify all issues presented to shareholders at such meetings, formulate
a principled position on each such issue and ensure that proxies pertaining to
all shares owned in client accounts are voted in accordance with such
determinations.
Pursuant
to Rule 206(4)-6 of the Investment Advisers Act of 1940 (“Advisers Act”),
Exchange Traded Concepts: (a) has adopted and implemented these Proxy Voting
Policies that are reasonably designed to ensure that Exchange Traded Concepts
votes client securities in the best interests of its clients (which includes how
Exchange Traded Concepts addresses material conflicts of interests); (b) will
disclose to clients how they may obtain information on how Exchange Traded
concepts voted their proxies; (c) will describe to clients its Proxy Voting
Policies and, upon their request, furnish a copy to its clients; and (d) will
maintain certain records relating to the proxy voting activities when an adviser
does have proxy voting authority.
Exchange
Traded Concepts shall utilize the formal proxy guidelines (set forth below) to
appropriately assess each proxy issue. Generally, Exchange Traded Concepts seeks
to vote proxies in the best interests of its clients, including the Funds. In
the ordinary course, this entails voting proxies in a way which Exchange Traded
Concepts believes will maximize the monetary value of each portfolio’s holdings.
Exchange Traded Concepts’ Management Committee, which oversees proxy voting,
will address any unusual or undefined voting issues that may arise during the
year.
In
addition, Exchange Traded Concepts may engage the services of an independent
third-party (“Proxy Firm”) to cast proxy votes according to Exchange Traded
Concepts’ established guidelines. When Exchange Traded Concepts deems it in the
best interest of clients, they may permit a sub-adviser to a Fund the authority
to cast proxy votes either in accordance with Exchange Traded Concepts’
established guidelines or in accordance with the proxy voting policies submitted
by that firm to and approved by the Board of Trustees of ETF Series Solutions.
The Proxy Firm or sub-adviser will promptly notify Exchange Traded Concepts of
any proxy issues that do not fall under the guidelines set forth below. Exchange
Traded Concepts does not believe that conflicts of interest will generally arise
in connection with its proxy voting policies.
Generally,
Exchange Traded Concepts views that proxy proposals can be grouped into six
broad categories as follows:
I.Election
of Board of Directors
■Exchange
Traded Concepts will generally vote in support of management’s nominees for the
board of directors; however, Exchange Traded Concepts may choose not to support
management’s proposed board if circumstances warrant such consideration.
II.Appointment
of Independent Auditors
■Exchange
Traded Concepts will support the recommendation of the respective corporation’s
board of directors.
III.Issues
of Corporate Structure and Shareholder Rights
■Proposals
may originate from either management or shareholders, and among other things,
may request revisions to the corporate bylaws that will affect shareholder
ownership rights. Exchange Traded Concepts does not generally support obstacles
erected by corporations to prevent mergers or takeovers with the view that such
actions may depress the corporation’s marketplace value.
■Exchange
Traded Concepts supports the following types of corporate structure and
shareholder rights proposals:
◦Management
proposals for approval of stock repurchase programs, stock splits (including
reverse splits)
◦Authorization
to increase shares outstanding
◦The
ability of shareholders to vote on shareholder rights plans (poison pills)
◦Shareholder
rights to eliminate or remove super majority provisions
◦Shareholder
rights to call special meetings and to act by written consent
■Exchange
Traded Concepts votes against management on the following items which have
potentially substantial financial or best interest impact:
◦Capitalization
changes that add “blank check” classes of stock or classes that dilute the
voting interests of existing shareholders which are contrary to the best
interest of existing shareholders, anti-takeover and related provisions that
serve to prevent the majority of shareholders from exercising their rights or
effectively deter appropriate tender offers and other offers
◦Amendments
to bylaws which would require super-majority shareholder votes to pass or repeal
certain provisions
◦Elimination
of shareholders’ right to call special meetings
◦Establishment
of classified boards of directors
◦Reincorporation
in a state which has more stringent anti-takeover and related provisions
◦Shareholder
rights plans that allow the board of directors to block appropriate offers to
shareholders or which trigger provisions preventing legitimate offers from
proceeding
◦Excessive
compensation
◦Change-in-control
provisions in non-salary compensation plans, employment contracts, and severance
agreements which benefit management and would be costly to shareholders if
triggered
◦Adjournment
of meeting to solicit additional votes
◦“Other
business as properly comes before the meeting” proposals which extend “blank
check” powers to those acting as proxy
◦Proposals
requesting re-election of insiders or affiliated directors who serve on audit,
compensation, and nominating committees
IV.Mergers
and Acquisitions
Exchange
Traded Concepts evaluates mergers and acquisitions on a case-by-case basis.
Exchange Traded Concepts uses its discretion in order to maximize shareholder
value. Exchange Traded Concepts generally votes:
■Against
offers with potentially damaging consequences for minority shareholders because
of illiquid stock, especially in some non-US markets
■For
offers that concur with index calculators’ treatment and the ability to meet the
clients’ return objectives for passive funds
■For
proposals to restructure or liquidate closed end investment funds in which the
secondary market price is substantially lower than the net asset value
V.Executive
and Director Equity-Based Compensation
■Exchange
Traded Concepts is generally in favor of properly constructed equity-based
compensation arrangements. Exchange Traded Concepts will support proposals that
provide management with the ability to implement compensation arrangements that
are both fair and competitive.
However,
Exchange Traded Concepts may oppose management proposals that could potentially
significantly dilute shareholders’ ownership interests in the corporation.
VI.Corporate
Social and Policy Issues
■Proposals
usually originate from shareholders and may require a revision of certain
business practices and policies.
Exchange
Traded Concepts is of the view that typical business matters that directly or
indirectly affect corporate profitability are primarily the responsibility of
management. Exchange Traded Concepts believes it is inappropriate to use client
assets to address socio-political issues. Therefore, social and policy issues
reflected in shareholder proposals should be subject to the approval of the
corporation’s board of directors.
Conflicts
From
time to time, Exchange Traded Concepts will review a proxy which presents a
potential material conflict. As a fiduciary to its clients, Exchange Traded
Concepts takes these potential conflicts very seriously. Exchange Traded
Concepts’ duty is to ensure that proxy votes are cast in the clients’, including
the Funds’, best interests and are not affected by Exchange Traded Concepts’
potential conflict. If a potential conflict of interest exists, and the matter
falls clearly within one of the proposals enumerated above, Exchange Traded
Concepts will vote proxies in accordance with the pre-determined guidelines set
forth in these Proxy Voting Policies.
In
other cases, where the matter presents a potential material conflict and is not
clearly within one of the enumerated proposals, or is of such a nature that
Exchange Traded Concepts believes more active involvement is necessary, Exchange
Traded Concepts may employ the services of a Proxy Firm, wholly independent of
Exchange Traded Concepts, to determine the appropriate vote.
In
certain situations, Exchange Traded Concepts’ Management Committee may determine
that the employment of a Proxy Firm is unfeasible, impractical or unnecessary.
In such situations, the Management Committee shall decide how to vote the proxy.
The basis for the voting decision, including the basis for the determination
that the decision is in the best interests of Exchange Traded Concepts’ clients,
shall be formalized in writing. Which action is appropriate in any given
scenario would be the decision of the Management Committee in carrying out its
duty to ensure that the proxies are voted in the clients’ best interests.